Compare borrowing and supplier finance
Explain overdrafts, loans, trade credit, leasing and hire purchase, matching their costs and terms to the need.
Section 5 · Financial information and decisions
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which source is most directly linked to a temporary negative bank balance?
What you will learn
- Recognise common external debt sources
- Compare their purposes and obligations
- Explain repayment and cash-flow risks
Different debt sources have different terms
A bank overdraft lets a business draw beyond its account balance up to an agreed limit; it can suit temporary timing needs but may be repayable on demand and carry variable charges. A bank loan provides an agreed amount with scheduled repayment and interest, often for a longer period.
Trade credit allows a buyer to pay a supplier later. It may support cash timing, but late payment can damage supplier relationships or trigger penalties. Leasing provides use of an asset for payments under an agreement; hire purchase usually allows use while instalments are paid, with ownership conditions set by the contract.
Check the full obligation
The amount received is not the same as the total cost. Compare interest, fees, repayment dates, security, flexibility and what happens if the business misses a payment.
Choose finance that fits the purpose and the business's ability to pay. A short-term source can be risky for a long-lived asset if repayment is due before the asset generates benefits.
Pause and explain
What should a business compare before accepting a loan?
Worked example
A retailer needs a delivery van for five years and has an uneven cash balance over each month. Compare a bank overdraft and leasing for these two needs.
Show the worked solution
- The overdraft can help with temporary monthly timing gaps.
- Leasing can provide the van for regular payments over its use period.
- Compare total cost, flexibility, contract terms and repayment ability.
Answer An overdraft may help with temporary cash timing but could be withdrawn or costly and is not automatically suitable for a five-year asset. Leasing may spread van payments across its use period, but the retailer must compare total payments, contract restrictions and ability to pay.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A firm needs $15,000 for a machine expected to last six years. A lender offers a three-year loan. Explain one benefit and one repayment risk to assess.
Give me a hint
A fixed schedule can aid planning, but compare the loan term to cash generated by the machine.
Compare my reasoning
- The loan gives the firm a known amount for the purchase.
- Repayments fall due over three years, shorter than the asset's expected life.
- Forecast cash available for each repayment date.
The loan can provide the purchase funds and a defined repayment schedule. Because repayments end sooner than the machine's six-year use, the firm should check that early cash flows can cover them without disrupting wages or suppliers.
Look for these in your work
- Benefit described
- Term mismatch recognized
- Cash-flow assessment requested
A manufacturer considers asking suppliers for 60-day trade credit instead of 30 days. Explain a possible cash benefit and a relationship risk.
Give me a hint
Later payment can preserve cash temporarily, but suppliers may have limits or costs.
Compare my reasoning
- The manufacturer retains cash for longer after receiving inputs.
- Suppliers may face their own cash needs or refuse the extended terms.
- Consider discounts, prices, reliability and agreed terms.
Longer trade credit may give the manufacturer more time to collect sales revenue before paying for inputs. Suppliers may refuse, raise prices or reduce reliability, so the firm should agree terms openly and consider any lost early-payment discount.
Look for these in your work
- Timing benefit explained
- Supplier risk included
- Terms and cost considered
A business considers leasing equipment rather than using hire purchase. Identify two contract points to compare before choosing.
Give me a hint
Both provide asset use through payments, but ownership and obligations depend on the agreement.
Compare my reasoning
- Compare total payments and fees.
- Check ownership, maintenance and return conditions.
- Check contract length and ability to end or change the agreement.
The business should compare total payments and fees, then check ownership, maintenance, return and end-of-contract conditions. It should also confirm that the term fits its likely use and cash flow; the agreement terms determine the practical differences.
Look for these in your work
- Cost compared
- Ownership and obligations checked
- Duration and flexibility checked
Common mistakes
- Calling a supplier's payment delay free finance
- Ignoring fees and contractual terms
- Using an overdraft as if it were permanent long-term capital
What can you explain now?
Which source is most directly linked to a temporary negative bank balance?
Compare with the explanation
Bank overdraft
An agreed overdraft lets a business draw beyond its balance within a limit.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why can an overdraft suit a temporary timing gap but be risky as permanent finance?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.