Chapter 4: Financial Flashcards
Financial Institutions:
Trading/ Commercial banks
- Financial intermediaries that accepts deposit and channel those deposit into lending activities
- Connects customers with capital surplus to customers with capital deficit
Financial Institutions:
Financial Companies
- Provides loans for businesses and consumers
- Does not accept deposit
- Organises funding from banks and financial institutions to extend the loan to customers
- Have high interest rates due to higher risk carried
Financial Institutions:
Credit Union
- Co-operative financial institution owned by members
- Only members can deposit and borrow from the union for business or personal lending
- Decides on the interest which is low to no interest rates
- Any profit earned will be given out to members as dividend
Financial Institutions:
Merchant banks/ Money Market Corporation
- Focus on bringing parties with large amount of capital to invest, and parties that need large amount of capital for acquisition and project together
- Borrow from and lend to large corporations and government agencies
- Merchant banks may also fund the projects themselves
Sources of funding:
Internal - Retained profit
- Profits kept in the company rather than paid out to shareholders as dividend
Adv:
- No interest rate to be paid
- Left in the business, providing cash flow benefit
Sources of funding:
External - Debenture
- A medium to long term debt format used by large companies
- It is to be paid within a fixed date at a fixed rate
Adv:
- Debenture holder are not shareholders, therefore hold no voting rights
Sources of funding:
External - Share capital
- Long term sources of finance where money is invested in the company by shareholders
Adv:
Gain profit through selling of shares
Sources of funding:
External - Trade credit
- An agreement between supplier and businesses to trade without making immediate payment
- The supplier provides the businesses an agreement to bill them later in a fixed number of days: 60, 90, 120
Adv:
- Reducing capital needed by increasing cash flow benefit
Sources of funding:
External - Secured loan
- Loan that is secured to an asset the company owns
Adv:
- Low interest rates
- Medium to long term source of finance
Sources of funding:
External - Unsecured loan
- Loan that is not secured to an asset
Adv:
- Asset is not secured to loan as collateral
Sources of funding:
External - Venture capital
- Capital invested by wealthy investor in business with long term growth prospect
Adv:
- More likely to be approved of loan
- Kick start business
Sources of funding:
External - Government
- Government encourage business and investment by providing grants and subsidies to build the economy
Adv:
- Low to no interest rates
- Have access to expertise
