UK fashion T-shirt manufacturer Stafford Fashions Ltd needs a new machine costing £125 000 to cut fabric for its T-shirt production lines.
Which one of the following would be the MOST appropriate source of finance?
Select ONE answer:
- Trade credit
- Overdraft
- Leasing
- Debenture
Show your workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 3
- Not correct – trade credit is normally designed for purchase of raw materials such as fabrics from suppliers rather than large items of capital equipment, such as a new machine.
- Not correct – overdrafts are usually given to help cash flow problems in the short term not for long term purchases of assets.
- Correct – leasing, allows a company to rent/without owning an asset. Leasing is the most suitable for SF Ltd because they will have the use of the cutting machine immediately. Therefore SF Ltd will not have to find, borrow or pay out the full £125k before starting to earn revenue and potentially profits from its operation.
- Not correct – debentures offer longer term finance usually to develop much larger capital projects, which is not what is required to purchase a piece of equipment costing £125 000.
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