(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....

Answer Details

(a) Six credit instruments used in business transactions are:

1. Bank loans
2. Trade credit
3. Commercial paper
4. Bonds
5. Debentures
6. Letters of credit

(b) Hire purchase is a type of financing arrangement where the buyer acquires an asset and pays for it in installments over time. Here are four advantages and three disadvantages of hire purchase as a source of finance:

Advantages:

1. Access to assets: Hire purchase allows a business to acquire an asset, such as machinery, vehicles, or equipment, without having to pay the full cost upfront, thereby preserving its cash flow for other uses.
2. Flexible repayment terms: Hire purchase provides flexible repayment terms, such as monthly, quarterly, or annual payments, that can be tailored to the business's cash flow and revenue cycle.
3. Fixed interest rate: Hire purchase has a fixed interest rate, which means that the business can budget and plan its cash flow with certainty, as it knows the exact amount of each installment.
4. Asset ownership: The business becomes the owner of the asset once it completes all the installments, which means that it can use, sell, or trade the asset as it sees fit.

Disadvantages:

1. Higher cost: Hire purchase is usually more expensive than paying cash upfront, as the business has to pay interest on the amount borrowed, as well as any other fees and charges.
2. Risk of default: If the business defaults on its payments, the lender can repossess the asset, which can cause disruption to the business's operations and damage its credit rating.
3. Impact on balance sheet: Hire purchase can impact the business's balance sheet, as the asset is recorded as a liability until all the installments are paid, which can affect the business's creditworthiness and financial ratios.

Overall, hire purchase can be a useful source of finance for businesses that need to acquire assets but have limited cash flow or capital. However, it is essential to weigh the advantages and disadvantages carefully before committing to a hire purchase agreement.