Short term sources of finance

Question 1

What are the four short-term sources of finance?

Answer 1

Short term loans

Overdraft

Trade payables

Debt factoring

Question 2

What are the advantages and disadvantages of short-term loans?

Answer 2

Advantages
- Reliable source
- Private agreement
- Interest may be fixed rates

Disadvantages
- Interest is payable
- Interest may be high
- Loan must be repaid in full

Question 3

what are the advantages and disadvantages of overdrafts?

Answer 3

Advantages
- Business only borrows what it needs
- Interest is only payable on borrowing utilised
- Once arranged the business doesn’t have to contact the bank to use it

Disadvantages
- Variable interest rates can be volatile
- Overdraft is repairable on demand
- Penalties incurred if a business exceeds the limit

Question 4

What are the advantages and disadvantages of trade payables?

Answer 4

Advantages
- Free finance
- It’s flexible

Disadvantages
- Late payments results in penalties
- Relationship with supplier at risk
- Can be withdrawn at any time

Question 5

Advantages and disadvantages of debt factoring

Answer 5

Advantages
- Cash injected without needing to borrow
- Factor expertise may reduce trade receivable days
- Cost saving from credit control jobs

Disadvantages
- Contacts so it could jeopardise relationship
- Factor fee is a significant cost
- Once out of sourced credit control expert is lost