Short Term finance

Question 1

when are short term sources of finance needed

Answer 1

To help a business maintain a positive cash flow

Question 2

What are 2 sources of short term finance

Answer 2

Overdraft trade credit

Question 3

When should overdrafts be used and why

Answer 3

In emergencies , due to high interest rates charged by banks

Question 4

What are the 3 common features of overdraft

Answer 4

Variable interest rates -the cost of borrowing money will change when the interest rate changes

flexibility - a business uses its overdraft only when it needs to, therefore the business will only pay interest when the overdraft is used

the bank can demand full payment - banks can demand full repayment of an overdraft within 24 hours

Question 5

What is trade credit

Answer 5

This source of finance allows a business to obtain raw materials and stock but pay for them at a later date.

Question 6

Terms and conditions of trade credit

Answer 6

Credit limit - the maximum amount of credit available to a business

Credit period - the length of time the business have to pay what is owed typically 30/60/90 days

Frequency of payment - how often payment is made - typically monthly

Method of payment - the way in which the business makes payment (eg bank transfer, cheque or card payment)

retrospective discount - a discount given when the business has purchased a certain amount of stock or raw materials