ACCA Financial Management (F9) Certification Practice Exam

What is the primary characteristic of overdrafts as a source of finance?

1. They are long-term loans.

2. They provide immediate liquidity.

3. They require collateral for approval.

4. They have fixed repayment terms.

The correct answer is: They provide immediate liquidity.

Overdrafts are primarily characterized by their ability to provide immediate liquidity. This means that they allow businesses or individuals to access funds quickly and effectively when needed, often to manage short-term cash flow challenges. An overdraft occurs when an account holder withdraws more money than is available in their account, up to a specified limit set by the bank. This facility is particularly useful for covering unexpected expenses or taking advantage of timely opportunities, as it provides instant access to extra funds without the lengthy application process typically associated with other forms of financing. The other characteristics mentioned in the options do not apply to overdrafts. For instance, overdrafts are usually a short-term source of finance rather than being classified as long-term loans. They typically do not require collateral since they are unsecured arrangements based on the relationship between the bank and the account holder. Additionally, overdrafts do not have fixed repayment terms; instead, they are designed to be flexible and can be repaid as funds allow, aligning more with the cash flow dynamics of the account holder.