Question

What are Advantages and disadvantages of the different non-deposit sources of funds? Post advantages and/or disadvantages...

What are Advantages and disadvantages of the different non-deposit sources of funds? Post advantages and/or disadvantages of 2 or more non-deposit sources of funds considering a Bank’s standpoint.

Homework Answers

Answer #1

Non deposit sources of Funds:

1. Bank loan

2. Bank overdraft

3. Share issues

4. Leasing etc.

Bank loan :

Advantages:

Set repayments are spread over a time which is good for budgeting.

Disadvantages:

  • It can be expensive due to interest repayment.
  • Bank may be require security for this types of loans.

Bank overdraft:

Advantages:

  • It helps to control & manage the period of money going out and cash inflow into a business.
  • For short term purposes ,it is usually cheaper & effective than bank loans.

Disadvantages:

  • Interest repayable on the amount which is overdrawn, so it could be ineffective for the business to repay the due as the overdrawn money could have different in amount .
  • Overdraft can be expensive if it is used for a long-term period of time.

Share issues:

Advantages:

  • Doesn't require to repay.
  • It has to pay no interest.

Disadvantages:

  • Profits are spread out to shareholders as dividend
  • Ownership of the company could hand change in this case.

Leasing:

Advantages:

  • Business can have use of up to date equipment immediately.
  • Payments are spread over a good period of time which is good for budgeting.

Disadvantages:

  • The proper reason which doesn't satisfy from the business's point of view is that this total asset belongs to finance company.
  • Leasing is very much expensive than any other non deposit sources.
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