A credit facility is an arrangement that is between a business and a bank which allows the business to seek a particular amount of financing for various reasons for a specific period of time. Credit facility enables a business to take credit whenever they need to borrow money. There are two categories of the funding basis that is fund base credit and non-fund base credit.
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Cash credit is a great option for ZZ&Z Company. Cash credit is a flexible plan as the business can borrow money at whichever time the need arises. It is mainly provided to businesses more than it is to individuals. Since the company prefers a facility that does not need security then this is the best option as they can use the inventory as security instead of having to present an asset. The extension of the credit limit is based on the cash credit account which is usually a percentage of the offered security value.
The Company can borrow any time with respect to a particular limit for a particular period for the needs of the working capital of inventory needed for the month of August. The company can be able to decide independently how and when capital will be deployed. This in turn helps them to know how exactly to handle their finances and have the guarantee of the money in their convenience. Considering the August sales the company is able to have speedy funding especially in case an emergency occurs like when the demand exceeds the expected demand. Since ZZ&Z is in a highly competitive market it means that it can be able to meet the needs of the customers by providing the demand required and have a competitive advantage over the competitors.
The cash credit option allows the business to be able to offset the temporary shortages of cash flow that might occur in the operations of the business to the duration and extent that cannot be anticipated. This means that it can help in reducing the risks levels that might arise and had not been anticipated. The credit facility can be used for the payment to suppliers for the benefiting from the most significant discounts. This in helps to build a solid relationship between the supplier and the business and build a future credit relationship if need be. The other big advantage of the credit facility is that there are no restrictions as to the point at which the business can terminate the agreement or contract. This makes the credit facility option convenient and flexible to meet the future needs of the company.
There are no costs that are charged in case of termination of the plan hence making it the best for a growing firm. The main objective of ZZ&Z acquiring a credit facility is to help in the company’s working capital as well as the short term cash flow as it tries to get a more preferable financing plan. Cash credit is best for this purpose and unsuitable for acquiring commercial vehicles, properties or machinery. If the company acquires cash credit it will be able to meet its expenses that result from the operating cycle between the supply phase and customer payment phase. It does not have to present any form of collateral as well as the inventory will serve as security. This therefore makes the financing option the best for Zhang, Zhang & Zamparello Company.
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