1.4 The role of Credit in the Economy Flashcards
What is a bank?
A financial intermediary, that moves funds from savers to borrowers. A.K.A. a place that rips you off and steals your money and has the power to close down even when you need it most and betray you in ways you didn’t even know were possible.
What are the 2 main functions of a bank?
- providing a safe place for saving and gaining interest
- offer loans to people and businesses in return for interest
What is an interest payment?
Reward savers for parting with their money (low rates)
Charge borrowers for being given money (high rates)
How can the average person gain from a bank?
As banks provide loans to the government, investments into facilities can raise the standards of living for the country and for individuals.
What is working capital?
The money needed by a business to run it day-to-day until the sales revenue come in.
How can a borrower reduce their interest rate by credit rating?
Convince the bank that they will pay back the money and that there is little risk. They can do this by having a good credit rating (always repaying).
How can a borrower reduce their interest rate using collateral?
Collateral refers to the assets a borrower can owe the bank if they fail to repay the loan/interest off in full. Such as premises. This gives the bank an incentive to loan as they will always win something.
What is risk and how can it be measured?
The likelihood that a particular outcome may happen. Uncertainty is the opposite as we don’t know the likelihood of it happening. Risk can be measured using statistics, such as the cost of car insurance based on age, gender, etc…
What is the difference between limited and unlimited liability?
Unlimited (sole traders & partnerships) means the debt is passed onto the owners after the business goes into debt and personal possessions may be sold to repay it.
Limited (ltd, plc.) means the debt is only passed onto the business and owners only lose the money they invested.
What happens to a limited business that goes into debt?
it goes into liquidation - this means that it will go into compulsory liquidation, get taken to court and people will buy the possessions and try repay all the debt
What are 3 main costs a business will incur during its lifetime?
Start-up: Premises, equipment, staff, advertising, raw materials.
Day-to-day
Expansion
What the main 3 internal sources of finance to provide money for the business during it’s lifetime?
Owner’s equity - Owner’s savings
Retained profits - After dividends, tax and interest has been taken away, how much is left over
Sales of assets - The money made from selling assets
What are the ads/disads of internal finance?
A - Cheaper (little/no interest). Low opportunity cost.
D - May not be a larger enough value to fund expansion, etc..
What are 2 external sources of finance a bank provides?
Overdraft (short term solution)
Loans (agreed fixed amount)
What are 2 external sources of finance other businesses provide?
Trade credit - From suppliers
Leasing - Rental agreements
