3.4a Sources of finance

Question 1

Short term sources of finance are designed to…

Answer 1

Help a business maintain a positive cash flow

Question 2

Explain one reason why a business might take out a short-term loan

Answer 2

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.

Question 3

Why should overdrafts be used with care or in emergencies?

Answer 3

This is because the bank will charge a high interest rate on the amount borrowed

Question 4

What is Credit Limit?

Answer 4

It is the maximum amount of credit a business has with a supplier or a financial institution.

Question 5

Name some payment methods that businesses may use

Answer 5

Cash, Cheque, Credit Card

Question 6

What is a retrospective discount?

Answer 6

It is a discount applied when a business purchases a certain number of goods or spends a certain amount of money.

Question 7

What is Factoring?

Answer 7

Where firms sell their invoices to a factor such as a bank.

Question 8

Why do businesses use factoring?

Answer 8

It allows them to get cash straight away rather than having to wait.

Question 9

What is a creditor?

Answer 9

A creditor is an individual or business that has lent funds to a business and is owed money.

Question 10

What is a debtor?

Answer 10

A debtor is an individual or business who has borrowed funds from a business and so owes it money.

Question 11

What is trade credit?

Answer 11

It is a credit arrangement that is offered to the businesses by their suppliers.

Question 12

What is overdraft?

Answer 12

Overdraft is a facility offered by banks that allows a card holder to borrow money at short notice.

Question 13

What are the terms and conditions required for a credit agreement between the business and supplier?`

Answer 13

The credit limit, credit period, frequency of payment, the method of payment and retrospective discount.

Question 14

What is credit period?

Answer 14

Credit period is the maximum amount of time that a business can take to pay what is owed for a specific month.

Question 15

What is the frequency of payment?

Answer 15

It is the frequency with which a business will pay a supplier.

Question 16

What is the method of payment?

Answer 16

It is the way in which businesses sends the money owed to the supplier.

Question 17

Why do suppliers give out credit accounts?

Answer 17

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.

Question 18

How is a business able to get trade credit?

Answer 18

The business has to apply for a supplier for a credit arrangement and it will probably have to complete a credit application form.

Question 19

Why is cash unlikely to be an appropriate method of payment?

Answer 19

As the amount owed is likely to be a large amount of money.

Question 20

What could suppliers do to draw in businesses?

Answer 20

They may offer retrospective discounts as an incentive to a business to buy from them.

Question 21

Why are short term sources of useful?

Answer 21

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.