Compare and contrast (describe and explain the relative advantages and disadvantages) of an overdraft versus a...

Compare and contrast (describe and explain the relative advantages and disadvantages) of an overdraft versus a term loan versus project finance versus a syndicated loan versus hire purchase versus leasing. (350 words max – you might want to simple create a table and explain pros and cons)

Homework Answers

Answer #1
Advantages Disadvantages
Bank Overdraft

1. It’s good for business owners that operate on a seasonal basis and need to cover short-term cash flow issues

2. Borrower only pay interest on the funds he withdraw

1. If borrower can't repay the amount withdrawn from overdraft facility then his assets are also liable for repayment.

2. The facility can be just as quickly closed down by the bank if borrower breach the terms and conditions of the facility or even the covenant reporting requirements of the overall business loan.

Term Loan

1. Term loans are often offered at lower interest rates compared to other shorter-term financing options, such as a business credit card.

2. Term loans are paid back in fixed instalments on a set schedule, so it’s simple to project the required budget for the duration of the loan period.

1. Borrower has to provide specific collateral for getting term loan from lender

2. Borrowers has to pay higher fees for getting term loan like origination fees, prepayment penalties, late payment penalties, and monthly or annual loan fees.

Project Finance 1. Project financing is especially applicable in cases of two or more manufacturers joining forces to build a new plant in the presence of the economy of scope in production.

1. Raising capital through project finance is generally more costly than through typical corporate finance avenues. The greater need for information, monitoring and contractual agreements increases the transaction costs.

2. Due to its high complexity, project financing requires higher transaction costs compared to those incurred in direct financing.

Syndicated Loan

1. Since a syndicated loan is contributed to by multiple lenders, the loan can be structured in different types of loans and securities.

2. The borrower can enter into a single loan agreement rather than entering into separate loan agreements with separate the lenders. This reduces the heavy paperwork and efforts for both the borrowers and the lenders.

1. The borrower becomes responsible to a group of lenders rather than a single entity. This means that if he defaults his payments, he risks opening him to a large number of lenders in one go. Thus he cannot opt for a loan to repay another loan.
Hire Purchase

1. With hire purchase agreements, interest is fixed for the duration of the repayment term, and often works out lower than options such as an overdraft or bank loan.

2. Under hire purchase agreement, purchaser will own asset after making last installment.

1. Purchaser of assets will end up paying a higher amount under Hire purchase.

2. Purchaser commits to make fixed payment for particular asset, so under difficult situation if he is unable to make that payment then the lending facility could be within their rights to seize the asset.


1. Leasing is classified as an off-balance sheet debt and doesn’t appear on the company’s balance sheet.

2. Leasing is an ideal option for a newly set-up business given that it means lower initial cost and lower CapEx requirements.

1. At the end of the leasing period, the lessee doesn’t end up becoming the owner of the asset though quite a good sum of payment is being done over the years towards the asset.

2. The Person taken assets under lease agreement remains responsible for the maintenance and proper operation of the asset being leased.

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