Why should a permanent increase in working capital be funded by long-term finance rather than an overdraft?

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Question

Why should a permanent increase in working capital be funded by long-term finance rather than an overdraft?

Accepted Answer

An overdraft is repayable on demand, so a permanent need funded that way leaves the business exposed — Award 1 mark. Finance should match the life of what it funds, and this mismatch is precisely how an overtrading business gets caught.

Answer

Long-term finance carries no interest

Answer

Accounting standards require it

Answer

An overdraft always costs more than a long-term loan

Answer

An overdraft is repayable on demand, so a permanent need funded that way leaves the business exposed

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