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.
- State four differences between the two financing options suggested.
- 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
- The business/project Hassan Saidy wants to undertake must be viable.
- The volume of his business transactions/turnover with the bank would be considered.
- The type of collateral security provided by Hassan Saidy must be over and above the worth of the loan being applied for.
- 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.
- The net worth of Hassan Saidy’s business would be considered.
- The government policy regarding the subject matter of the loan would determine the possibility of granting the loan.
- The length of time required for the repayment would be considered.
- The purpose for the loan vis-a-vis the total cost of the project would be considered.
- Hassan Saidy must provide a guarantor who is also a customer to the bank.