Financial institutions and sources of funding Flashcards
Banks
Banks are financial institutions that primarily offer savings, checking accounts, loans, and mortgages. They make money by lending out customer deposits. Commercial banks focus on everyday banking services for individuals and businesses, while investment banks handle larger financial transactions.
Financial companies
Finance companies are financial institutions that provide loans to both businesses and individuals. Unlike banks, they do not accept deposits from customers. Instead, they obtain funds by borrowing from banks and other financial institutions. Finance companies typically charge higher interest rates on loans compared to banks.
Retained profits
Retained profit is a company’s leftover profit after paying dividends to shareholders. It’s essentially money reinvested back into the business for growth and expansion. A dividend is the portion of profit paid out to shareholders.
Debentures
Debentures are long-term unsecured loans issued by companies to raise capital. They offer a fixed rate of interest and a maturity date to investors and do not grant ownership or voting rights. Unlike shares, debentures provide a guaranteed income and are considered a lower-risk investment. Companies benefit from debentures as a source of long-term financing without diluting ownership.
Share capital
Share capital is the money a company raises by selling shares to investors. It’s a form of equity financing, meaning shareholders become part-owners of the company rather than creditors. Companies use share capital to fund operations, growth, and investments. Unlike loans, it doesn’t incur interest costs. However, increasing share capital dilutes ownership and profit per share as more shareholders share the company’s earnings.
Trade credit
Trade credit is a financing arrangement where businesses purchase goods or services now but pay later, typically within 30-60 days. It’s essentially a short-term loan from suppliers, improving cash flow management for buyers. While suppliers don’t charge interest, it’s a flexible financing option widely available across industries.
Venture capital
Venture capital is a form of financing provided to early-stage businesses with high growth potential. Investors, often called venture capitalists, take significant risks by providing funds in exchange for ownership equity. While the chance of business failure is high, successful ventures can generate substantial returns for investors. To secure venture capital, businesses must present a compelling business plan demonstrating their potential for high growth and return on investment. Repayment of principle amount + interest is determined by terms established at the start of the investment.
Secured loans
A secured loan is a loan obtained from a financial institution where the borrower pledges an asset as collateral. These loans are typically used for medium to long-term purposes and involve fixed or variable interest rates. Lenders offer secured loans to mitigate risk, as they can seize the pledged asset if the borrower defaults on repayments. Examples include mortgages and business development loans.
Financial institutions
Financial institutions are organisations that handle financial transactions like loans, investments, and deposits. They are essential for individuals and businesses, facilitating activities from everyday spending to major financial undertakings. These institutions vary widely, offering a range of services tailored to different clients. Their role in the economy is crucial as they channel funds from savers to borrowers, stimulating economic growth.
Government
Government grants are one-time financial rewards provided by governments to businesses that meet specific criteria. They are used to stimulate economic growth, support innovation, and encourage specific business activities. By offering financial assistance without requiring immediate repayment, grants can help businesses overcome financial hurdles, invest in research and development, and expand their operations. Examples include Austrade Export Grants and the R&D tax incentive.
