Question

Differentiate between bank overdraft and accruals.
Discuss the different forms of long-term debt.

Answer 1

Bank overdraft is a facility provided on Current account of a bank, under this facility a credit limit is fixed for excess withdrawal of fund even after your bank account has zero balance.It allows you to over withdraw money whenever required for short term period. it is basically used for short term financing requirements. on the other hand accruals are another source of financing, but it results from trade credit. under accruals goods and raw materials are purchased on credit from suppliers and payments are made after a specified period. no interest is charged on accruals if paid with in the credit period.

Different forms of long term debt- there are different forms of long term debt. some of them are as follows:

Issuance of bonds- Bonds is a very important and commonly used source of long term debts. Bonds are debt instruments issued to public with a stated coupon rate and face value and a fixed maturity period.

Institutional Borrowings: this is another way to arrange debts from long term source of borrowing. under this source funds are arranged in the form of term loan from various financial institutions or from banks with stated term of interest rate, maturity period, mode of payment etc.

venture Funding is another way to arrange long term debt. it is commonly used when Business is very new and in this case venture capitalist provides debt either in conventional form or conditional form.

Asset Securitization is another way through which long term funds can be borrowed. In asset securitization a pool of existing assets are created and on the backing of pool of securities, debt units are issued by other financial intermediary