Anar Karim
Mr.Hounsell
Sources of Finance Worksheet
For the following items below, decide which form of external finance is suitable and why? (You may have to decide between more than one, evaluate the best solution).
Item:
An unexpected bill for repair of machinery. It must be paid immediately. The business has insufficient funds in its bank account.
Trade Credit – This is suitable because the company could get their machine fixed but on the other hand cannot pay 'immediately' they need to pay at a later date, usually 30-90 days. The cost of the service could also go higher if the company does not pay early.
Bank Overdraft (Best Solution) – over drafting money from the bank is suitable because it stays under your name and can be paid back over time since the amount borrowed depends on the borrowers need at the time. Also, since the company has no sufficient funds in its bank account, if bank overdraft is used, they don’t need to pay interest until the account is overdrawn.
5 new delivery vehicles need to be purchased for the company.
Hire Purchase (Best Solution) – The Company can pay down payment and can agree to pay the rest over a period of time, preferably after making profits from their deliveries. In the end, after all the payment have been done, the vehicles are legally the company’s property, giving them ability to use them at any time for deliveries.
Leasing – Leasing the vehicles would be a good solution if they wanted the cars for a selected period of time. It is useful when the vehicles are used occasionally, for example, if the company had to do extra deliveries during specific seasons or holidays. The vehicles are not their property, they are simply renting and don’t need to pay maintenance and repair costs (which could save them money).
A sports team needs new uniforms.
Trade Credit – Trade credit can benefit the team because they can use the uniforms and pay the supplier back over a period of time. Most likely, they will not need so much time because the cost of uniforms might not be major, and therefore, paying earlier can result in good business relations with the suppliers.
Credit Card (Best Solution) – Because it is only one team, the company is able to pay by their credit card. Also, interest rates can be avoided if the monthly accounts are settled. Credit cards are convenient and flexible since they can be paid with upfront without consulting too many people and borrowing a certain amount of money from the bank.
A new machine is required for a printing company.
Trade Credit (Best Solution) – With trade credit, the company has time to pay back the cost of the machine and it does not waste anybody’s money, also, no internet has to be paid at the end. If the company can pay earlier, they might be offered discounts by the supplier which will end in a good relationship between them and build loyalty.
Bank Loan – Because it’s a new machine and most likely crucial for a printing company, the cost of the machine will be high and at the end, interest needs to be paid. At least the bank will have a guarantee that you will pay back the amount because of liquidity.
A builder needs to buy materials for building a villa.
Hire Purchase (Best Solution) – This would give the builder time to pay the money back after building the house, which would take a period of time. This would be the best solution because it is also interest fee, which would not raise worry for the builder in paying more than he borrowed.
A new company is looking for start up capital.
Ordinary Shares (Best Solution) – because the company hasn’t started, they need people to buy shares so they can use that money to start up their business. This is a long term process because the share holders, over time, are what will build the company up. The prices of stocks will also change in price depending on how much profit is made.
A firm is looking to recover bad debts.
Industrial loan Specialists (Best Solution) – Because the firm is not able to raise money and pay off its debt, an organization can provide a fund for them. These organizations are very helpful because they supply businesses that have difficulty in raising money. By doing this, the firm would have money to pay off their debt and note some strategies in how to raise money for the future.
A salesman is paying for flights and accommodation for an overseas sales trip.
Credit Card (Best Solution) – This is most suitable to pay for things that do not cost too much. Also, with a credit card, payments can be done online easily since it is flexible and secure.
An unexpected bill for repair of machinery. It must be paid immediately. The business has insufficient funds in its bank account.
Trade Credit – This is suitable because the company could get their machine fixed but on the other hand cannot pay 'immediately' they need to pay at a later date, usually 30-90 days. The cost of the service could also go higher if the company does not pay early.
Bank Overdraft (Best Solution) – over drafting money from the bank is suitable because it stays under your name and can be paid back over time since the amount borrowed depends on the borrowers need at the time. Also, since the company has no sufficient funds in its bank account, if bank overdraft is used, they don’t need to pay interest until the account is overdrawn.
5 new delivery vehicles need to be purchased for the company.
Hire Purchase (Best Solution) – The Company can pay down payment and can agree to pay the rest over a period of time, preferably after making profits from their deliveries. In the end, after all the payment have been done, the vehicles are legally the company’s property, giving them ability to use them at any time for deliveries.
Leasing – Leasing the vehicles would be a good solution if they wanted the cars for a selected period of time. It is useful when the vehicles are used occasionally, for example, if the company had to do extra deliveries during specific seasons or holidays. The vehicles are not their property, they are simply renting and don’t need to pay maintenance and repair costs (which could save them money).
A sports team needs new uniforms.
Trade Credit – Trade credit can benefit the team because they can use the uniforms and pay the supplier back over a period of time. Most likely, they will not need so much time because the cost of uniforms might not be major, and therefore, paying earlier can result in good business relations with the suppliers.
Credit Card (Best Solution) – Because it is only one team, the company is able to pay by their credit card. Also, interest rates can be avoided if the monthly accounts are settled. Credit cards are convenient and flexible since they can be paid with upfront without consulting too many people and borrowing a certain amount of money from the bank.
A new machine is required for a printing company.
Trade Credit (Best Solution) – With trade credit, the company has time to pay back the cost of the machine and it does not waste anybody’s money, also, no internet has to be paid at the end. If the company can pay earlier, they might be offered discounts by the supplier which will end in a good relationship between them and build loyalty.
Bank Loan – Because it’s a new machine and most likely crucial for a printing company, the cost of the machine will be high and at the end, interest needs to be paid. At least the bank will have a guarantee that you will pay back the amount because of liquidity.
A builder needs to buy materials for building a villa.
Hire Purchase (Best Solution) – This would give the builder time to pay the money back after building the house, which would take a period of time. This would be the best solution because it is also interest fee, which would not raise worry for the builder in paying more than he borrowed.
A new company is looking for start up capital.
Ordinary Shares (Best Solution) – because the company hasn’t started, they need people to buy shares so they can use that money to start up their business. This is a long term process because the share holders, over time, are what will build the company up. The prices of stocks will also change in price depending on how much profit is made.
A firm is looking to recover bad debts.
Industrial loan Specialists (Best Solution) – Because the firm is not able to raise money and pay off its debt, an organization can provide a fund for them. These organizations are very helpful because they supply businesses that have difficulty in raising money. By doing this, the firm would have money to pay off their debt and note some strategies in how to raise money for the future.
A salesman is paying for flights and accommodation for an overseas sales trip.
Credit Card (Best Solution) – This is most suitable to pay for things that do not cost too much. Also, with a credit card, payments can be done online easily since it is flexible and secure.
1 comment:
1. OK - Bank OD best.
2. OK, but Leasing better than HP.
3. Sponsorship
4. Bank Loan 1/2
5. Trade Credit
6. Bank Loan or Venture Capital
7. Debt Factoring
8. Credit Card.
Need a bit of review here, Anar. Good effort though, some good analysis.
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