Explain four factors a business should consider when choosing which source of finance to use for expansion.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.

1. [1] Legal form of business – if the business is a company, then share issue is an option/if the business is unincorporated then owner's savings may have to be used as it cannot issue shares to raise finance
2. [1] Amount required – as the finance is for expansion then a large amount is likely to be required so sources such as bank loans or share issue may be chosen
3. [1] Purpose - as the finance is needed for expansion it is likely to be a large amount and so should be able to be repaid over a long period to make the repayments manageable
4. [1] Existing loans – if the business already has a high number of bank loans, then this may not be an option due to the already high expenses of paying the interest on loans
5. [1] Control of the business – if the business is a company, then issuing additional shares may lead to the original shareholders losing control of the business so may need to decide which is more important, expansion or control
6. [1] Cost of finance – the interest rate charged on the borrowing
7. [1] Length of time needed to repay
8. [1] Size of business
9. [1] For example: Legal form of business (1) if the business is unincorporated then owner's capital or borrowing may have to be used as the business cannot issue shares to raise finance for expansion (1).
10. [ADV Direct] Price may be lower as profit margins are only for SSE and do not include a retail profit margin - so sales may be higher – hence profit gained from selling cricket helmets may be higher
11. [ADV Direct] Direct relationship with customers who ride bicycles possibly better knowledge of customer needs as can gain direct feedback from customers - may lead to improved customer loyalty - increased repeat sales/improved reputation and word-of-mouth advertising
12. [ADV Direct] Reaches a wider market for sport safety helmets in other countries – website can be accessed all over the world for customers to view and order sports helmets
13. [ADV Direct] SSE controls all of the marketing mix
14. [DISADV Direct] Increased costs of processing returned goods - as not able to try on sport helmets before buying – may lead to higher costs if safety helmets are returned if do not fit well
15. [DISADV Direct] Increased costs of distribution due to postage to each individual customer – fewer journeys made in larger orders if supply retailers
16. [DISADV Direct] Increased administration costs as processing large number of individual orders for bicycle safety helmets rather than fewer bulk purchases from large retailers
17. [DISADV Direct] May require increased storage for sport helmets before being dispatched to customers – increased warehouse costs
18. [DISADV Direct] Increased advertising costs and costs of maintaining and upgrading the website
19. [DISADV Direct] Not all customers have access to the internet
20. [ADV Retailers] Bulk orders from large retail chains in other countries - shipped as large bulk orders abroad - reducing distribution costs
21. [ADV Retailers] Retailers are more familiar with the markets in other countries - may only order sports helmets such as cricket safety helmets for children that are likely to sell well in other countries – increases sales/revenue
22. [ADV Retailers] May carry out some advertising for SSE – reduces marketing costs
23. [ADV Retailers] Large sports retailers attract customers who are likely to be interested in SSE's products - easier to reach its target customers in other countries than selling direct through a website
24. [ADV Retailers] Improved reputation/higher sales/revenue – customers can try on the sport helmets – buy a better fitting product - better meets their needs for protection whilst playing sports
25. [ADV Retailers] Costs of storage are all or at least partly paid for by the retailer
26. [DISADV Retailers] Sold with sports helmets of competitors - may be more difficult to compete as products directly next to each other in the sports shops - harder to increase sales
27. [DISADV Retailers] No direct contact with customers – less likely to gain feedback about customers' thoughts on the sport helmets
28. [DISADV Retailers] Prices may be higher if markup is added- reduced demand or profit margin reduced for SSE as discount required by retailer – lower profit
29. [JUS] SSE should choose to sell directly to customers in other countries using its own website as it will have complete control over the marketing of its sports safety helmets. It can gain feedback directly from its customers so it can adapt to market changes and better meet customer needs leading to increased demand and sales. Sports retailers should not be chosen as they sell many other brands of sports safety helmets and SSE cannot control the advice given to customers when they make a purchase which could lead to the wrong products being purchased and SSE's reputation being ruined.
30. [JUS] SSE should choose to distribute through large sports retailers in other countries as it will reduce both administration and transport costs. Warehouse space will also be reduced. Customers can try on the sports safety helmets in shops making it more likely that they will make a purchase and increase sales for SSE.