Lesson 1.3.4a

1.3.4a Short-term sources: overdraft and trade credit Quiz: Pearson Edexcel Business, Unit 3

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 1.3.4a, Short-term sources: overdraft and trade credit: 20 multiple choice questions for the Pearson Edexcel GCSE Business (1BS0), Unit 3: Putting a business idea into practice, written with Revision Ninja.

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The 20 questions

  1. What is an overdraft?

    • Profit kept back in the business and reinvested rather than paid out to the owners
    • Money invested by an outside party in exchange for a share of the company's ownership
    • A long-term loan repaid in fixed monthly instalments over several years to buy fixed assets
    • An agreed facility that lets a business spend more than its bank balance, up to a set limit

  2. Trade credit is best described as:

    • Borrowing from a bank at a fixed interest rate to buy machinery for use in the factory
    • Receiving cash from customers before the goods they ordered have been produced and dispatched
    • Selling unwanted stock to a discount wholesaler in return for immediate cash payment in full
    • Being allowed to pay a supplier for goods some weeks after they have been delivered

  3. Which of these is a short-term source of finance?

    • Retained profit kept in the business from earlier years
    • Crowdfunding from many people contributing small sums online
    • Share capital raised by issuing new shares to investors
    • Trade credit from a supplier allowing payment after 30 days

  4. Why is an overdraft often described as a flexible source of finance?

    • It requires the owner to give up a percentage of the business to the lender
    • The business pays interest only on the amount actually overdrawn and can repay at short notice
    • It can only be used to buy land and buildings for the business premises
    • It must be repaid in equal instalments over ten years regardless of the business's cash flow

  5. A business has £500 in its bank account and an overdraft limit of £1,000. What is the most it can spend before it exceeds the facility?

    • £500
    • £1,500
    • £1,000
    • £2,000

  6. A café has an overdraft limit of £3,000 and is currently overdrawn by £2,450. How much further can it draw on the overdraft?

    • £3,000
    • £2,450
    • £5,450
    • £550

  7. A printing firm buys paper on 60 days' credit from its supplier. What is the main benefit of this to the firm?

    • It pays a lower price for paper than rival printers, because the supplier discounts all of its bills
    • It can sell the printed work and collect cash before it has to pay for the paper
    • It can borrow extra money from the supplier at a fixed interest rate of 5% a year
    • It avoids having to keep any stock of paper in the workshop, since orders arrive on demand

  8. Which is a disadvantage of using an overdraft?

    • The business cannot use the money for any purpose other than buying fixed assets like machinery
    • The business has to give the bank a share of its ownership as security for the facility
    • Interest is charged on the amount overdrawn and the bank can ask for repayment at short notice
    • The business must repay the whole amount in one lump sum at the end of a fixed ten-year term

  9. Trade credit is mainly provided to a business by:

    • Its customers paying for goods in advance of delivery
    • Its shareholders paying extra money in return for new shares
    • The government through grants paid to businesses in a region
    • Its suppliers allowing it to pay for goods after delivery

  10. A business orders £4,000 of stock on 45-day trade credit terms. What is the effect on its cash flow?

    • Cash leaves the business immediately on delivery, so cash flow is weaker in the first month
    • The supplier pays the business £4,000 so that it can buy more stock next time
    • Cash leaves 45 days later, giving time to sell the stock before paying the supplier
    • The business gets the stock free of charge, so there is no effect on cash flow at all

  11. A shop wants to pay its supplier only after it has sold the goods. Which source of short-term finance best suits this?

    • A mortgage secured on the shop premises over twenty-five years
    • Share capital raised from a new issue of shares to the public
    • Retained profit from the previous financial year kept in the business
    • Trade credit from the supplier, paid after the goods are sold

  12. Why might a supplier refuse trade credit to a new small business?

    • The supplier only offers trade credit to businesses that are listed on the stock exchange
    • Trade credit is only legal for businesses that have been trading for more than 20 years
    • The business has too many customers, so credit checks are not needed by the supplier
    • It has no trading history, so the supplier cannot judge whether it will pay on time

  13. Explain why an overdraft is usually more expensive than trade credit for a business that uses both.

    • Overdrafts are only available to large listed companies, so small firms usually pay a premium rate
    • Trade credit is usually interest-free, whereas overdraft interest is charged on the amount borrowed
    • Trade credit requires a larger cash deposit than an overdraft, so it nearly always costs more overall
    • Trade credit must be repaid in full each month, whereas overdraft interest is never charged at all

  14. Which of these is NOT a short-term source of finance?

    • A mortgage loan secured on the business premises over many years
    • Trade credit from a supplier that must be paid within a few months of the order
    • Credit from a supplier that is paid after the goods have been sold on to customers
    • An overdraft agreed with the bank to cover day-to-day cash needs over the coming months

  15. A bank can ask for an overdraft to be repaid at short notice. Which risk does this create for the business?

    • The business is automatically placed into liquidation by the courts without notice
    • The business may have to find cash quickly, possibly by selling assets at a loss
    • The business must immediately issue new shares to the public to repay the bank
    • The business loses the right to trade with its suppliers for the rest of the year

  16. Which situation best suits a short-term overdraft?

    • Buying a new factory building that will be used by the business for the next twenty years
    • Raising money to pay the owners a permanent dividend out of expected future profits
    • Covering a temporary cash shortfall caused by seasonal sales slowing for a few months
    • Financing the purchase of a fleet of delivery vans that will be kept for ten years

  17. A business has many customers paying late and must pay wages this month. Which short-term source gives it immediate access to cash?

    • An overdraft, which gives access to cash up to the agreed limit
    • Venture capital from an investor who takes a large share of the firm
    • Share capital from a new issue of shares sold to existing shareholders
    • A long-term loan repaid over fifteen years at a fixed interest rate

  18. A firm buys £12,000 of goods on 30 days' trade credit and sells them for £20,000 cash within 10 days. What is the effect on its need for an overdraft?

    • It cannot use an overdraft at all because trade credit already covers every cash need
    • It may need less overdraft because sales receipts arrive before the supplier must be paid
    • It must increase its overdraft limit by exactly £12,000 to cover the trade credit
    • It needs a larger overdraft because the cash from sales arrives after the supplier is paid

  19. Why must a business monitor its overdraft use carefully?

    • Because interest and charges can grow quickly if it stays near or over the limit, eating into profit
    • Because the bank must approve every single purchase made using the overdraft facility each time
    • Because overdrafts are illegal for any business that has been trading for over a year
    • Because the overdraft interest rate is fixed for life and cannot ever be reduced by the bank

  20. Which short-term source is usually interest-free if the bill is paid within the agreed period?

    • A long-term bank loan, which is repaid with interest in fixed instalments over several years
    • An overdraft, which charges interest on any amount used and can be recalled at short notice
    • Venture capital, which gives an investor a stake in ownership and some say in decisions
    • Trade credit, which usually carries no interest if paid within the agreed period

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