Question

Renita works as a freelancer. She wants to start her own business, but she does not have the required funding. To meet the working capital for her business, she takes a short-term loan from a bank. The bank agrees to provide her funding up to $50,000, as and when she needs it. However, she can repay the amount immediately or over a pre-specified period of time. Which of the following short-term financing sources does Renita utilize to fund her business in the given scenario?

A. Line of credit
B. Trade credit
C. Commercial paper
D. Factoring

Answer 1

A. Line of credit

Step-by-step explanation:

Renita is using a line of credit because her financing option has the following characteristics:

• A maximum amount she can withdraw, in this case $50,000
• She can draw from that maximum amount as she needs, for example, she could have one month $30,000, and the following month $20,000, effectively exhausting her credit in a two-month period.
• She can pay off her debt either at specified periods of time, or in full at any time.

All those characteristics above are specific of a line of credit.