6: Finance

Question 1

overdraft

Answer 1

when a business withdraws more cash from a bank account than it holds

short term

Question 2

cons and pros of an overdraft

Answer 2

Pros of an Overdraft:

Quick and flexible access to funds.
Helps manage short-term cash flow issues.
Only pay interest on the amount used.
No need for formal loan arrangements.

Cons of an Overdraft:

High interest rates and fees.
Can encourage overspending.
Bank can demand repayment at any time.
Limited borrowing amount.

Question 3

trade credit

Answer 3

when you buy raw material or components from suppliers today but pay later

short term

Question 4

pros and cons of trade credit

Answer 4

Pros of Trade Credit:

Improves cash flow by delaying payments.
Helps build relationships with suppliers.
No immediate cash needed for purchases.
Can boost short-term liquidity.

Cons of Trade Credit:

Limited to trusted customers or businesses.
May lose discounts for early payments.
Late payments can damage supplier relationships.
Risk of over-reliance on credit.

Question 5

Bank loan

Answer 5

When a business borrows a sum of money and pays it back with interest over an agreed period of time

long term

Question 6

pros and cons of bank loan

Answer 6

Pros of a Bank Loan:

Fixed repayment terms provide predictability.
Lower interest rates compared to overdrafts.
Larger amounts can be borrowed.
Helps build business credit.

Cons of a Bank Loan:

Requires collateral or a good credit history.
Fixed repayments may strain cash flow.
Long approval process with strict requirements.
Risk of debt if business struggles to repay.

Question 7

income statements

Answer 7

A financial document showing a business’s performance over a period by detailing revenue, expenses, and profit.