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I. Overdrafts
These are very short-term sources of finance to the company and are usually used to finance the
company’s working capital or solve its liquidity problems. This finance is usually not secured and is
more costly than long-term loans as much as its interest is 1-2% higher than bank rates. Interest on
overdrafts is computed on a daily basis although it may be paid monthly.
2.Bills of Exchange-A bill of exchange us defined as an unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on
demand at a fixed or determinable future date a certain sum of money to the order of the person
or to bearer. Most of the bills mature between 90-120 days although they could be sight bills i.e.
payable on sight or issuance
3.Debenture Finance- It is a document that is evidence of a debt which is long-term in nature, and confirms that the
company has borrowed a specific sum of money from the bearer or person named in the
debenture certificate. Most debentures are irredeemable thus forming a permanent source of
finance to the company. If these are redeemable then these will be long-term loans which range
between 10-15 years. They can be endorsed, negotiated, discounted or used as securities for
loans. They carry a fixed rate of interest which is payable after six months i.e. twice a year.
4.Hire Purchase-This is an arrangement whereby a company acquires an asset by paying an initial installment
usually 40% of the cost of the asset and repays the other part of the cost of the asset over a period
of time. This source is more expensive than bank loans. Companies that use this source of
finance need guarantors as it does not call for collateral securities to raise. The company hiring
the asset will be required to honor all the terms of the arrangement which means that if any term
is violated then the hire may repossess the asset
NatalieR answered the question on February 9, 2022 at 08:19