Theory question 103
Business FinanceCommerce 2 (theory)
(a) List six credit instruments used in business transactions.
(b) Mr. Sylva is considering hire purchase as a source of finance for his business operations. State four advantages and three disadvantages of this source of finance.
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(a) Any six: cheque; bill of exchange; promissory note; credit card; letter of credit; bank draft; hire purchase agreement; trade credit/credit note; acceptance credit; treasury bill; debenture.
(b) Advantages (any four): he gets the equipment at once and pays from income; no need for large capital; working capital is kept free; no collateral needed as with a bank loan; easier to obtain than a bank loan; helps the business expand/raise output.
Disadvantages (any three): total cost is higher because of interest; goods can be repossessed if he defaults; he is not the owner until the last instalment; temptation to over-commit; strict terms of the agreement.
Hire purchase lets him use the asset at once but costs more overall.