A business can raise money from inside itself, such as profit kept back, or from outside, such as a bank, suppliers or new owners. Questions ask you to recommend a source for a stated need, and a good answer weighs how long the money is needed and how much control the owner keeps.
This lesson sits in cash flow and finance after you have seen why a profitable firm can be short of cash. Check your syllabus for the exact list of sources your exam year expects, because the lesson uses the common ones to teach the method.
How do you sort the sources?
First by time.
| Duration | Typical need | Example sources |
|---|---|---|
| Short-term | Cover a gap of days or weeks, such as late customer payments | Overdraft, trade credit from a supplier |
| Long-term | Pay for something that lasts years, such as a van or a shop | Bank loan, retained profit, owner’s capital, sale of shares in a company |
Then by control: does the owner give up ownership or a say in decisions?
- A loan or overdraft gives the lender no share of ownership. The cost is interest and the duty to repay.
- Retained profit and the owner’s own savings keep control, but the amount is limited by how much the business has earned or the owner holds.
- Selling a share of the business brings in money with no repayment, but the new owner shares profit and may influence decisions.
How do you choose, step by step?
- State the need: how much money, and for how long.
- Match the time: use short-term money for short gaps and long-term money for long needs.
- Check control: would the source give someone else a share or a say?
- Check cost and risk: interest, repayment and what happens if the business cannot pay.
- Conclude with a condition: “A loan is suitable if the business can afford the monthly repayment.”
Worked example
Kedai Basikal Pantai, a bike shop in Kota Bharu, needs RM48,000 for a delivery van that will last about eight years. The owner is also unsure how to cover RM6,000 of wages for two weeks while a customer pays late.
The van. This is a long need. A bank loan of RM48,000 repaid at RM1,100 a month for 48 months costs 1,100 × 48 = RM52,800 in total, so the extra cost of borrowing is 52,800 − 48,000 = RM4,800. Control stays with the owner. A second option is selling a 20% share of the shop for RM48,000. There is no repayment, but the new part-owner is entitled to 20% of future profit and may question decisions.
The wage gap. This is a short need, a few weeks. An overdraft fits, because the owner uses it only while the money is missing and it is repaid when the customer pays.
Conclusion. A bank loan suits the van if the shop can afford RM1,100 each month, because it keeps full ownership. The overdraft suits the wage gap, but would be a poor way to buy the van, because it is meant for short, changing needs.
The mistake to watch for
A common slip is to match the source to the problem by name, with no thought of time.
Mistaken answer: “Kedai Basikal Pantai should use an overdraft to buy the van, because an overdraft is quick and easy.”
The van lasts years. An overdraft is a short-term arrangement that may be reviewed or recalled, and it can leave the shop short of cash again.
The correction is to say how long the money is needed first, then pick a source that lasts that long. Match short with short, and long with long.
Check yourself
Try these on paper, then open each answer.
1. Classify each as short-term or long-term, and as internal or external: (a) 30 days’ trade credit from a supplier, (b) a five-year bank loan, (c) retained profit.
Show answer
(a) Short-term, external. (b) Long-term, external. (c) Long-term, internal, because it comes from the business’s own profit and has no repayment date.
2. A sole trader wants to keep full control but needs RM200,000 to open a second shop. Which source weakens control, and why?
Show answer
Selling a share of the business to a new investor, because the investor becomes a part-owner and shares in profit and decisions. A bank loan would leave control unchanged but must be repaid with interest.
3. A café needs RM3,000 for ten days while a catering client pays. Recommend a source and give one reason.
Show answer
An overdraft, because the need is short and the cost is only for the days the money is used. A condition is that the café has an agreed overdraft limit of at least RM3,000 with its bank.
Where this leads next
With sources sorted, return to the idea of timing in explaining a delayed receipt’s effect, then bring everything together in proposing a case-specific action. The ratios tool can help when you compare the total cost of a loan with the amount borrowed, and the cash versus profit bridge shows why a gap appears in the first place.
Students often know the sources but lose the mark when the answer does not say why this source fits this case. That reasoning is a habit our teachers practise in online one-to-one Business tuition.