Colin from Stafford is a heating engineer, has started his own business as a sole trader.
He needs to buy a new van.
Which one of the following would be the most suitable external source of finance to buy his van?
Select ONE answer:
- Overdraft
- Commercial bank loan
- Retained profit
- Issue of share capital
Show the workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Business Studies KS4 & KS5 classes
The answer is 2
- Not correct- because an Overdraft, although an external source of finance, is used as a flexible short-term method of finance, usually used for cash-flow problems and not to purchase an asset.
- Correct – External source of finance e.g. is money that is provided from outside of the business / a commercial bank loan is when finance is borrowed from an external source such as bank and is repaid over a period of time with interest. A bank loan is a medium term source of finance and is therefore suitable for purchasing an asset such as a van. Interest and capital would be paid over a period of time and Colin would be able to plan for this.
- Not correct – because retained profits are an internal source of finance.
- Not correct – because Colin is a sole trader and therefore cannot issue share capital as this method of finance is only available for limited companies.
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