Chapter 4, Market for Credit, Review, Exercise 4-1

The sources of financing for Company RS according to the business plan provided by the company are as follows:

• Bank loans - Bank loans can be a source of finance for Company RS because the business may have banking relationships with the bankers, as it is already a successful company in that area. By acquiring bank loans, the company can finance the construction of the land and the storage facility by securing bank financing in terms of long and short term loans with acceptable terms.
• Lease financing - Lease financing can be used by the company to finance the cost of office equipment and leasehold improvements. Lease financing is the medium and long-term financing that helps the company in acquiring the right to use an asset against a periodical return to the owner of the asset. This will also help the company in using the funds that would have been used for purchasing the asset in more economical operations.
• Trade credit - Another source of financing is the trade credit for the purpose of purchasing the inventories because trade credit will help the company in purchasing the inventories by making the payment at a later date which will provide short-term finance facility to the company.
• Retained Earnings - The company can also use the retained earnings for the purpose of paying various operating expenses until the company starts earning stable revenues. The retained earnings are the earnings which the company have saved in the past years and these earnings are a good source of finance for the company.