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Difficulty: HardTypes and Sources of Business Capital

A sole trader operating a supermarket requires immediate funding of ₦500,000\text{₦}500,000 to settle a supplier's invoice due in five days and secure a bulk purchase discount while awaiting payments from credit customers due in thirty days. Considering the legal form of business ownership and the short-term nature of the financial requirement, which of the following is the most appropriate source of capital?

  1. Bank overdraftAnswer
  2. B
    Issue of debentures
  3. C
    Venture capital financing
  4. D
    Issue of preference shares

Answer

Bank overdraft is the most appropriate source of capital.
A bank overdraft is a flexible short-term credit facility provided by commercial banks allowing business owners to overdraw their current account up to an approved limit. It is specifically designed to finance immediate operational expenses and bridge temporary working capital gaps, fitting both the five-day time urgency and the sole proprietorship legal structure.

Step-by-Step Solution

1
Analyze the time horizon of the financial requirement
The money is needed within five days to bridge a thirty-day gap between supplier settlement and trade credit collection, representing a short-term working capital need.
Matching the duration of funding to the asset/liability cycle prevents capital mismatching.
2
Analyze the legal constraints of the business organization
The business operates as a sole proprietorship (unincorporated entity).
Sole proprietorships cannot raise capital by issuing shares or debentures, which are legally reserved for incorporated companies.
3
Select the appropriate commercial capital instrument
A bank overdraft provides flexible short-term borrowing specifically tailored for current account holders managing immediate working capital deficits.
It fulfills both short-term duration and sole trader legal compatibility criteria.

Key Concept

Classification and suitability of short-term versus long-term capital sources across different business forms
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Topics

Types and Sources of Business Capital

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