(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....
Question 1 Report
(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.
Answer Details
(a) Six credit instruments used in business transactions
- Cheque
- Bill of exchange
- Promissory note
- Bank draft
- Credit card
- Letter of credit (also acceptable: money order/postal order)
(b) Hire purchase as a source of finance
Four advantages:
- It enables Mr. Sylva to acquire and use expensive assets without paying the full price at once.
- Payment is spread over an agreed period in convenient instalments, easing the burden on his cash flow.
- He can put the asset to productive use immediately and use the income earned to pay the instalments.
- It frees his working capital for other day-to-day business needs since the asset is not fully paid for upfront.
Three disadvantages:
- The total cost is higher than the cash price because of the interest added to the instalments.
- He does not own the asset until the last instalment is paid, so it can be repossessed if he defaults, and any earlier payments may be lost.
- The fixed instalments are a continuing liability that can strain the business, especially in periods of low sales.
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