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Advantages.
• It is useful in financial crisis which an accountant cannot forecast due to abrupt fall in profits thus liquidity problems.
• In some cases it may be secured on goodwill thus making it flexible finance.
• It does not entail preconditions and is therefore investible in high-risk situations when the firm would not have finance in normal circumstances.
• It is raised faster and as usual is ideal to invest in urgent ventures e.g. documentary investments e.g. treasury bonds, shares, treasury bills, housing bonds etc.
• If not used for a long period of time – it does not affect the company’s gearing level and therefore does not relate to company’s liquidation or receivership.
• Less formalities/procedures involved.
Disadvantages.
• It is expensive as the interest rates of overdrafts are much higher than bank rates.
• The use of this finance is an indication of poor financial management principle.
• It may be misused by management because it does not carry pre-conditions
• Being a short-term financial arrangement, it can be recalled at short notice leaving the company in financial crisis.
Kavungya answered the question on March 11, 2019 at 13:44
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