ExpertHard9 marksExtended Response
AQA GCSE · Question 02.7 · Finance
Debbie is considering a bank loan to open a studio and upgrade her camera equipment, but she would have to use her home as security. This means that if she struggled to repay the loan the bank could force her to sell the house.
Recommend whether Debbie should use a bank loan.
Give reasons for your answer.
Debbie is considering a bank loan to open a studio and upgrade her camera equipment, but she would have to use her home as security. This means that if she struggled to repay the loan the bank could force her to sell the house.
Recommend whether Debbie should use a bank loan.
Give reasons for your answer.
How to approach this question
This is a 9-mark "recommend" question requiring a justified conclusion.
1. **Start with a clear recommendation:** "Debbie should take the loan..." or "Debbie should not take the loan...".
2. **Develop your first argument.** State a reason for your recommendation (e.g., it provides capital for growth). Explain it and use evidence from Item B (e.g., "open a studio", "low interest rates").
3. **Develop your second argument.** Provide another reason supporting your recommendation (e.g., structured repayments over 5 years). Contrast this with the alternative loan from a friend.
4. **Develop a counterargument.** Acknowledge the other side. What is the main reason she should *not* take the loan? (e.g., risk of losing her home). Use the case study to support this.
5. **Write a conclusion.** Weigh up the arguments. Re-state your recommendation and explain *why* the arguments for it are stronger than the arguments against. For example, "Although the risk is high, the alternative is worse, and the loan is necessary for growth, therefore...".
Full Answer
**Recommendation:** Debbie should take the bank loan to finance her expansion.
**Reason 1 (For):** A bank loan would provide the necessary capital for Debbie to open a studio and upgrade her equipment. This expansion is a logical step to grow her business by focusing more on family photography, which may provide more stable revenue than the "unpredictable" wedding market. The case study notes interest rates are "currently low", making the cost of borrowing cheaper and repayments more manageable. This investment could lead to higher profits in the long term.
**Reason 2 (For):** The bank loan offers a structured repayment plan over five years with "fixed instalments". This makes it easier for Debbie to budget and manage her cash flow, as she will know exactly how much she needs to pay each month. This is a significant advantage over the loan from her friend, which requires the "full amount repaid within six months". Such a short repayment period would put immense pressure on the cash flow of a small business with unpredictable revenue.
**Counterargument (Against):** The most significant risk is that the loan is secured against her home. The text explicitly states that if she "struggled to repay the loan the bank could force her to sell the house". As a sole trader, she has unlimited liability, meaning her personal assets are at risk. Given her revenue is "unpredictable", there is a real danger that a few bad months could jeopardise her family's home. This is a massive personal risk to take for a business expansion.
**Conclusion:** Despite the severe risk of losing her home, Debbie should take the bank loan. The alternative of a loan from a friend with a six-month repayment term is likely unachievable for her business and would almost certainly lead to failure. The bank loan, while risky, provides the capital and a manageable repayment structure needed for growth. To mitigate the risk, she must create a thorough business plan with realistic cash-flow forecasts before committing. The potential to create a more stable and profitable business outweighs the risk, provided it is carefully managed.
This question requires a balanced evaluation of using a bank loan.
**Arguments FOR the bank loan:**
- **Enables Growth:** It provides the funds to "open a studio and upgrade her camera equipment", allowing her to expand into the potentially more stable family photography market.
- **Favourable Terms:** "Interest rates are currently low", reducing the overall cost of borrowing.
- **Manageable Repayments:** "fixed instalments over five years" makes financial planning and budgeting easier compared to the alternative.
- **Better than the alternative:** The friend's loan requires repayment in six months, which is highly risky for a small business with unpredictable cash flow.
**Arguments AGAINST the bank loan:**
- **Risk of Losing Home:** The loan is secured on her house. If the business fails or struggles, she could lose her personal property. This is the most significant drawback.
- **Unlimited Liability:** As a sole trader, she is personally responsible for all business debts. This loan increases her personal financial risk substantially.
- **Interest Costs:** Even at low rates, interest is an additional cost that will reduce her profits over the five-year period.
**Evaluation:** A strong answer will recognise the huge personal risk involved. The conclusion should weigh this against the necessity of the loan for growth and the unsuitability of the alternative. A justified conclusion might argue that the risk is worth taking *if* she has a solid business plan, but it must acknowledge the severity of the potential consequences.
Common mistakes
✗ Not making a clear recommendation.
✗ Failing to discuss the major risk of using her home as security.
✗ Not comparing the bank loan to the alternative loan from the friend.
✗ Not writing a justified conclusion that weighs the pros and cons.
Practice the full AQA GCSE Business Paper 2
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