Question

Q2.Leah Ltd produces a range of central heating systems for sale to builders merchants. As a result of increasing demand for the business’s products, the directors have decided to expand production. The cost of acquiring new plant and machinery and the increase in working capital requirements are planned to be financed by a mixture of long-term and short-term borrowing. Required:

(A) Discuss the major factors that should be taken into account when deciding the appropriate mix of long-term and short-term borrowing necessary to finance the expansion programme.

(B) Discuss the major factors that a lender should take into account when deciding whether to grant a long-term loan to the business.

Answer 1

A)various factors which should be taken into account while deciding whether to finance with short term loan or long term loan are-

1. Duration of the business needs is very much important in order to select short term or long term loans.

2. Maturity concept can also be followed which states that it short term loan requirements are to be funded with short term debt and long term loan requirements are to be funded with long term debt.

3.it should also match the capital structure of the company which is prevalent before taking the loan.

4. It should also account the growth prospect as well as the previous trend of Companies borrowings.

B). Factors a Lender should always take into account while approving loans are as follows-

1. Creditworthiness of the borrower.

2. Liquidity available on the books of accounts of the company.

3. Past performance and previous credit history of the borrower.

4. Whether the debt is secured or unsecured