A manufacturer called Luma Tags makes engraved identity tags for pets. Its two owners have received an order from a chain of veterinary practices, but they ...
Question 1 Report
A manufacturer called Luma Tags makes engraved identity tags for pets. Its two owners have received an order from a chain of veterinary practices, but they need $12 000 to buy a laser cutter before manufacturing can begin. They have already used most of their personal savings to start the business. A supplier has offered 60 days' trade credit for metal sheets. The bank has offered a three-year loan, while a local investor wants a share of future profits. The owners want to protect their cash flow and keep control of pricing and product decisions.
(a) What is meant by trade credit? [2]
(b) Identify one internal source of finance that Luma Tags could use. [1]
(c) Explain one disadvantage to Luma Tags of using a bank loan to purchase the laser cutter. [3]
(d) Which one of the following sources of finance is most likely to reduce the owners' control of the business? Give one reason.
A Retained profit
B Trade credit
C A local investor
D Bank overdraft [2]
Answer Details
(a) Trade credit is an agreement under which a business receives goods now and pays the supplier later. Here, Luma Tags can receive metal sheets and pay after 60 days. [2]
(b) Personal savings are an internal source of finance because they come from the owners rather than an outside lender or investor. Retained profit or selling an owner's asset would also be valid. [1]
(c) A bank loan requires repayments and interest, increasing Luma Tags' costs. Repayments may still be due when sales are low, which could create cash-flow problems and leave less money available for materials, wages or other expenses. [3]
(d) A local investor is most likely to reduce the owners' control. The investor may receive shares or voting rights, allowing them to influence pricing, product and other business decisions. [2]
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