Business Finance Chapter 8

Factoring is a financial service where a factor provides services such as bill discounting and debt collection by purchasing receivables at a discount.

The two methods of factoring are recourse factoring and non-recourse factoring.

In recourse factoring, the client is not protected against bad debt losses, while in non-recourse factoring, the factor assumes that risk.

<p>Factoring is generally considered costly because it charges fees for the services rendered, which can be higher compared to other financing sources.</p> Signup and view all the answers

<p>Factoring services in India are provided by banks like SBI and non-banking finance companies.</p> Signup and view all the answers

<p>Trade credits refer to the limited amount of funds that can be generated through sales made on credit.</p> Signup and view all the answers

<p>Businesses may prefer factoring because it is often cheaper than obtaining finance through traditional bank credit methods.</p> Signup and view all the answers

<p>The RBI played a crucial role in introducing factoring services in India by initiating steps for its development in the early nineties.</p> Signup and view all the answers

<p>Reputation of the purchasing firm, financial position of the seller, volume of purchases, past payment record, and market competition.</p> Signup and view all the answers

<p>It provides a reliable source of funds that can be accessed quickly, allowing for better financial flexibility.</p> Signup and view all the answers

<p>It may lead to lower dividends for shareholders, causing dissatisfaction.</p> Signup and view all the answers

<p>The uncertainty arising from fluctuating business profits makes it an unreliable funding source.</p> Signup and view all the answers

<p>Terms of trade credit can differ based on industry standards and the competitive landscape.</p> Signup and view all the answers

<p>Creditworthiness determines the likelihood that a seller will extend credit, influencing deal terms.</p> Signup and view all the answers

<p>Excessive reliance on retained earnings may lead to sub-optimal use of funds due to overlooked opportunity costs.</p> Signup and view all the answers

<p>It is often readily available to businesses as they establish relationships with suppliers.</p> Signup and view all the answers

<p>Finance is considered the lifeblood of any business as it is essential for carrying out various activities and meeting financial requirements.</p> Signup and view all the answers

<p>Entrepreneurs need to know various sources of finance to ensure they can adequately cover all financial requirements beyond their initial capital.</p> Signup and view all the answers

<p>Factors include the specific financial needs, cost of funds, repayment terms, and the potential risks involved with each source.</p> Signup and view all the answers

<p>Initial capital is often insufficient to meet all financial needs, requiring entrepreneurs to seek additional sources of funding for their business operations.</p> Signup and view all the answers

<p>External sources provide access to larger amounts of funds and can help sharing financial risk while allowing the business to grow more rapidly.</p> Signup and view all the answers

<p>One limitation is the obligation to repay the borrowed amount along with interest, which can strain cash flow.</p> Signup and view all the answers

<p>A clear assessment involves determining how much capital is required, when it is needed, and for what specific purposes.</p> Signup and view all the answers

<p>Understanding the merits and demerits helps business owners make informed decisions when selecting the most appropriate funding source.</p> Signup and view all the answers

<p>Public sector undertakings have experienced a significant growth in lease financing.</p> Signup and view all the answers

<p>Mid-market companies use lease financing as an alternative to traditional bank or institutional financing.</p> Signup and view all the answers

<p>Negative experiences with corporate financing have shifted consumer focus towards retail funding options like car leasing.</p> Signup and view all the answers

<p>The government sector has recently entered the leasing market.</p> Signup and view all the answers

<p>Public deposits are funds raised directly from the public, typically offering higher interest rates than bank deposits.</p> Signup and view all the answers

<p>New companies generally find it challenging to raise funds through public deposits.</p> Signup and view all the answers

<p>Interest rates on public deposits are usually higher to attract more investors directly into the organization.</p> Signup and view all the answers

<p>Lease financing is significant for consumers as it provides an accessible means to acquire durables, like cars, without large upfront payments.</p> Signup and view all the answers

<p>Second debentures are repaid after first debentures.</p> Signup and view all the answers

<p>Borrowers are required to provide security or create a charge on the firm's assets.</p> Signup and view all the answers

<p>Difficult terms and conditions, such as restrictions on the sale of mortgaged goods, can be imposed.</p> Signup and view all the answers

<p>Banks provide timely assistance to businesses in need of funds.</p> Signup and view all the answers

<p>It allows borrowers to maintain secrecy about their business operations.</p> Signup and view all the answers

<p>The issuance of prospectuses and underwriting are not required.</p> Signup and view all the answers

<p>Loans from banks are typically more flexible.</p> Signup and view all the answers

<p>They provide both owned capital and loan capital for long and medium term requirements.</p> Signup and view all the answers

<p>Short-term borrowings offer the benefit of reduced costs due to the reduction of idle capital.</p> Signup and view all the answers

<p>A partnership firm cannot raise money by issuing equity shares, as only joint stock companies are permitted to do so.</p> Signup and view all the answers

<p>Using a combination of sources is advisable because it allows businesses to address the limitations associated with each type of funding.</p> Signup and view all the answers

<p>Factors include the cost of procurement, the period of funds needed, the purpose of use, and the financial structure of the firm.</p> Signup and view all the answers

<p>Shares and debentures are more appropriate for long-term finance needs such as business expansion plans.</p> Signup and view all the answers

<p>The cost of utilizing funds should be compared alongside the cost of procurement to ensure effective financial decision-making.</p> Signup and view all the answers

<p>An example of a short-term source of financing is trade credit or commercial paper.</p> Signup and view all the answers

<p>Matching the purpose with the source ensures that the financing aligns with the company's operational and strategic goals.</p> Signup and view all the answers