OVERDRAFTS & TRADE CREDITS

What are “Overdrafts”?

• When more money is removed from a current account than there is available, an overdraft arises. This can be money in a bank account in financial systems.

• When you have extra money in your bank account

• An overdraft is a smaller loan

• If you don’t know, just say so ;)

What are some Disadvantages of Overdrafts? (2 marks so be keen)

• The bank has the right to request an urgent overdraft repayment.

• Overdrafts are inefficient and expensive.

• In contrast to loans, which have a set interest rate, interest rates might change from time to time.

• They are Bad.

What is “Trade credit”?

• Credit given by traders

• this occurs when a company postpones paying suppliers for a while to strengthen their cash position.

• similar to loans, the company can arrange trade credit by allowing businesses to spend more than what is in their bank account. The overdraft will vary with each month, based on how much extra money the business needs.

Which of the following is true for Trade Credit (multiple options may be ticked):

• It is easily or readily available.

• It facilitates the purchase of supplies without immediate payment

• It is given by one trader to another for purchase of goods and services

• All of the above

____ refers to the credit extended by one business firm to another as incidental to sale or purchase of goods & services.

• Cash credit

• Trade credit

• Installment credit

• Bill discounting

Trade Credit is granted to those customers who have reasonable amount of:

• a)Funds in their Bank A/c

• b) Financial standing and goodwill

• c) Weakness

• d) Zero

  Balance in their A/c

What are the advantages of trade credit?

• It is unexpensive

• No interest or repayment is necessary.

• it improves buyer loyalty

What are the advantages of overdrafts?

• Flexible borrowing arrangement since monthly overdraft amounts might change

• Only the amount that is overdrawn requires paying interest.

• In the long run, overdrafts are typically less expensive than loans.

• No interests, repayments involved

• Short notice repayment

What are the disadvantages of trade credit?

• If the payments are not completed promptly, suppliers can stop providing goods altogether or stop offering discounts in the future.

• it puts you at a greater risk for larger debt

• It is bad for your company because of loss

• The market share of your company will decline

Define “Overdrafts”