Short Term Finance

Question 1

Bank Overdraft Features

Answer 1

Flexible, interest charged daily, repayable on demand

Question 2

Bank Overdraft Advantages

Answer 2

Easy to access, immediate finance, no obligation to use full limit, tax deductible interest

Question 3

Bank Overdraft Disadvantages

Answer 3

High/variable interest, risk of recall, may require security, and fees apply

Question 4

Bills of Exchange/Invoice Discounting - Mechanism

Answer 4

Advance against customer invoices,

Question 5

Invoice Discounting - Advantages

Answer 5

Quick, no extra collateral is needed, supports working capital.

Question 6

Invoice Discounting - Disadvantages

Answer 6

Reduces profit margin, can affect customer perception, limited to qualifying invoices

Question 7

Factoring: Disclosed or Undisclosed

Answer 7

A company sells its unpaid invoices to a third-party company (the “factor”) for an advance payment, typically 80-90% of the invoice value. The factor then handles collecting the payment from the customer and, once the invoice is paid, remits the remaining balance (minus fees) to the original company.

Question 8

Factoring Advantages

Answer 8

Quick cash, outsourcing of collection, factoring w/o recourse avoids the risk of bad debts

Question 9

Factoring Disadvantages

Answer 9

Expensive, lost control of customer relations, risk of bad debt is retained in factoring with recourse

Question 10

Crowd funding, peer-to-peer lending and invoice trading

Answer 10

New developments that allow access to a different pool of capital than is usually available to businesses

Question 11

Crowdfunding, p2p & invoice trading Advantages

Answer 11

Quick to access, online, can be tailored to business needs, innovative, diverse pool of capital

Question 12

Crowdfunding, p2p & invoice trading Disadvantages

Answer 12

High costs, only good for raising small sums, under £100k, less regulated