Is the amount of money needed the most important factor for a sole trader to consider when deciding on an appropriate source of finance?
CAMBRIDGE
O level and GCSE
Year Examined
May/June 2021
Topic
Sources of Finance
👑Complete Model Essay
Do you think the amount of money needed is the most important factor for a sole trader to consider when deciding on an appropriate source of finance?
When choosing how to finance their business, sole traders must consider a variety of factors to make the best decision. While the amount of money needed is certainly important, other factors such as the cost of finance, the purpose of the loan and the risks associated with unlimited liability are also crucial.
Clearly, the amount of money needed is a significant factor. A sole trader might not have sufficient funds of their own and would need to borrow. For example, a sole trader who needs £10,000 to buy new equipment might not have that amount readily available. In such cases, borrowing becomes essential.
However, the cost of finance is equally important. Interest rates affect the overall expense, directly impacting the profit margin. A loan with a high interest rate might seem manageable initially but could become a burden, especially if profits are lower than expected.
Furthermore, sole traders face unlimited liability, meaning their personal assets are at risk if the business cannot repay its debts. This factor significantly influences their financing options. Lenders perceive sole traders as higher risk, often resulting in higher interest rates or limited loan amounts regardless of the total sum required.
Finally, the purpose of the finance is key. If the money is needed for a long-term investment, such as buying a new premises, a long-term loan would be more appropriate. This allows for manageable repayment over an extended period.
In conclusion, while the amount of money needed is undeniably a crucial factor, it is not the most important. Unlimited liability significantly restricts a sole trader's financing options and often makes them riskier borrowers, impacting the cost and terms of finance regardless of the amount. Therefore, factors like the cost of finance, the purpose of the loan, and the implications of unlimited liability are equally, if not more, critical when a sole trader considers sources of finance.
Is the amount of money needed the most important factor for a sole trader to consider when deciding on an appropriate source of finance?
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Do you think the amount of money needed is the most important factor for a sole trader to consider when deciding on an appropriate source of finance?
When choosing how to finance their business, sole traders must consider a variety of factors to make the best decision. While the amount of money needed is certainly important, other factors such as the cost of finance, the purpose of the loan and the risks associated with unlimited liability are also crucial.
Clearly, the amount of money needed is a significant factor. A sole trader might not have sufficient funds of their own and would need to borrow. For example, a sole trader who needs £10,000 to buy new equipment might not have that amount readily available. In such cases, borrowing becomes essential.
However, the cost of finance is equally important. Interest rates affect the overall expense, directly impacting the profit margin. A loan with a high interest rate might seem manageable initially but could become a burden, especially if profits are lower than expected.
Furthermore, sole traders face unlimited liability, meaning their personal assets are at risk if the business cannot repay its debts. This factor significantly influences their financing options. Lenders perceive sole traders as higher risk, often resulting in higher interest rates or limited loan amounts regardless of the total sum required.
Finally, the purpose of the finance is key. If the money is needed for a long-term investment, such as buying a new premises, a long-term loan would be more appropriate. This allows for manageable repayment over an extended period.
In conclusion, while the amount of money needed is undeniably a crucial factor, it is not the most important. Unlimited liability significantly restricts a sole trader's financing options and often makes them riskier borrowers, impacting the cost and terms of finance regardless of the amount. Therefore, factors like the cost of finance, the purpose of the loan, and the implications of unlimited liability are equally, if not more, critical when a sole trader considers sources of finance.
Extracts from Mark Schemes
Question:
Do you think the amount of money needed is the most important factor for a sole trader to consider when deciding on an appropriate source of finance? Justify your answer.
Award up to 2 marks for identification of relevant points. Award up to 2 marks for relevant development of points. Award 2 marks for justified decision as to whether the amount of money needed is the most important factor for a sole trader to consider when deciding on an appropriate source of finance.
Points might include:
- The business might not have sufficient funds [1] so would need to borrow [2]
- A sole trader is likely to have access to fewer sources of finance [1]
- Cost of finance / interest [1] would change expenses [2] altering profit margin [2]
- Unlimited liability for sole traders [1] means that if the business cannot pay its debts the owner’s personal assets would be at risk [2]
- Amount of debt [1] if a business already has a high level of borrowing banks may not lend any more money [2]
- Purpose (why money is needed) [1] if buying a non-current asset then a long-term source would be used [2] allowing sufficient time to repay [2]
Other appropriate responses should also be credited.
Justification might include:
The amount is important because a business might not have sufficient funds [1], so they would need to borrow money [2]. This would involve interest [1], which would increase business expenses [2]. Unlimited liability is probably the most important factor for a sole trader because this reduces the finance options available [eval]. They are probably also seen as higher risk so whatever the amount finance is, it is likely to be more expensive [eval].