Question:
Explain trade credit and bank credit as sources of short term finance for business enterprises.
Answer:
Trade Credit: Trade credit is the credit extended by the trader to another to purchase goods and services. It facilitates the purchase of supplies without immediate payment. In books of accounts they are shown as "creditors' or ‘ills payable'.
Merits of Trade Credit
- It is a convenient and continuous source of finance.
- It is readily available.
- It helps in promoting sales of an organization.
- If an organization wants to expand its inventory level so as to meet expected rise in demand, it may use trade credit.
- It does not demand any security.
Demerits of Trade Credit
- When easy and flexible trade credit is available, it may induce the firm to indulge in over trading.
- Trade credit can meet only limited financial needs. Funds required for inventory can be met through it but not others like plant and machinery, land and building or salaries of employees etc.
Bank Credit: Borrowings from banks are an important source of finance to companies. Bank lending is still mainly short term, although medium-term lending is quite common these days.
Short term lending may be in the form of:
- An overdraft, which a company should keep within a limit set by the bank. Interest is charged (at a variable rate) on the amount by which the company is overdrawn from day to day.
- A short-term loan, for up to three years.
- Medium-term loans are loans for a period of three to ten years.
The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and risk of the borrower. A loan may have a fixed rate of interest or a variable interest rate, so that the rate of interest charged will be adjusted every three, six, nine or twelve months in line with recent movements in the Base Lending Rate.
Merits of Bank Credit
- Economical: Rate of interest charged by banks is quite nominal and is therefore economical.
- Maintains business secrecy: Banks maintain secrecy of the business. They do not disclose the information shared to any third party.
- Less formalities: As compared to issue of shares, debentures or accepting public deposits, it has less legal formalities..
- Flexible source: It can be increased or decreased as per the requirements of the business. It is not so that once a loan is taken it can't be reduced.
Limitations of Bank Credit
- Short-term financing: It does not provide loans for long term as shares and debentures do.
- Difficult procedure: As compared to commercial papers and trade credit, it involves many legal and paper formalities. It makes its procedure difficult.
- Restrictive clauses: Bank credit has many restrictive clauses which includes mortgage on company's assets or ineligibility to raise funds from specific sources.
Sources of Business Finance
Q 1.
Write a note on international sources of finance.
Q 2.
In leasing agreement what right is given to lessee?
Q 3.
What is a commercial paper? What are its advantages and limitations?
Q 5.
Name two sources of funds under owner's fund.
Q 6.
Explain in detail the types of debenture a company can issue.
Q 7.
Which deposits are directly raised from the public?
Q 8.
Explain trade credit and bank credit as sources of short term finance for business enterprises.
Q 9.
State two factors affecting the working capital requirement of a firm.
Q 10.
Differentiate between a share and a debenture.
Q 11.
What advantage does issue of debentures provide over the issue of equity shares?
Q 12.
What is business finance? Why do businesses need funds? Explain.
Q 13.
What is lease financing? Discuss its merits and demerits.
Q 14.
Specify the objective of I.D.B.I.
Q 15.
Give the full form of GDR and ADR.
Q 16.
Why does business enterprise need finance?
Q 17.
Discuss the financial instruments used in international financing.
Q 18.
What is factoring? Discuss its pros and cons.
Q 19.
Why is equity share capital called Risk Capital'?
Q 20.
Who regulates the acceptance of public deposits?
Q 21.
State the meaning of finance. What factors determine working capital and fixed capital requirements of a business?
Q 22.
What do you mean by discounting of bills of exchange?
Q 23.
Name any three special financial institutions and state their objectives.
Q 24.
Preference shares are preferred by company but not by investors. Why?
Q 25.
State various sources of short and medium term funds.
Q 26.
What are public deposits?
Q 27.
What are Indian depository receipts (IDRs)?
Q 28.
What is the status of debenture holders?
Q 29.
Explain different types of preference shares which can be issued by a company.
Q 30.
Describe in brief the features of equity shares.
Q 31.
Why preferences are given to preferential shares?
Q 32.
Retained earnings are not a good source from the values point of view as it is the right of equity shareholders. Do you agree? Justify your answer.
Q 33.
Name zones of the Lessors and Lessees in India.
Q 34.
What are the two important functions of factors?
Q 35.
Mr. John has ? 1,00,000 for investment purposes. Should he invest in equity shares, preference shares, public deposits or debentures? Justify your answer.
Q 36.
Who are called the owners of a company?
Q 37.
What are the preferences given to preference shareholders?
Q 38.
What preferential rights are enjoyed by preference shareholders? Explain.
Q 39.
What are retained profits? Discuss their advantages and disadvantages.
Q 40.
State two factors affecting the fixed capital requirement of a firm.
Q 42.
What is a trade credit?
Q 43.
Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.
Q 44.
List sources of raising long-term and short term finance.
Q 45.
Preference shares are not suitable for which kind of investors?
Q 46.
Describe briefly the factors responsible for selecting a source of finance.
Q 47.
Write a short note on the features of GDRs.
Q 48.
Classify internal and external sources on the basis of time.
Q 49.
As a source of finance retained profit is better than other sources. Do you agree with this view? Give reasons for your answer.
Q 50.
State various sources of long term funds.
