Business (Y12) - Sources of finance - Loans and Overdrafts

How long should a bank loan be used for?

Medium-term

Are bank loans an internal or external source of finance?

External

What are the key features of a bank loan?

Provided over a fixed period, rate of interest fixed/ variable, timing and amount of repayments are set, some security required

What are the benefits of bank loans?

Greater certainty of funding, lower interest rate than an overdraft, appropriate to finance fixed assets

What are the drawbacks to bank loans?

Requires security, interest paid on full amount, harder to arrange, start ups and small businesses excluded

Are bank overdrafts used as a short-term source or a long-term source?

Short-term

Are bank overdrafts an internal or external source of finance?

External

What are the key features of a bank overdraft?

Used by businesses of all sizes, ‘owe’ a bank when balance is below zero, flexible, good for helping with seasonal fluctuations in cash flow

What are the benefits of a bank overdraft?

Easy to arrange, flexible, interest only paid on amount borrowed

What are the drawbacks of an overdraft?

Can be withdrawn at short notice, interest rates as interest charge varies, higher interest rate than bank loans