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1.5 Sources of Short-term Finance 1.5.1 Bank Overdraft Bank account holders can prearrange with the bank to draw cheques to a greater valuethan the actual balance in the account. Customers are charged interest on the size of theoverdraft. Bank charges will also apply where an overdraft limit has been exceeded. Bank overdrafts are a fairly cheap form of finance with the added advantage of flexibility.In some cases a small overdraft facility may be offered free of charge. 1.5.2 Short-term Loan Bank customers can formally arrange to borrow a sum of money for a specified period oftime, usually for a specific purpose. Repayments are made monthly, together with an interest charge. 1.5.3 Trade Credit Businesses commonly purchase raw materials or inventory for resale and pay for them later. By delaying payment for inventory, cash is made available for other uses. Using trade credit may appear to be an interest free way of raising finance, however, by delaying payment for goods customers may forfeit discounts. Delayed payments can also lead to poor relations with suppliers. 1.5.4 (Debt) Factoring For a fee, debt collection agencies will buy a company��s debts and then attempt tocollect the money themselves. This is very useful for a company that is experiencing cashflow problems as they can receive a large percentage of their debts in cash before these debtsare due for payment. This can mean a company can receive up to 80% of outstanding cashimmediately without the associated costs of debt collection. The remaining cash may bereceived later (minus the debt collection agency��s fee) once the debtor pays. ?��Company sells its debts. ?��Factoring company pays all cash for trade sales. ?��A fee is charged. 1.5.5 Hire Purchase The cost of an asset may be spread over a period of time whereby a company makes aninitial down payment followed by regular fixed instalments with the additional payment of HPinterest. This source of finance would normally be for a specific asset that would remain theproperty of the lender until the last payment has been made. This could also be a medium termsource of finance, in which case it is referred to as Instalment Credit. 1.6 Sources of Medium-term Finance 1.6.1 Medium-term Loan Medium-term loans are similar to short-term loans, however there is greater flexibility ofconditions. For example: ?��Repayments may not begin until after a certain period has passed. ?��All repayments may be deferred until a specific future date. ?��Interest rates may be fixed or variable or adjusted at regular intervals. With such agreements, as well as interest, an arrangement fee will apply and the loan may be secured on the company��s assets. 1.6.2 Leasing Where a firm does not wish to purchase an asset outright, they may rent it instead from a leasing company. The user does not own the assets, however an option to buy the assets outright once the leasing term is completed may be available. Other advantages include: increased efficiency when equipment is only required occasionally, more up-to-date equipment, reduced maintenance costs. However leasing is more expensive than outright purchase over a long period of time and loans cannot be secured on assets which are leased. 1.6.3 Syndicate Loan Where a larger sum of money is involved or if the customer carries a risk, a group of banks will contribute towards a single loan. 1.6.4 Instalment Credit This source of finance is as per hire purchase but the agreed period is longer.