Tidal Energy Solutions is a small engineering business in Scotland. It designs and installs solar panels for residential customers. The owner, Fiona, starte...

(a) Two internal sources of finance [2]

1. Retained profit - profits kept in the business from previous trading periods. [1]
2. Sale of existing assets - selling equipment, vehicles, or other items the business no longer needs. [1]

(Owner's personal savings is also a valid internal source.)

(b) Difference between a bank overdraft and a bank loan [4]

A bank overdraft allows a business to spend more money than it has in its bank account, up to an agreed limit set by the bank. Interest is charged only on the amount overdrawn and only for the days the account is overdrawn, making it flexible for managing short-term cash flow gaps. The bank can also withdraw the overdraft facility at short notice. [2]

A bank loan is a fixed amount of money borrowed for a set period (e.g. 3 or 5 years), with regular repayment instalments that include interest calculated on the full loan amount. The repayment schedule is agreed in advance, providing certainty about monthly costs. Loans are more suitable for large, planned purchases because the full sum is available immediately and the terms are fixed. [2]

(c) Analysis: why a government grant might suit Fiona's business [6]

• No repayment required: A government grant does not have to be repaid, unlike a loan or overdraft. For a small business like Tidal Energy Solutions with limited cash flow, this is a major advantage because it avoids the burden of monthly repayments that would reduce the money available for day-to-day operations.
• Alignment with government priorities: The solar panel industry directly supports environmental sustainability and the transition to renewable energy. Governments frequently offer grants to encourage businesses in this sector, meaning Fiona may qualify for funding that businesses in other industries cannot access. A small engineering firm installing solar panels is exactly the type of business these schemes are designed to support.
• No increase in debt: Because a grant is not a loan, it does not appear as a liability on the business's balance sheet. This leaves Fiona free to borrow from a bank in the future for other purposes without the complication of existing debt commitments.
• Potential for additional support: Some government grant programmes also offer business advice, mentoring, or networking alongside the funding. This could help Fiona plan her expansion more effectively, which is valuable given that she has no experience with external finance.
• Limitations: Grant applications can be competitive and time-consuming. The grant may not cover the full $25,000 needed for the van, and there may be conditions attached (such as using the money for specific purposes or reporting on outcomes). Processing times can also be slow, delaying the purchase.

[6]

(d) Is hire purchase the best option for the delivery van? [8]

Advantages of hire purchase:

• Fiona can use the van immediately while spreading the cost over monthly instalments. This preserves cash flow because the $25,000 does not need to be paid upfront.
• Monthly payments can be budgeted for in advance, giving Fiona certainty about her costs.
• At the end of the hire purchase agreement, Fiona owns the van outright.
• No large lump sum is needed, which is important since the business is small and has limited reserves.

Disadvantages of hire purchase:

• The total cost will be higher than the $25,000 cash price because interest is added to the monthly payments. Over the full term, Fiona may pay significantly more than the van is worth.
• Monthly payments are a fixed commitment that must be met even in quiet trading months when fewer solar panel installations are booked.
• If Fiona misses payments, the finance company could repossess the van, leaving the business without a delivery vehicle.

Comparison with alternatives:

• A bank overdraft is unsuitable for a large capital purchase like a van. Overdraft interest rates are typically higher than hire purchase rates, and the overdraft facility could be withdrawn by the bank at short notice.
• A government grant would be ideal (free money, no repayment), but the application process is uncertain and potentially slow. Fiona cannot guarantee she will receive the grant, and it may not cover the full $25,000.

Conclusion: Hire purchase is a reasonable option for Fiona. It allows her to acquire the van immediately, which is necessary for her expansion plans, while spreading the cost in a predictable way. However, she should first apply for a government grant, since her renewable energy business may well qualify. If the grant covers part of the cost, the remaining amount could be funded through hire purchase with lower monthly payments. If the grant is not available or takes too long, hire purchase on its own is a practical and manageable solution for a $25,000 purchase. [8]