Intro to Accounting. Sources of Business Finance

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Laksamana College of Business

Accounting Assignment 1

Introduction to Accounting

LCB/1311

University Foundation Course (Group A)


Table of Contents

                                                                                 Page

Part 1

An Overdraft Facility                                                                2

A Long-term Loan                                                                2

A Finance Lease Agreement                                                        3

A Hire Purchase Agreement                                                        3-4

The Formation of Partnership                                                        4

Part 2                                                                                5-6

References                                                                        7-8


Part 1

An Overdraft Facility

        

Definition

It is a formal credit arrangement with a financial institution that permits an account holder to use or withdraw excess cash balance in their account, up to an agreed limit. (O. Wallace, n.d) It is a facility ready for immediate, unforeseen financial needs, but negative balance typically needs to be repaid within a month. Overdraft fees may be charged by the bank for an overdraft facility access. Banks also charge an interest rate which is based on the amount overdrawn – usually at a higher rate.

Advantages

  • An overdraft is there when you need it. You only borrow what you need at a time, which could make it cheaper than a loan. (bizhelp24, 2009)
  • Overdrafts are easy and quick to arrange. (bizhelp24, 2009)
  • Interest is to be paid only for the overdrawn amount. (Jigneshbapna, 2012)
  • No additional expenses for pre-payment of bank overdraft. (Jigneshbapna, 2012)

Disadvantages

  • Interest is charged on the overdrawn amount, but the interest rate is nearly always variable- often at much higher rates, making it difficult to accurately calculate the total cost of borrowing. (bizhelp24, 2009)
  • Because of the availability of overdraft, we may overspend, and administration fees may be charged when you exceed the specified limit. (bizhelp24, 2009)
  • Overdrafts may need to be secured against business assets - which put them at risk if you cannot repay the overdraft. (bizhelp24, 2009)
  • Maintaining a current account is necessary for overdraft facility. (blurtit, n.d)

A long-term loan from a financial institution

Definition

A long-term loan is a form of debt with a prolonged time of period for repayment normally lasting between 3 and 30 years. Obtaining a long term loan provides an organization with working capital to develop property or stock or to finance plant and machinery which can then be used to generate additional profit for the business. A company must disclose its long-term loan on its balance sheet with its date of maturity and interest rate. (Ycharts, 2012)

Advantages

  • Long-term loans boast long lifespan. Long-term loans always run for more than 3 years. (Don Rafner, n.d)
  • A payment schedule – Some long-term loans require quarterly payments, while others call for a monthly fee or some other arrangement. (Don Rafner, n.d)
  • Long-term loans can help a business to grow financially. (Lee Morgan, n.d)
  • Long-term loans normally have lower interest rates. (Lee Morgan, n.d)
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Disadvantages

  • The total payoff at the end of the period will likely reveal that a business has paid back considerably more money than they received initially. (Lee Morgan, n.d)
  • Challenging to get approved - The applicant must prove his ability to repay the loan before the bank will consider approving the application. (Lee Morgan, n.d)
  • New businesses usually finds it more difficult to obtain long-term debt financing, because they have no proven track record, low cash flow, and small asset base. (Don Rafner, n.d)
  • A person or a business may be facing foreclosure or repossession of the ...

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