Internal and External Sources of Finance (Edexcel 9BS0 2.1.1–2.1.2)

Model answer guidance: Retained profit carries no interest payments and never has to be repaid, so expansion does not add fixed financial commitments. The owners also keep full control, unlike a share issue which dilutes ownership. Greggs funding new shop openings from its profits — around £204m pre-tax in 2024 — means growth does not depend on lenders' approval. The main limit is that the amount available is capped by past profitability.

Model answer guidance: An overdraft is repayable on demand and charges high interest, so it is designed for short-term cash gaps, not multi-year investment. If the bank withdraws or reduces the facility mid-project, the business faces a funding crisis before the investment earns anything. The interest cost over years would also far exceed a term loan. Matching the duration of finance to the life of the asset avoids this mismatch.

Model answer guidance: Crowdfunding suits consumer brands because backers become both shareholders and advocates — BrewDog's Equity for Punks raised over £80m while building a community of customer-owners who promoted the beer. It also avoids a single powerful investor. However, campaigns are public: failure to hit a target damages the brand, thousands of small shareholders create administrative and governance burdens, and the sums raised are usually smaller than venture capital or bank lending can offer. It is most suitable when the product excites the public and the business wants marketing value alongside money; a business-to-business firm would gain far less.

Model answer guidance: Selling equity raises large, repayment-free sums matched to growth risk, and the right investor adds expertise and contacts — Gymshark's 2020 sale of a 21% stake to General Atlantic brought retail-scaling experience along with capital at a valuation above £1bn. Equity also strengthens the balance sheet when borrowing was expensive, as with base rates above 4% across 2024–25. The costs are permanent: dividends and value flow to outsiders, founders accept scrutiny and may lose strategic freedom, and disagreements over exit timing can be corrosive. The judgement should turn on the growth plan: if the opportunity is large, time-limited and beyond debt capacity, diluting ownership to own a smaller share of a much bigger business is rational; if growth can be funded from retained profit, keeping control is usually worth the slower pace.

Model answer guidance: Internal finance — chiefly retained profit — is cheap, quick and preserves control, which is why profitable firms like Greggs fund expansion largely from their own earnings. It imposes discipline too: growth is paced by real profitability rather than optimism. But internal sources are rationed by the past; they cannot fund transformational moves, and hoarding cash has an opportunity cost when shareholders could reinvest dividends elsewhere. External finance unlocks scale and speed: loans amplify returns when projects out-earn interest, equity shares risk with investors, and options such as leasing and trade credit tune finance to specific needs. Its dangers are gearing risk, dilution and dependence on markets that can close — costly borrowing through 2024–25 showed how conditions shift. The strongest evaluation rejects 'better' in the abstract: internal finance should normally fund routine growth, with external finance reserved for opportunities whose returns clearly exceed its cost, because the real skill is matching source to purpose, amount and risk.