can a business maintain its solvency with a mortgage? (1 Viewer)

[meilz92]

i have this assignment right (due 2moro LOL) and its like this business who wants to expand overseas, but like they have this problem where they have excessive credit sales and their financial goal for the expansion is to maintain solvency...

the question is "evaluate ONE method which could be used to finance the expansion"


our teacher told us to do mortgage.... but how are u sposed to justify that?!!?!?

 

[meilz92]

thanks for all the replies guys

MUCHH appreciated....................................



:S


lol

 

[ajay12]

Of course it can maintain it's solvency with a mortgage. All a mortgage is - is long term debt. For excessive credit sales, one thing it might need to do is discounts for early payment or factor debtors to make sure cash is flowing into the business, this can help pay short term debt as well and maintain it's solvency.

In regards to you question, of course a business can maintain its solvency. Consolidating short term debt into a mortgage just allows a business more time to pay back the debt. The expansion of a business might contribute to retained profits which will increase equity, but if the business keeps expanding and it needs more loans, then debt is going to exceed equity largely and deterioate the solvency of the business.

To recap, make sure a business has lots of cash in the current assets (lease NCA's to fund it/factor debtors) or consolidate debt.