HookGymshark refused outside money for eight years
In 2012, 19-year-old Ben Francis was delivering pizzas for Pizza Hut by night and sewing gym vests in his parents' garage in Birmingham by day. Gymshark took no bank loan and sold no shares: for eight years, every pound of growth came from retained profit — money earned by the business and ploughed straight back in. When Francis finally did sell a stake, in August 2020, the buyer — US private equity firm General Atlantic — paid for roughly 21% of the company at a valuation of over £1bn. The slow, internal route had cost him nothing in interest and almost nothing in control.
Contrast BrewDog, which went the other way. From 2009 its 'Equity for Punks' crowdfunding rounds raised, over the following decade, in the region of £70m from tens of thousands of small shareholders — fast money, but every round handed out slices of ownership. Same problem, two opposite answers. Everything in 2.1 is that choice: internal money is slow but keeps control; external money is fast but has a price — interest, equity, or both. And behind every lending decision sits the question this section forces you to answer: who is liable if it all fails?
ModelInternal finance — the money already inside the business
The spec lists three internal sources. Owner's capital is the founder's own savings — the commonest start-up finance in the UK because banks rarely lend to firms with no trading history. Retained profit is profit kept in the business rather than paid out to owners; it is the single largest source of finance for established UK firms. Sale of assets raises cash from things the business already owns — surplus vans, machinery, or property. Some large retailers have gone further with sale-and-leaseback, selling their stores and renting them back, which converts a fixed asset into cash at the cost of a permanent rent bill.
The attractions are real: no interest, no repayment schedule, no dilution of ownership, no lender scrutinising the accounts. But internal finance is not free. Retained profit carries an opportunity cost — every pound reinvested is a pound the owners could not take as dividends or hold as a safety buffer. It is also slow (you can only reinvest what you have already earned) and capped by the size of the business, which is exactly why Gymshark's bootstrapped growth was remarkable rather than normal.
ModelExternal finance — sources versus methods (Edexcel tests the difference)
Edexcel splits external finance in two, and exam questions punish students who blur them. Sources are who provides the money: family and friends, banks, peer-to-peer lending platforms, business angels, and crowdfunding. Methods are how it arrives: loans, share capital, venture capital, overdrafts, leasing, trade credit, and grants.
Each method has a shape. A bank loan delivers a lump sum repaid with interest over a fixed term — predictable, but the bank usually wants security. An overdraft lets a firm run its current account below zero up to a limit — flexible, charged only on what is used, but at a far higher interest rate than a loan, so it suits short gaps, not long projects. Leasing rents an asset instead of buying it, protecting cash at a higher lifetime cost. Trade credit — typically 30 to 60 days to pay suppliers — is effectively a free short-term loan from further up the supply chain. Share capital and venture capital sell ownership: no repayments, but a permanent claim on profits and, with venture capitalists, usually a seat at the table and pressure for rapid growth. Business angels do the same at smaller scale — the Dragons' Den deal where Peter Jones and Richard Farleigh backed Levi Roots' Reggae Reggae Sauce with £50,000 for 40% in 2007 is angel investment in its purest televised form. Grants — from bodies such as Innovate UK — need no repayment at all, but are scarce, slow and hedged with conditions.
MechanismLiability — the question behind every lending decision
Sole traders and standard partnerships have unlimited liability: legally, the owner and the business are the same person, so business debts can be collected from the owner's house, car and savings. Shareholders in a private limited company (Ltd) or public limited company (plc) have limited liability: the most they can lose is what they paid for their shares, because the company is a separate legal person.
This is not just a legal footnote — it determines which finance is even available. An unlimited-liability business cannot sell shares, so it is confined to owner's capital, borrowing and trade credit; lenders will often only lend against the owner's personal assets. A limited company can issue share capital, which is why founders planning serious external investment incorporate early. But the shield is thinner in practice than in theory: banks routinely require directors of small limited companies to sign personal guarantees, which put the director's own assets back on the line for that specific debt. Limited liability protects shareholders from creditors; it does not protect anyone from a bank that insisted on a guarantee before lending.
DataPlanning — the business plan and the cash-flow forecast
A business plan — the product, the market, the team, and the financial forecasts — exists chiefly to obtain finance. Lenders read it to judge whether the loan comes back; investors read it to judge whether the equity grows. A plan with lazy numbers signals a founder with lazy thinking, which is why the cash-flow forecast inside it is the most scrutinised page.
A cash-flow forecast predicts, month by month: cash inflows, cash outflows, net cash flow (inflows minus outflows), and the running bank balance (opening balance plus net cash flow equals closing balance, which becomes next month's opening balance). Its job is to spot the month the balance turns negative before it happens, so the firm can arrange an overdraft, delay a purchase or chase payments in advance. Banks are far happier extending an overdraft to a firm that predicted the dip than to one that discovers it on the day wages are due.
A seaside café forecasts April: opening balance £4,000; cash inflows £18,000; cash outflows £21,500 (stock, wages, rent and a new coffee machine). Net cash flow = £18,000 − £21,500 = −£3,500. Closing balance = £4,000 − £3,500 = £500. May looks better: inflows £26,000, outflows £22,000, so net cash flow +£4,000 and a closing balance of £4,500. The April squeeze is not a profitability problem — the machine was a one-off and summer trade is coming — it is a timing problem, and £500 of headroom is dangerously thin. The correct management response is arranging a small overdraft in March, not cancelling the machine.
CaseChoosing the source — match the money to the purpose
The examiner's favourite finance question is 'which source should this firm use?', and the method is always the same: match the term of the finance to the life of the need. A short-term gap (a seasonal stock build, a late-paying customer) suits an overdraft or trade credit. An asset purchase suits a loan or lease whose term matches the asset's life. Long-term expansion suits retained profit, share capital or venture capital — money that never has to be handed back in a hurry.
Then overlay the control-versus-cost trade-off. Gymshark's route (retained profit, then one late equity sale) kept Francis in control but capped growth at what the business could self-generate. BrewDog's route (repeated crowdfunding) bought speed and a devoted customer-shareholder army, but meant continually selling ownership. A debt-heavy route keeps 100% of the equity but loads the business with fixed interest payments that must be met in bad months as well as good — the risk that makes highly geared firms fragile in a downturn. There is no universally right answer, which is exactly why it makes a good 10-marker: the right source depends on the firm's legal structure, its stage of life, its appetite for risk, and what the money is for.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Edexcel finance questions nearly always come wrapped in a context, and the mark scheme pays for matching the source to that firm — its legal structure, its stage, its purpose. A sole-trading jam maker cannot issue shares; a plc will not fund a decade-long expansion on an overdraft. State the match explicitly: 'because the café is a sole trader with unlimited liability, a bank will likely demand personal security, so…'.
On cash-flow calculations, show the chain: inflows minus outflows equals net cash flow; opening balance plus net cash flow equals closing balance; and carry the closing balance forward. Most dropped marks are carry-forward errors, so write each month's opening figure down before calculating. On 'assess' questions (10 or 12 marks), the strongest evaluation is almost always the control-cost-risk triangle: debt keeps ownership but adds fixed interest commitments; equity avoids repayments but dilutes control permanently. Conclude with a judgement that depends on something in the case — the firm's gearing, the owner's objectives, or how predictable its revenues are.