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Question

Difficulty: EasyTypes and Sources of Business Capital

A manufacturing firm needs immediate financing to settle its monthly utility bills and acquire raw materials for current operations. Which source of capital is most appropriate for meeting this short-term requirement?

  1. Bank overdraftAnswer
  2. B
    Issue of debentures
  3. C
    Ordinary share capital
  4. D
    Mortgage loan

Answer

Bank overdraft is the most suitable short-term source of capital for financing working capital needs.
Bank overdraft allows a firm to withdraw funds exceeding its current account balance up to an agreed limit, providing an ideal short-term solution for managing operational cash flows such as paying suppliers and utility bills.

Step-by-Step Solution

1
Analyze the financial requirement described in the scenario.
The firm requires funds for utility bills and raw materials, which constitute short-term operational expenses (working capital).
Short-term operational needs require capital sources that are accessible quickly and matured within a short period.
2
Evaluate the financial options based on maturity and purpose.
Bank overdraft is a short-term facility, whereas debentures, equity shares, and mortgage loans are long-term instruments.
Financing short-term assets or expenses with long-term capital creates financial inefficiency and unnecessary capital lock-up.

Key Concept

Classification of Business Capital by Duration (Short-term vs. Long-term)
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Topics

Types and Sources of Business Capital

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