O-LevelCommerceFinance7100/21 · Oct/Nov 2019 · Q514 Marks

Jemila owns a small business selling garden tools. She finds it difficult to obtain finance. She always needs to know if she has enough working capital.

(a)What would be the working capital of Jemila's business if the current assets were valued at $30000 and the current liabilities at $27000? Show your working.[2]
(b)State one reason why small businesses find it difficult to obtain finance.[1]
(c)Which of the following statements about banking are true and which are false? Tick (✔) TRUE or FALSE in the correct column. A paying-in slip is used to deposit money in a savings account. A debit card is used to postpone payment. Internet banking has led to bank branches closing. TRUE FALSE[3]
(d)Jemila wants to buy a small piece of land next to her business to provide parking for her customers. Should she apply for a bank loan or a bank overdraft to pay for the land? Discuss both options. Which would you recommend? Give reasons for your answer.[8]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

[2] Correct answer $3000 (2); Method $30 000–$27000 (1)
[1] Poor/no credit history; Limited cash flow; Limited assets/lack of collateral; Unable to access financial markets; Uncertainty for investors/concerned that they will not be paid
[3] A paying-in slip is used to deposit money in a savings account. (TRUE); A debit card is used to postpone payment. (FALSE); Internet banking has led to bank branches closing. (TRUE)
[8] Bank Loan: Would usually be repaid by monthly instalments over a set period of time, with a fixed rate of interest. It is a long-term source of finance usually for a large amount. Jemila would receive a fixed amount. Normally used for a specific purpose, such as buying equipment, i.e. an asset such as land because the bank will use it as security/collateral, but Jemila might still need a deposit.
[8] Overdraft: Would enable Jemila to spend more than she has in the bank, up to an agreed limit. Interest is charged on the amount overdrawn. Overdrafts tend to be used in the short term for working capital requirements – such as buying more stock currently she has $3000 working capital. The interest charged is likely to be higher than for a loan. They do not require much paperwork to complete. The overdraft can be received quickly and repaid at irregular intervals – when Jemila has the money – but interest will be charge until she has repaid in full.
[8] Evaluation example: Jemila needs finance for a specific project – a fixed asset of land so a loan seems most appropriate if she doesn't have enough cash available, but it will depend on how much the land costs. If it is a large amount of money, which would have to be repaid over a longer time, then a loan is again the recommended option, but if the land is a relatively small amount of money, Jemila might just use her overdraft and clear the overdrawn amount quickly, or use her working capital of $3000.