Where does the money come from? (Sources of Finance, HSC Business Studies steeze)

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In the HSC Business Studies course, an important element is how a business finds the finance for its plans. 

In terms of the syllabus, this relates to the Influences on financial management, and the internal and external sources of finance. 

Look, you need to have a really in-depth understanding of the sources of finance. This is because the HSC Business Studies exam often asks you to compare and contrast different sources of finance.

Let’s take a look at an example form the 2018 NSW Business Studies HSC exam. This is Q24, part c — a five mark question from the short response focusing on finance. You can see the question below.

This is tha question. Click through for the exam and marking guide.

This is tha question. Click through for the exam and marking guide.

Pay attention to the wording of the question

In HSC exam questions, every word is deliberate. For this question, it can be tempting to just compare leases and mortgages. 

To elevate your response:

  • Bring your points back to the business expanding into a larger factory. Connect your response to the stimulus and the language of the question. For example, if you want to expand BUT then business conditions worsen, what then? Are you locked in to the new premises?

  • Notice how it says to “discuss” leases and mortgages? The secret code to “discuss” is to include the pros and cons of each.  

Strategies to answer this question

I’d be looking to divide up the question into two: one part to discuss leasing and the other for mortgages. It’s tricky having five marks on offer. But I’d still follow this pattern.  

I’d then suggest providing one pro and one con for each, providing an example to support the discussion.

For leasing 

One pro is that the business has FLEXIBILITY. If trading conditions change, the business can end its lease and go back to a smaller premises. It is much easier and cheaper to break a lease rather than a mortgage. To break a mortgage, you’d likely have to sell the property.

Another pro of leasing is that the property owner is responsible for all maintenance, including organising and paying for repairs. 

A con of leasing? After all these lease payments, the business does not have an asset to show for it. They do not own the factory, or even a piece of it. 

For mortgages

One pro is that, at the end of the mortgage, the business owns the asset outright. This will show up on the balance sheet and could then be sold if needed. 

Lots of cons to mortgages. They’re expensive, as the business needs to find a deposit, repay principal and interest, and cover fees associated with taking out loans. There’s a lack of flexibility, as outlined as a pro for leasing. And, as a property owner, you are responsible for the costs of maintenance. 

You can see more of my process in the video below.