Key Idea: In 3.2, IB wants you to know where finance comes from and which source fits the business situation best.
🏠 Internal finance: **Internal finance —** comes from inside the business. **Retained profit —** profit kept in the business. **Sale of assets —** selling business assets for cash. **Owner's savings —** personal funds invested.
🌍 External finance: **External finance —** comes from outside the business. **Loans —** borrowed money repaid with interest. **Overdraft —** short-term flexible borrowing. **Share capital —** selling shares for investment.
Short-term vs long-term
- Short-term finance — less than 1 year (overdraft, trade credit)
- Long-term finance — more than 1 year (loans, shares, retained profit)
- Matching principle — short-term for working capital, long-term for assets
Always match the source of finance to the purpose.
Important: Do not just name a source of finance — explain why it is suitable.
- Identify internal or external
- Decide short-term or long-term
- Explain advantage and disadvantage
- Apply to the business