LDP 6.3 Using Projections to Help Determine Appropriate Loan Type

Question 1

Permanent sources

Answer 1

Include:

• Increases in net worth
• increases in liabilities that do not have to be reduced within one year, and
• reductions in assets that do not have to be replenished right away.

Question 2

Permanent borrowing causes

Answer 2

Those that tie up funds for a period of several years.

Question 3

Temporary sources

Answer 3

Include:

• reduction in assets that will have to be replenished soon (usually within a year) and
• an increase in current liabilities that will have to be reduced within the year.

Question 4

Temporary needs can be met with:

Answer 4

1) Seasonal or Revolving Lines of Credit

2) Short-term Loans

Question 5

Long-term needs can be met with:

Answer 5

1) Permanent Working Capital Loans
2) Installment, Term, or Mortgage Loans
3) Term Loans to Provide Long-Term Financing for Reductions in a Company’s Net Worth

Question 6

Three key considerations when determining the repayment schedule for a long-term loan.

Answer 6

• Useful life of any long-term assets being financed
• Impact of the debt on financial leverage
• Availability of cash flow to service the debt