chapter 24 *

Question 1

what is short term finance

Answer 1

this is needed for a day to day running of a business and is usually up to a period of 3 years. there must be a sufficient inflow of cash to meet the cahs outflows

Question 2

examples of short term finance- overdraft

Answer 2

there are 2 types of accounts (deposit accounts- savings) and (current accounts- used to make and receive payments).

a deposit account requires a period of noticde before funds can be withdrawn.

current accounts earn less interest than savings accounts or even none at all.

when a overdraft is granted no money is credited to he current account but the business is allowed to run the account down to 0 and then a further pre arranged amount can be drawn.

if a business wants a alrger overdraft it has to negotiate for one for which it might be charged an arrangmenet fee , if it fails to do this and tries to overdraw more the bank may refuse to release money.

interest is only paid on overdraft on the amount that gets withdrawn.

Question 3

short term finance- loans

Answer 3

short term loans are tended to be used to buy specific bits of equipment of purchase a particular raw material.

a seperate account will be opened and the full amount gets credited to the businesses current account.

when repayments are made they are taken from the busiensses current accounts and paid into the loan account therefore reducing the amount of loan outstanding.

Question 4

factors influencing a banks decsion to lend

Answer 4

1. type of product being sold
2. companies past trading record
   - what the finace is used for

Question 5

define factoring

Answer 5

where a business sells its debts to raise finace

Question 6

what is hire purchase

Answer 6

this is a method of paying for a item over a period of months or years.

Question 7

what is medium term finance

Answer 7

this is over a period of 3-10 years

Question 8

medium term finance- medium term loan

Answer 8

a agreed amount is credited to a businnes current account. the rate of interest is vital

Question 9

medium term finance- leasing

Answer 9

allows payments to be made in instalments. leasing a item is like renting it

Question 10

what is long term finance

Answer 10

usually for a period of time in excess of 10 years

Question 11

long term finance- long term loan

Answer 11

used for expensive pieces of machinery and the cost can be spread over a lengthy period of time up to 20 years.

Question 12

long term finance- debenture

Answer 12

these are only availble to a public limitted company. the company doesn’t borrow money from the bank it sells debentures to investors in order to raise finance.

the debentures carry a fixed rate of interest which the company must pay to the debenture holder every year and then it can be resold to someone else if the investor needs the money back before it matures.

debentures will be secured on a specific asset of the company so that if there’s any financial problems the debenture holders can force the company to sell the asset in order to get their money back.

Question 13

what is sale and leaseback

Answer 13

this is where the asset is sold but then leased back for long periods of time.

Question 14

internal and external sources of finance

Answer 14

finance is classified whether it’s internal or external.

if finance is raised internally it doens’t increase the debts of the business

external is provided by people or outside the business in the from of loans, overdrafts, shares and debentues