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Question

Difficulty: MediumBanking: Functions and Services to Trade

A retail distributor in Ibadan requires short-term financial accommodation to resolve sudden working capital shortages during peak inventory restocking. The business owner prefers a flexible credit arrangement that allows withdrawing beyond the current account balance up to an agreed limit, paying interest strictly on the daily overdrawn amount rather than a fixed lump sum. Which banking facility is most suitable for this distributor?

  1. Bank OverdraftAnswer
  2. B
    Bank Loan
  3. C
    Bank Draft
  4. D
    Equipment Leasing

Answer

Bank Overdraft
A bank overdraft is specifically tailored for commercial current account holders who face temporary liquidity gaps. It grants permission to overdraw the current account up to a negotiated ceiling, and interest is debited strictly on the actual overdrawn amount on a daily basis.

Step-by-Step Solution

1
Analyze the trader's financial requirement
The trader needs flexible short-term borrowing to cover fluctuating working capital deficits, requiring interest to be charged only on the exact amount used.
Commercial bank credit facilities differ in terms of flexibility, interest computation, and duration.
2
Evaluate credit facility options
A bank overdraft grants current account holders permission to overdraw up to an agreed limit, calculating interest daily on the overdrawn balance.
Unlike bank loans which charge interest on the total credited sum immediately, overdrafts offer flexible interest based on actual usage.

Key Concept

Bank Overdraft vs Bank Loan in Commercial Banking Services to Trade
Estimated Time:1m 0s
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Topics

Banking: Functions and Services to Trade

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