Planning, Finance and Forms of Business

A business plan is, at its simplest, a document setting out how a proposed business intends to operate — the mark scheme's own credited answer, paraphrased from a Jan 2020 examiner report, describes it as a plan for the development of a business that gives details of the resources it will need (spec 2.3.1.1a). What actually goes into one matters less as a memorised checklist than as an answer to three separate questions: what is this business trying to do (its aims and objectives), what does it need to do it (finance required, staff, premises, equipment), and how will it know if it's working (sales forecasts, cash-flow forecasts, a marketing plan setting out how it intends to reach customers).

The relevance and uses of a business plan (spec 2.3.1.1b) fall into the same three-question structure, aimed at three different audiences. To an external lender or investor, a plan is evidence — the thing a bank or business angel actually reads before deciding whether the risk described in the mechanism below is one they're willing to take on. To the founder themself, writing one is a forcing function: putting a genuine sales forecast and cash-flow forecast on paper makes optimistic assumptions visible before real money is committed, not after. And once the business is trading, the plan becomes a benchmark — a stated target to measure actual performance against, which is what turns 'we're not doing as well as we hoped' from a vague feeling into a specific, measurable gap.

None of this makes a business plan a guarantee. Real exam content confirms business-plan advantages appear as genuine question territory (Jan 2024, Kajak Kanu Klub, a canoe and kayak rental club) — but a plan is only ever as good as the assumptions inside it. A beautifully structured plan built on an unrealistic sales forecast is still a bad plan, which is exactly why 'difficulties of sales forecasting' gets its own separate spec point elsewhere on this paper (2.3.2.2c) rather than being treated as solved the moment a plan exists.

Internal finance is money the business raises from its own resources rather than from an outside lender or investor, and the spec names three sources (2.3.1.2). Owner's capital — personal savings the owner puts into the business — is the source the mark scheme defines with two required parts, verbatim: "A source of (internal) finance (1) provided by the owner of a business/personal money from the owner (1)" (Jan 2023 mark scheme). Retained profit is profit the business earned in a previous period and chose to keep rather than pay out, held back specifically to fund future spending instead of being distributed. Sale of assets means selling something the business already owns and no longer needs at full value — old equipment, an unused building, a vehicle — converting it directly back into cash.

All three share the same underlying advantage, which is really the mirror image of the mechanism below: internal finance requires no lender or investor to be convinced of anything at all, because nobody outside the business needs to verify a repayment risk that doesn't exist — there's no interest to pay, no equity to give up, and no application or approval process to go through. That's also exactly why it's limited: a business can only draw on savings it has, profit it has already earned, or assets it already owns. A start-up with no trading history has no retained profit to draw on by definition, and a business that has already sold its spare assets has nothing further to sell — which is precisely the gap external finance exists to fill.

The spec's sources of external finance (2.3.1.3a) are family and friends, banks, peer-to-peer funding, business angels, crowdfunding, and other businesses. Family and friends finance trades on a genuinely different currency: personal trust replaces the trading-history-and-collateral evidence a bank needs, which is exactly why it's often available to a business with nothing else to offer. The cost isn't measured only in interest — a loan or investment from someone close to the founder puts a real relationship at risk if the business struggles to repay, a cost that doesn't show up on any balance sheet.

Peer-to-peer funding channels the same underwriting problem through an online platform that matches individual lenders directly to borrowers, without a bank in between. Each lender takes on a small slice of the same risk a bank would otherwise be asked to underwrite alone, compensated with a market interest rate a bank itself might not have offered — suiting a business a single bank judges too risky, but where enough individual lenders, each risking a modest sum, are collectively willing to take the bet. Business angels are wealthy individuals investing their own money directly into an early-stage business for equity, usually alongside their own expertise, contacts and mentoring — the human-scale version of the venture-capital mechanism derived above, suited to a start-up with growth potential but no track record.

Crowdfunding spreads the same evidence gap across the largest possible number of contributors, typically through an online platform, usually in exchange for a reward, an early product, or a small equity stake rather than requiring any one backer to underwrite the whole risk. It suits a business with a story or product that can generate broad public appeal directly — reward-based crowdfunding, in effect, replaces 'can this business repay a loan' with 'do enough individual people want this to exist,' a genuinely different question a bank is never asked to answer. Finance from other businesses takes several forms — a supplier extending trade credit (below), a larger firm investing in a smaller supplier to secure its own supply chain, or a joint venture — and its suitability depends on whether the other business has its own strategic reason, not just a financial return, to want this specific relationship to succeed.

The spec's methods of external finance (2.3.1.3b) are loans, share capital, venture capital, overdrafts, leasing, trade credit and grants. Bank loans and venture capital sit at the two ends of the mechanism already derived above — fixed, lower-cost debt for a business that can offer evidence, or equity accepting higher risk for uncapped return where it can't. Share capital is the wider category venture capital sits inside: selling ownership stakes in a company, available only to a business that has incorporated (see the chain-drill below). Incorporating doesn't force a business straight to public flotation, either: a private limited company can raise further share capital simply by selling more shares privately — to existing directors, employees or family — without ever listing on a public exchange, a genuine, mark-scheme-credited alternative in its own right ('If [a company] remains as a Ltd it could sell shares to additional directors without floating the business. These could be employees or other family members, for example,' January 2020 mark scheme). The limit on this route is control, not law: an owner unwilling to sell enough shares to risk losing majority ownership caps how much can practically be raised this way, whatever the theoretical ceiling on shares available to sell — exactly the tension a full flotation exists to resolve, at the cost of the control problem discussed below. Overdrafts solve a different problem entirely — not raising capital for a big one-off purchase, but smoothing short-term timing gaps in a business's own cash flow — flexible to arrange and quick to draw on, but priced at a noticeably higher interest rate than a loan precisely because that flexibility is itself a cost to the bank offering it.

Leasing means renting an asset — machinery, vehicles, premises — rather than buying it outright, which avoids the large upfront capital outlay a purchase would require and, because the leasing company retains ownership of the asset itself, avoids the collateral problem entirely: its security is simply repossessing an asset it never stopped owning. Trade credit means a supplier allowing a business to receive goods now and pay for them later (typically 30, 60 or 90 days) — less a deliberate financing decision than an automatic, interest-free cash-flow cushion built into ordinary buying and selling, whose real cost is usually the early-payment discount given up rather than a stated interest rate. Grants, usually from a government body or a development fund, are the one method that never needs to be repaid or exchanged for equity at all — but that absence of cost is exactly why grants are narrowly targeted (a specific sector, region or activity, such as environmental improvement) and competitively awarded, suiting a business whose specific project happens to fit a specific scheme's criteria, not a general source a business can rely on for ordinary working capital.

Share capital and venture capital aren't 'free money' just because there's no interest to repay — the cost is the value of the ownership given up, and it's a real, calculable one. Sell a 25% stake for £150,000 and the deal implies the company, including the new cash it just raised, is now valued at £600,000 (£150,000 ÷ 0.25) — meaning the business itself was worth roughly £450,000 the moment before that cash landed (£600,000 minus the £150,000 raised). Whichever way it's sliced, that ownership stake is a cost that grows automatically if the company succeeds, which is exactly why equity finance is normally more expensive over a business's lifetime than debt, for a business that genuinely has the option of borrowing instead.

A sole trader is a business owned and run by one person, requiring no formal incorporation to start trading — the fastest, cheapest way to become self-employed, with full control over every decision and the whole of the profit. The direct cost of that simplicity is unlimited liability (below): there is no legal boundary between the owner's personal finances and the business's, so what the business owes, the owner owes. A partnership extends the same basic structure to two or more owners — the mark scheme's own credited definition, verbatim: "A (type of) business/organisation owned (1) by two or more people (1)" (Oct 2024). A partnership pools finance, skills and workload, but by default carries the same unlimited liability as a sole trader, now shared: each partner is normally liable for the whole partnership's debts, not just their own share of them, which is exactly why choosing a business partner is, in the liability sense, a genuinely higher-stakes decision than hiring an employee.

A private limited company (Ltd) is, by contrast, incorporated — it exists as its own legal person, distinct from its owners (shareholders), who hold limited liability (below) and can, precisely because the company now legally exists as something separate from them, sell shares in it, though only privately, to people the company invites, not to the public at large. Incorporating is a specific legal act, not just a change of name or letterhead: it requires filing a memorandum of association and articles of association, which takes real time a busy owner-manager may not have to spare — confirmed directly by the October 2022 mark scheme's own indicative content for a question asking students to assess the benefits to a sole trader of becoming a Ltd, which credits exactly this cost: "it would be necessary for Mark to complete a number of legal documents, such as the memorandum of association and the articles of association in order to form a private limited company. This would take time, something he is already short of." That same mark scheme separately credits a reputational benefit running the other way, distinct from anything to do with raising finance: "Private limited companies are considered to have a higher status than sole traders" — a status effect a lender or customer can read directly off the legal form itself.

Franchising is a specific business relationship, not a form of ownership in its own right — an established business (the franchisor) allows another person or business (the franchisee) to trade under its name, using its brand, systems and support, usually for an upfront fee and an ongoing share of revenue. Both halves of that definition genuinely matter — see the trap below. A social enterprise is — the mark scheme's own definition, verbatim (Jan 2022) — "a business with mainly welfare or environmental objectives ... rather than maximising profit." That is not the same thing as a charity, and it does not mean the business makes no profit: a social enterprise still trades and competes, and can be highly profitable, it simply directs that activity primarily toward its stated welfare or environmental purpose rather than toward maximising shareholder return.

A lifestyle business is deliberately built and kept at whatever size suits the way its owner wants to live and work, rather than pursued for maximum growth or profit — a genuine, spec-named business type, not a euphemism for a business that simply hasn't grown yet; staying small is often the entire point. An online business operates primarily or entirely over the internet rather than from physical premises, which typically means lower fixed overheads (no retail rent) and a potentially far larger customer reach, in exchange for depending heavily on digital marketing and logistics and facing intense, low-barrier-to-entry competition — real, examined territory (Etsy's business failure and online-business analysis, Jan 2022) that rewards understanding the actual trade-off, not just naming 'lower costs' as the whole story.

Growing from a private limited company into a public limited company (plc) and pursuing a stock market flotation removes the one restriction a private Ltd company still carries: the right to sell shares only to people it personally invites. Listing on a public stock exchange opens that sale to any investor willing to buy, which is the actual mechanical reason flotation can raise dramatically more capital than a private share sale ever could — not because a plc is simply 'a bigger, more prestigious kind of company,' but because the pool of people legally permitted to buy in has changed from a small private circle to the entire investing public. That access comes at a real cost: far heavier disclosure and reporting requirements, public scrutiny of every decision, and genuine exposure to a hostile takeover, since anyone can now buy enough shares to challenge the existing owners for control.

Flotation status is also, separately, evidence in its own right — real mark-scheme content credits this as a benefit distinct from the capital-pool mechanism above, not a restatement of it. The January 2020 mark scheme's indicative content for a stock-market-flotation question credits both a reputational effect — flotation 'could lead to an enhanced reputation... as it could be recognised more easily by the plc status' — and a financing effect that runs directly through the bank-lending mechanism established earlier in this lesson: 'it is likely that [a newly-floated business] could find borrowing from banks and other financial institutions cheaper and easier because banks are more likely to take a risk on plcs as they already have the backing of public shareholders.' In other words, a bank can treat plc status itself as a further piece of verifiable evidence, on top of — not instead of — the trading history and collateral a private business would otherwise need to supply alone. The same mark scheme also credits a benefit with nothing to do with finance at all: flotation can bring in new directors with wider marketing or operational skills a small founding team may lack, filling a genuine capability gap the extra capital alone wouldn't close.

The cost side runs deeper than disclosure and takeover risk, too. Once a plc's shares trade publicly, its share price becomes a constant, visible verdict on performance — and the same mark scheme separately credits the risk that this pressure pushes management toward short-term profit maximisation specifically to keep that share price high, 'which could be detrimental to the long-term success' of the business, potentially at the expense of exactly the priorities (product quality, customer relationships, staff welfare) that built its reputation as a private company in the first place. A private limited company answers only to the small group of shareholders it personally chose to invite — who may well have bought in precisely because they shared those original priorities — so this specific tension is one flotation itself introduces, not a cost that was already present beforehand.

Unlimited liability means an owner is personally responsible for every debt the business owes, without limit and without a legal boundary separating personal wealth from business wealth: if the business fails owing more than its own remaining assets can cover, the owner's personal savings, property and other possessions can be used to pay the difference. This is the default position for a sole trader and an ordinary partnership (spec 2.3.1.5a) — not a rare or extreme outcome, but the direct legal consequence of a business having no separate legal identity from the person or people running it — the same fact the sole trader and partnership discussion above already turns on, and that the chain-drill below derives its own consequence from.

Limited liability caps what an owner stands to lose at the amount they invested — typically the value of the shares they hold — precisely because a private limited company or plc exists as its own legal person: it is the company, not the shareholder personally, that owes the debt, and the company's own assets, not the shareholder's house or savings, are what a creditor can claim against. The advantage is a genuinely lower personal risk, which is exactly what makes outside investors more willing to put money into a company in the first place — and, just as directly, what makes the owners themselves more willing to take the risk of starting or growing the business at all: with personal possessions no longer on the line, a founder can pursue a venture they might otherwise avoid, a real credited benefit distinct from investor confidence (confirmed directly, June 2019 mark scheme, on Zwift: limited liability meant its founders 'were able to take more risks without the worry they may lose their personal possessions if the venture failed'). The disadvantage is the administrative cost of the separate legal identity that makes it possible — incorporation itself, plus ongoing public disclosure of accounts most sole traders and partnerships never have to file. There is a second, easily-missed disadvantage on the other side of the same coin: because the owners themselves face less personal consequence from company debt, they may take on more borrowing than a sole trader risking personal ruin ever would — and if the business overextends on the strength of that lowered personal risk, it is the business's own creditors left unpaid when it can't meet its debts, a genuinely distinct risk from the incorporation-cost point above (the same June 2019 mark scheme, on the same business: 'with less concern over running up huge debts, if problems occur in the future, [it] may not be able to repay their creditors and could go into liquidation').

The finance appropriate for each (spec 2.3.1.5b) follows directly from the mechanism running through this whole lesson. An unlimited-liability business cannot issue share capital at all, for the structural reason established above, so it depends more heavily on internal finance, family and friends, and lender-based external finance (bank loans, overdrafts, trade credit) — and because the owner's personal wealth is already on the line regardless of what the business itself owns, a bank can, and often does, treat that personal exposure as informal security when deciding whether to lend. A limited-liability business gains a genuinely wider set of options — share capital and venture capital chief among them — but shouldn't be assumed to have unlocked easy borrowing overnight: a very new, very small Ltd company with few assets of its own is often still asked by a bank for a personal guarantee from its director before it will lend, precisely because incorporation changes the legal position on liability without instantly changing the evidence — trading history, assets — a lender still needs to see.