1.4: The role of credit in the economy Flashcards
what are Banks
Financial intermediaries, channelling funds from savers to borrowers, in particular to home-buyers and to businesses that want to borrow for investment, or just to keep the business going.
what are Interest payments
Reward savers for parting with their money and ensure that borrowers pay for their loan, together with any possible risks involved.
what is Working capital
The money needed by business to cover costs of production until the sales revenue comes in.
what is the role of banks in the economy
channelling savings towards investment
provide credit to firms or consumers
make money via interest rates and collateral on a loan
what is Risk
Measures the likelihood that a particular outcome may or may not occcur.
what is Liability
Responsibility for the financial debts of the business
A legal claim for payment
what are Sole traders and partnerships
Have unlimited liability
The owners have a legal duty for all debts and can have all of their personal possessions seized to pay for the debts.
what are Limited companies
Liability is limited to the business itself and not the owners/shareholders.
The company may lose its assets but the personal wealth of the owners is protected.
what are Start-up costs
Starting a new business involves numerous costs.
Some of these are large one-off costs
Business may also need finance for working capital, to cover costs such as wages and raw materials until enough income comes in from sales
what is Day to day
If all goes well, the business will be successful and make a profit.
However, this does not mean that the business will have enough cash on a day to day basis to pay its bills.
May well need additional finance to provide sufficient working capital to cope with any cash flow problems
what is Expansion
Business may want to expand and will require finance for this
name the Internal sources of finance
Comes from inside the business
Owner’s capital
Retained profits
Sale of assets
name the External sources of finance
Comes from outside the business
Trade credit
Overdrafts
Leasing
Loans
Venture capital
Share capital
what is Owner’s equity
The money that the owner have available to put into the business
what is Retained profit
All the money that is left after all deductions have been taken away from sales revenue
Can then be re-invested into the business
what is Sale of assets
Selling things of value
what is Collateral
Assets that can be used to repay the bank if the borrower does not have enough money to cover both interest and repayments
what are Overdrafts
Allow a business to spend more than it has in its account up to an agreed amount
what are Bank loans
Fixed amounts that are borrowed for a specific period at an agrred rate of interest, which will be lower than the overdraft rate but has to be paid monthly
what is Trade credit
Offered by suppliers, giving time to pay, commonly 30-60 days
what is Leasing
A long term rental agreement with a supplier, that allows the business to use equipment without having to buy it outright, so freeing uo funds for other uses
Often used for vehicles, machinery, photocopiers etc
what do Insurance companies and pension funds do
Buy and hold shares in many companies
what is Share capital
Investors may buy shares in the company
When business makes profit, dividend paid to shareholders
what is Venture capital
Funding provided by specialist firms or individuals in return for a proportion of company’s shares
