Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What is the most likely reason for a company to take out a commercial loan?

1. To invest in stocks

2. To buy equipment/machinery

3. To increase employee salaries

4. To pay off debt

The correct answer is: To buy equipment/machinery

A company is most likely to take out a commercial loan to buy equipment or machinery because such purchases typically require significant capital investment that may not be available from internal funds. By obtaining a commercial loan, a business can access the necessary funds to acquire essential assets that can enhance its operations and improve productivity. Investments in equipment and machinery are crucial for growth, as they can lead to increased efficiency in production and the ability to meet rising demand for products or services. Choosing this option reflects a common financial strategy where businesses leverage loans to invest in their operational capabilities, ultimately aiming to boost revenue generation over time. This type of funding is often characterized by specific terms, allowing companies to spread the cost of equipment or machinery over an extended period, which can be aligned with the anticipated cash flow generated from its use. The other options, while they might represent different uses of resources, do not align as closely with typical reasons for commercial loans. For instance, investing in stocks may not be the primary reason for a loan as it is generally more speculative. Increasing employee salaries typically relies on operational cash flow rather than external financing. Paying off debt may suggest the need for refinancing rather than acquiring assets or services that facilitate growth.