3.4a Sources of finance Flashcards
Short term sources of finance are designed to…
Help a business maintain a positive cash flow
Explain one reason why a business might take out a short-term loan
As an emergency access to finance. They may also use credit and overdrafts as part of their operating model if they know that customers will pay their invoices.
Why should overdrafts be used with care or in emergencies?
This is because the bank will charge a high interest rate on the amount borrowed
What is Credit Limit?
It is the maximum amount of credit a business has with a supplier or a financial institution.
Name some payment methods that businesses may use
Cash, Cheque, Credit Card
What is a retrospective discount?
It is a discount applied when a business purchases a certain number of goods or spends a certain amount of money.
What is Factoring?
Where firms sell their invoices to a factor such as a bank.
Why do businesses use factoring?
It allows them to get cash straight away rather than having to wait.
What is a creditor?
A creditor is an individual or business that has lent funds to a business and is owed money.
What is a debtor?
A debtor is an individual or business who has borrowed funds from a business and so owes it money.
What is trade credit?
It is a credit arrangement that is offered to the businesses by their suppliers.
What is overdraft?
Overdraft is a facility offered by banks that allows a card holder to borrow money at short notice.
What are the terms and conditions required for a credit agreement between the business and supplier?`
The credit limit, credit period, frequency of payment, the method of payment and retrospective discount.
What is credit period?
Credit period is the maximum amount of time that a business can take to pay what is owed for a specific month.
What is the frequency of payment?
It is the frequency with which a business will pay a supplier.
What is the method of payment?
It is the way in which businesses sends the money owed to the supplier.
Why do suppliers give out credit accounts?
As the business would be more likely to buy from them. This is because the business might not have enough money to buy the products/services to suit the customer.
How is a business able to get trade credit?
The business has to apply for a supplier for a credit arrangement and it will probably have to complete a credit application form.
Why is cash unlikely to be an appropriate method of payment?
As the amount owed is likely to be a large amount of money.
What could suppliers do to draw in businesses?
They may offer retrospective discounts as an incentive to a business to buy from them.
Why are short term sources of useful?
They could be useful as costs are likely to be incurred in order to meet customers’ needs, and this can happen before customers pay for the products that they are purchasing.
