Sources of Finance (Years 8–11) — Business Studies

Businesses raise money internally or externally, over the short or long term, including halal profit-and-risk sharing instead of interest.

Once a business knows how much money it needs, it must choose where to get it. Sources of finance are grouped as internal or external, and as short term or long term.

Why this matters Choosing the wrong source can cost a business dearly — borrowing when you cannot repay, or giving away too much ownership. Matching the source to the need is a real business skill.

Internal sources

These come from inside the business, so no outsider is involved.

Retained profit: profit kept back from previous years rather than taken by owners. It is cheap and involves no repayment.
Selling assets: selling items the business no longer needs, such as an old van, to raise cash quickly.

External sources

These come from outside the business.

Bank loan: a fixed sum repaid over time, usually with interest, in agreed instalments.
Share capital: money raised by selling shares in a limited company to investors, who then own part of the business.
Crowdfunding: many people each give a small amount, often online, sometimes in return for the product.
Trade credit: a supplier lets the business pay later, easing short-term cash needs.

Short term vs long term

Short-term finance (such as an overdraft or trade credit) covers day-to-day cash gaps. Long-term finance (such as a loan over several years, or share capital) pays for expensive, lasting items like buildings or machinery. A useful rule: match the length of finance to the life of what you are buying.

Halal (Islamic) finance

In Islam, charging or paying interest (ribā) is forbidden. Islamic finance therefore raises money by sharing profit and risk rather than charging a fixed interest.

Muḍāraba (profit-sharing partnership): an investor provides the money and the entrepreneur runs the business; they agree in advance to share any profit, and the investor shares the loss if the business does badly.
Equity / partnership: investors put in money in return for a share of ownership and future profits, taking on part of the risk.

This sits alongside conventional sources as a genuine option: the key difference is that the provider shares in the outcome instead of demanding fixed interest whatever happens.

A conventional loan charges the same fixed interest whatever happens to the business; mudaraba profit-sharing rises and falls with the business's actual results.

Put these steps in order for choosing a suitable source of finance:

Work out exactly how much money is needed
Decide whether it is for a short-term cash gap or a long-term asset
Compare the cost and risk of internal, external and halal options
Choose the source that best matches the need

Common exam mistake: describing Muḍāraba as "just a loan from an Islamic bank". The essential difference is that a loan charges fixed interest regardless of outcome, while Muḍāraba shares both profit and loss with the investor — this risk-sharing point must be stated explicitly to earn marks.

Exam technique: when recommending short-term or long-term finance, name what it is being used for — a lasting fixed asset (a shop, machinery) needs long-term finance, while a temporary cash-flow gap needs short-term finance such as an overdraft or trade credit.