Which facility allows spending beyond the available funds up to a pre-set limit and is typically the cheapest form of external financing?

Which facility allows spending beyond the available funds up to a pre-set limit and is typically the cheapest form of external financing?

• A. Creditors
• B. Overdrafts
• C. Leasing
• D. Revenue expenditure

Answer: (B)

An overdraft facility is a bank arrangement that lets a business spend more than its available cash up to an agreed limit. It’s designed to smooth short-term cash-flow gaps, so you can pay suppliers or cover expenses even when receipts are delayed. Because you’re charged interest only on the amount you overdraw (and not on the whole potential limit), and there’s no fixed repayment schedule, it’s typically cheaper than other external financing options that require regular repayments or long-term commitments. The limit is pre-set by the bank, giving you quick, flexible access to funds for immediate needs. Other options don’t fit this scenario as neatly: using suppliers credit is trade credit but isn’t a formal facility tied to your account balance, leasing funds asset purchases rather than providing general cash, and revenue expenditure refers to day-to-day operating costs rather than financing.

An overdraft facility is a bank arrangement that lets a business spend more than its available cash up to an agreed limit. It’s designed to smooth short-term cash-flow gaps, so you can pay suppliers or cover expenses even when receipts are delayed. Because you’re charged interest only on the amount you overdraw (and not on the whole potential limit), and there’s no fixed repayment schedule, it’s typically cheaper than other external financing options that require regular repayments or long-term commitments. The limit is pre-set by the bank, giving you quick, flexible access to funds for immediate needs.

Other options don’t fit this scenario as neatly: using suppliers credit is trade credit but isn’t a formal facility tied to your account balance, leasing funds asset purchases rather than providing general cash, and revenue expenditure refers to day-to-day operating costs rather than financing.