Introduction

Bank Loan

* This is money borrowed at an agreed rate of interest over a set period of time

* This is a medium or long-term source of finance

Advantages

* Set repayments are spread over a period of time which is good for budgeting

Disadvantages

* Can be expensive due to interest payments

* Bank may require security on the loan

Characteristic

* Time to Maturity – describes the length of the loan contract

* Repayment Schedule – payments maybe required at the end of the contract usually on a monthly or semi-annual basis. It will repaid little by little until it is completely retired.

* Interest – interest is the cost of borrowing money. the interest rate charged to cover operating costs, administrative costs and an acceptable rate of return.

* Security – assets pledged as security against loan loss are known as collateral. For example, borrower puts other assets, including cash aside as collateral.

Cost

* Long-term loans usually start at 25,000 and go up toward 200,000. The more money you need, the more rigorous the approval process becomes.

Implication

* Possible delay in getting the loan.

* Not everyone qualifies for a bank loan.

Application

* Best use to construction, major capital improvements, large capital investments, such as machinery, working capital, purchases of existing businesses.

* Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing.

Bank Overdraft

* This is where the business is allowed to be overdrawn on its account

* This means they can still write cheques, even if they do not have enough money in the account

* This is a short-term source of finance

Advantages

* This is a good way to cover the period between money...