Commerce WASSCE (PC), 2022

Question 7

 

Hassan Saidy is considering various options of financing his business. He was advised to approach his banker for either a loan or overdraft.

 

  1. State four differences between the two financing options suggested.
  2. State six conditions Hassan Saidy is required to meet for his banker to grant him a loan.

 

Observation

Most candidates who attempted the question did well. However, some candidates did not state the difference on same base.

 

The expected responses to the question include:

 

          (a)       Differences between a loan and an overdraft

No.

Loan

                             Overdraft

1.

A loan is for a stated sum of money

A customer is allowed to issue a cheque for more than his credit balance

2.

It is a long-term liability.

It is a current liability.

3.

The rate of interest is fixed for the length of the loan.

The rate of interest varies during the period of taking an overdraft.

4.

It is granted to anybody who satisfies the conditions for the loan.

It is granted to current account holders only.

5.

It requires collateral security.

It does not require collateral security.

6.

A separate account is opened.

A customer’s current account is used for the overdraft.

7.

A guarantor is needed to obtain a loan.

A guarantor is not needed to obtain an overdraft.


 

 

(b)     Conditions Hassan Saidy is required to meet for his banker to grant him a loan

  1. The business/project Hassan Saidy wants to undertake must be viable.
  2. The volume of his business transactions/turnover with the bank would be considered.
  3. The type of collateral security provided by Hassan Saidy must be over and above the worth of the loan being applied for.
  4. The integrity of Mr. Saidy or his reliability to repay the loan would be considered/The nature of his business liability would also be considered.
  5. The net worth of Hassan Saidy’s business would be considered.
  6. The government policy regarding the subject matter of the loan would determine the possibility of granting the loan.
  7. The length of time required for the repayment would be considered.
  8. The purpose for the loan vis-a-vis the total cost of the project would be considered.
  9. Hassan Saidy must provide a guarantor who is also a customer to the bank.