Identification of the sources of finance available to a medium size business, - Assignment Example

The legal implication comes in handy in that if the business does not go into overdraft, then the bank cannot charge interest. Overdrafts are repayable on demand, this could have a negative effect to the business in case of bankruptcy or where the business has no liquid cash to repay, posing a financial risk as well. A commitment fee is usually charged by the bank where a business wishes to increase its overdraft facility. No tax is charged. We can compare the opportunity cost of opting for overdrafts as compared to short term loans, with short term loans, the business does not have to worry about the bank withdrawing an overdraft before it is in a position to repay because there is an element of security which is not available with normal overdrafts.

Trade credit is an interest free short term loan. If a business has a good relationship with its suppliers, this could be a viable choice of finance. Raw materials may be purchased on credit with payment terms varying from between 30 to 90 days. In a period where the general price of goods and services is escalating, purchasing through credit keeps costs down. How a business operates its credit facility has a significant influence on credit scoring affecting its future accessibility to credit.

Also, a company’s credit rating could be worsened if the business delays in payments therefore making it difficult to obtain additional trade credits bringing in a tangible financial risk. Trade credits are not subjected to tax. If a business wishes to borrow from a bank for only a short period of time to purchase items such as fixed assets, then that would be termed as taking a short term loan. The amount is given in full at the beginning of the period and is paid in instalments. Term loans have legal implications that can be sited by the fact that the loans carry a facility letter setting out the terms of the