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IB DP Business Management — Unit 3: Finance and Accounts | SL | 3.1 Sources of Finance
📋 What You Will Learn
- Identify and classify the main external sources of finance available to businesses
- Explain the key features, costs, and conditions attached to each external source
- Analyse the suitability of different external sources for different business contexts and purposes
- Apply knowledge of external finance to real business decisions, including start-ups, expansion, and crisis management
- Evaluate the advantages and disadvantages of external sources, weighing financial cost against control and risk
- Recommend an appropriate source of finance for a given business scenario with justification
📊 Topic Importance
| Paper | Relevance | Common Question Types |
|---|---|---|
| Paper 1 | High | Identify sources used by the pre-seen company; "Recommend" the most appropriate source for a strategic decision |
| Paper 2 | High | Section A/B: explain or compare sources; Section C: discuss how a source of finance links to change, ethics, or sustainability |
| Paper 3 (HL) | Moderate | Evaluate financing options for a social enterprise; justify a recommendation integrating social and financial objectives |
🔍 Guiding Question When a business needs money it does not yet have, who should it turn to — and what does that choice cost beyond the interest rate?
🌍 Why This Matters In 2023, electric-vehicle start-up Rivian raised over $5 billion through a combination of equity issuance and a strategic investment from Volkswagen — not because it lacked ideas, but because scaling a factory requires capital that no founder can self-fund. The choice between debt, equity, and alternative sources shaped Rivian's ownership structure, its obligations to investors, and its strategic freedom for years to come.
What Are External Sources of Finance?
Every business eventually needs funds that exceed what it has generated internally. Understanding where that money comes from — and on what terms — is one of the most consequential decisions a manager makes.
📘 External Sources of Finance Funds obtained from outside the business itself — from lenders, investors, or other third parties — as opposed to internal sources such as retained profit or the sale of assets.
- External finance is used when internal funds are insufficient for the purpose — start-up capital, major expansion, acquisition, or bridging a cash-flow gap.
- The key trade-offs are: cost (interest or diluted ownership), control (lenders impose covenants; shareholders gain voting rights), and risk (debt must be repaid regardless of performance).
- The appropriate source depends on: the purpose (short-term vs long-term), the amount needed, the type of business (sole trader vs plc), and the business's financial position .
💡 Short-Term vs Long-Term Finance
- Short-term (typically under 1 year): overdrafts, trade credit, short-term loans — used to manage working capital and cash flow.
- Long-term (over 1 year): share issue, debentures, long-term bank loans, leasing — used to fund capital investment and