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Edexcel B A Level Economics > 1.4: The role of credit in the economy > Flashcards

1.4: The role of credit in the economy Flashcards

1
Q

Banks

A

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.

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2
Q

Interest payments

A

Reward savers for parting with their money and ensure that borrowers pay for their loan, together with any possible risks involved.

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3
Q

Working capital

A

The money needed by business to cover costs of production until the sales revenue comes in.

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4
Q

Risk

A

Measures the likelihood that a particular outcome may or may not occcur.

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5
Q

Liability

A

Responsibility for the financial debts of the business
A legal claim for payment

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6
Q

Sole traders and partnerships

A

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.

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7
Q

Limited companies

A

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.

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8
Q

Start-up costs

A

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

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9
Q

Day to day

A

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

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10
Q

Expansion

A

Business may want to expand and will require finance for this

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11
Q

Internal sources of finance

A

Comes from inside the business
Owner’s capital
Retained profits
Sale of assets

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12
Q

External sources of finance

A

Comes from outside the business
Trade credit
Overdrafts
Leasing
Loans
Venture capital
Share capital

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13
Q

Owner’s equity

A

The money that the owner have available to put into the business

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14
Q

Retained profit

A

All the money that is left after all deductions have been taken away from sales revenue
Can then be re-invested into the business

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15
Q

Sale of assets

A

Selling things of value

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16
Q

Collateral

A

Assets that can be used to repay the bank if the borrower does not have enough money to cover both interest and repayments

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17
Q

Overdrafts

A

Allow a business to
spend more than it has in its account up to an agreed amount

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18
Q

Bank loans

A

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

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19
Q

Trade credit

A

Offered by suppliers, giving time to pay, commonly 30-60 days

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20
Q

Leasing

A

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

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21
Q

Insurance companies and pension funds

A

Buy and hold shares in many companies

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22
Q

Share capital

A

Investors may buy shares in the company
When business makes profit, dividend paid to shareholders

23
Q

Venture capital

A

Funding provided by specialist firms or individuals in return for a proportion of company’s shares

24
Q

Advantage of owner’s equity

A

Does not have to be repaid but cannot be invested elsewhere

25
Q

Disadvantages of owner’s equity

A

Starting a business is risky - owners may lose all their savings/wealth

26
Q

Owner’s equity best for

A

Starting a small business

27
Q

Advantages of retained profit

A

Does not have to be repaid

28
Q

Disadvantages of retained profit

A

Can be limited, particularly in early years, does have an opportunity cost

29
Q

Retained profit best for

A

Expansion of business

30
Q

Advantages of sale of assets

A

Does not have to be repaid - no interest
Can be good to dispose of underused assets

31
Q

Disadvantages of sale of assets

A

Assets might hhave been useful in the future
not available for a new business later

32
Q

Sale of assets best for

A

Raising money quickly

33
Q

Advantages of trade credit

A

No interest

34
Q

Disadvantages of trade credit

A

Limited amounts
Short term
Delaying payment too long may mean supplier withdraws credit

35
Q

Trade credit best for

A

Short term cash flow problems

36
Q

Advantages of overdraft

A

Flexible - interest paid only on amount borrowed for as long as overdraft is needed.

37
Q

Disadvantages of overdraft

A

Interest rates usually higher than for loans - not suitable for long term or large amounts

38
Q

Overdraft best for

A

Short term cash flow problems

39
Q

Advantages of leasing

A

Much lower outlay on equipment, maintenance often included, new models regularly updated.

40
Q

Disadvantages of leasing

A

More expensive than buying outright in long term
Cannot own leased items
Regular monthly payments

41
Q

Leasing best for

A

Items such as vehicles, machinery, photocopiers

42
Q

Advantages of loans

A

Fixed sum available - easy to plan for fixed repayments

43
Q

Disadvantages of loans

A

Interest paid
Regular payments must be made despite cash flow
May need collateral in case of default of loan

44
Q

Loans best for

A

Medium term finance and expansio

45
Q

Advantages of venture capital

A

Immediate cash injection
Given in exchange for share of business
Does not need repayment

46
Q

Disadvantages of venture capita;

A

Venture capitalists buy shares in the business
May mean some loss of control for the owner

47
Q

Venture capital best for

A

Often obtainable by businesses deemed too risky for other sources of finance

48
Q

Advantages of share capitla

A

Immediate cash injections
Does not require payment

49
Q

Disadvantages of share capital

A

Loss of control as more people own a share of the business
Need to share profits or pay dividend

50
Q

Share capital best for

A

Long term or large expansions

51
Q

Advantages of online collaborative funding

A

Access to share capital or unsecured loans without past credit rating

52
Q

Disadvantages of online collaborative funding

A

May take time to arrange
May not actually raise enough funding

53
Q

Online collaborative funding best for

A

Innovative start-ups and technology developments

Edexcel B A Level Economics (17 decks)

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