1.4.3 Types and sources of credit and the impact of credit within the economy Flashcards
What are the 3 types of credit?
loans, overdrafts and trade credit
What are advantages of a loan
Loans guarantee a firm a sum of moeny for a period of time. If interest rate is fixed on the loan also beneficial as they know what they must pay back
What are disadvantages of a loan
If the interst on the loan is floating, the business costs to pay the loan back will constantly vary perhaps making it hard for CFF models and inaccurate predictions. Also loans may be secured against assets.
What is trade credit
When a business can be supplied their raw materials from suppliers and pay the cost later on through negotiation.
What are advantages of trade credit
Paying later whilst recieving their supplies means the business can generate a positive cash flow in the mean time. Also have time to generate profits before paying their costs back.
What are disadvantages of trade credit?
The business may miss out on any discounts from suppliers when purchasing through trade credit. For example purchasing economies of scale which can bring costs down. Also the business run the risk of not paying on time and if they dont pay within the certain time frame suppliers may charge a penalty causing for even higher costs for the business.
What is an overdraft?
An overdraft is an agrrement made between a bank and consumer or business which allows them to borrow from the bank by spending more than what is in their savings account. They are charged interest on what they have borrowed and the sum of borrowing is limited.
What are advantages of overdrafts?
Only charged interest on the sum of moeny borrowed and doesnt need to be secured against an asset.
What are disadvantages of overdrafts
Substantially higher interst rate charged on overdradts compared to loans. Also tend to be accessed for only small sums of money
Besides banks, how can other businesses act as creditors?
Bigger businesses can often act as creditors to smaller firms by investing and buying shares in the company. This is because smaller businesses tend to hit certain areas of the market where biggere business dont such as the environmental-consicious consumer.
What can be a disadvantage of this?
If the bigger business invests and gains high share percentages, it may influence decsions which can cause conflict and also can influence the new target audience.
What are other types of finance?
venture capital, share capital and leasing
Explain what a venture capital is?
Ads/disads
This is when a business proposes a plan and then looks for an investor to invest in the business hence a source of finance. The investor becomes a shareholder. As a result if high returns are made off this investment the investor gains high dividends which can be a disadvantage as this return on investment couldve put elseswhere. Also conflict of interests can be caused if inestors become too involved with the company. However investors are usulaly succesful business owners themsleves so can offer useful business advice.
What is share capital?
This is raised through selling shares to investors. The shareholders then benefit when a business makes profits through the form of dividends.
Investors only have limted liability on their shares.
What is leasing
This is when a business gains full access to an asset without fully paying for it upfront. Intead interest is paid on it and rent to cover up depreciation of the asset.
Explain how sale of assets is a source of finance?
Sale of assets is commonly used as a source of finance and is particulrly useful in the short term as liquidating the business means they can generate a source of cash flow
Explain how owners capital is a source of finance?
Owners capital is when an owner invests its own money into the business. It alrealsy owns the capital so no start up costs and is beneficial as it prevents requirement for a source of finance from creditors such s banks where interest is paid.
Explain how individual investors act as a source of finance
investors who dont already control the business can invest in a business. This means ownership becomes more diluted which can cause conflict and if they have an active role, objectives may be conflicting due to conflicting ideas.
Explain colloborative funding?
This is usually done by smaller firms who cannot access credit from banks. Funds are collected from several people and can be done online allowing to raise funds at a low cost. Also benefits the business as its another way of advertising the business whilst raising funds as well as widening their consumer base
What are challenges in obtaining credit?
It tends to be smaller firms who find it difficult to obtain credit due to poor credit rating which takes a while to build up. Also even when offered credit it may be with harsh conditions such as high interest rates. Larger firms usually have the finance to pay off loans as well as have higher credit ratings.
