Which of the following means of funding a business is very reliable and cheap?

1. Analyze the question The question asks which source of business finance is both very reliable (always available, not dependent on anyone's approval) and cheap (little or no cost to the business).

2. Explain the concept Sources of finance can be internal or external:

• Internal sources come from within the business, such as ploughed-back profits (retained earnings).
• External sources come from outside, such as bank loans, loans from friends and debentures.

3. Evaluate each option

• A. Bank loans: These require collateral, approval and interest payments, so they are not cheap. Approval is not guaranteed either, so they are not fully reliable.
• B. Loans from friends: These are cheap, sometimes interest-free, but not reliable. Friends may not have the money, or may demand it back at any time.
• C. Plough back profits: The business reinvests its own earnings. There is no interest to pay, no collateral to provide, and no outsider's permission is needed. It is available as long as the business makes a profit, so it is both reliable and cheap.
• D. Debentures: These carry a fixed interest that must be paid whether or not the business makes a profit, and issuing them involves costs. They are not cheap.

4. Answer The best choice is C. Plough back profits.

5. Exam tip Remember: "Plough back = Pay nothing back." Whenever a question asks for the cheapest, most reliable or least risky source of finance, think of retained or ploughed-back profits. One limitation is that it only works if the business is already making profit, and it may be too small an amount for big expansion.