CAIE A-Level Business 5.2.4 Selecting an Appropriate Source of Finance

Evaluate whether a bank loan is the most appropriate source of finance for JC's growth.

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1(d)

Indicative content

AO1 Knowledge and understanding

Knowledge of Bank loans (max $2{ }^{\kappa} \mathrm{s}$ )

- set amount

- fixed period of time

- fixed interest rate

- requires good credit/reputation

Knowledge of other internal and external sources of finance; (max $2 \square^{\kappa} \mathrm{s}$ )

- retained earnings

- owners investment

- mortgage

- hire purchase

- overdraft

- partner

AO2 Application

Limited application ${ }^{\Delta \text { PF }}$ applies knowledge of appropriateness of sources of finance to DC once. Developed application ${ }^{\text {№ } \text { ® }}$ applies knowledge of appropriateness of sources of finance twice.

- retention of 100\% stake, not a 50\% stake

- $ 25000 investment offered requires a 50% sale of JC

- capital investment to rent business premises/a kitchen, employ staff and invest in promotion

- current gearing ratio of 0

1(d)

AO3 Analysis

Limited analysis ${ }^{\mathrm{AN}}$ - candidate shows one link in the chain of analysis.

Developed analysis - candidate shows two or more links in the chain of analysis.

Bank loan as an appropriate source of finance

- retains full control - is able to make investment decisions in his own long term best interest

- keeps all future profits for own benefit - no risk of externals hindering future expansion

- liable for interest and loan repayments - may reduce cashflow which is already poor and will require an alternative short term SoF such as an overdraft or owners investment

Investor as an appropriate source of finance

- loss of complete ownership - may have negative implications on Jake's motivation levels

- ability to control finances would be reduced (as he would have to gain agreement from the investor on any financial decisions) - investor may not want to invest capital on non-owned property

- able to invest to improve marketing/employ staff - no financial repayment risk - all future profits can be reinvested or taken as dividends

Any alternative source of finance compared with the business loan/suitability for JC to be accepted

AO4 Evaluation

Limited evaluation ${ }^{\text {® }}$ - unsupported judgement and/or a weak attempt at evaluative comment

Developed evaluation E - supported judgement and/or reasonable evaluative comment

Developed evaluation in context EE - supported judgement in context and/or reasonable evaluative comment in context.

- does JC need the investment as he was able to keep up with demand, invest in his equipment and as the closing balance is positive and growing each month?

- does Jake have the necessary ability to manage the risk of an external source of finance?

- the most important benefits and drawbacks of a bank loan as a source of finance

- weighing up the objectives and risks of choosing a bank loan

- a judgement on whether a business loan is most appropriate for JC based on the evidence

1（d）

Accept all valid responses．

Bank Loans means a fixed amount of money from the bank but can have high interest rates which would lead to increased costs／outflows ${ }^{\mathrm{AN}}$ and lower profits for the business ${ }^{\text {口ev }}$ which means he will not be able to improve his cash flow issues as shown by the negative cash flow forecast．

Retained earnings can also be another type of source of finance JC can get from its profits．Which means there are no cash outflows required such as when borrowing money．${ }^{\mathrm{aN}}$ This is a method that JC already used for marketing and new equipment ${ }^{\text {月FF }}$ This will allow JC to have a better cash flow but he may not have enough capital to invest into the garage conversion straight away．

A bank loan is the most appropriate method as a source of finance ${ }^{\text {⿴囗大 }}$ as JC requires $ 15000 so he can specifically ask for this amount from the bank to be able to reach its aim for growth．EE

However，this also depends on whether JC is able to take a loan from the bank or not and if so whether the interest rate is affordable E because if it is not affordable then the cost will increase drastically which will further affect the poor cash flow forecast negatively EE