Theme 1 section 4 Flashcards
What is a bank
A bank is a financial institution that offers both individuals and businesses a wide range of services to help them manage their money. They provide financial security through the provision of financial services.
What is the banks most important feature
They provide a safe space for economic agents to keep their money in return for interest payments. This allows firms and people to save. They then use the savings to provide investment funds for businesses e.g for machinery
What is the difference between investment banking and commercial banking
Investment banking provides services to large corporations. Commercial banking works with many clients in the general public.
Investment banks have a more competitive and higher paying salary as a career but often have long working hours but commercial banking offers a better work-life balance but not as high of a salary as investment banking
What are commercial banks
The public are the firms main customer- sometimes known as high street banks e.g barclays and HSBC.
What are commercial banks three core functions
-accepting deposits
-Lending money
-Transferring bank deposits (transferring funds between economic agents
What are commercial banks other functions
foreign exchange , insurance and brokerage (stocks)
How are commercial banks good for the economy
They provide liquidity to the economy, they distribute funds from savers to borrowers
They provide firms with funds to invest in capital
What are investment banks
They don’t directly serve to the public. Their focus is companies, the government and other financial institutions like insurance and pension funds.
They raise finance by offering advice and arranging shares/ corporate bonds e.g USB and Merill lynch
What is credit
credit is the creation of money by banks.
Is the ability to borrow money under the agreement you will repay it later
What must a bank do with a deposit
A bank must hold !0% of the deposits to ensure liquidity
An example of banks holding deposit to create money
1- customer x deposits £1000 into bank A
2-Bank A loans out £900 to customer Y (still holding the 10% the customer then deposits the money into bank B
3-Bank B uses the deposit an lends out £810 (holding 10% of the £900 to customer Z
4- customer Z then spends £810 which moves to bank C
5- Bank C then uses the £810 which they then hold 10% and lend out £729
Overall total deposits are £2710 (1000,900,810) from £1000
Cash reserves
How can banking systems create credit
the more cash they receive from deposits the more credit they can create.
Lending creates deposits because the electronic systems credit the account with money which did not previously exist
What are interest rates
Interest rates are the price of money
the cost of borrowing
the reward for saving A
What happens as interest rates increase
As interest rates increase borrowing become less attractive
As the return on savings they are more likely to save than spend
Consumers who already have loans will have less disposable income
what is collateral
collateral is what banks use as a security for a loan
normally properties but sometime in the form of vehicles which they will seize if they fail to repay loans
often means lower interest rates
What is the impact on business if there are higher interest rates
Expansion becomes more expensive,so less likely
Businesses with existing loans have to pay more in repayments- which reduces their competitiveness
Less jobs are created because costs are so high
More likely to try save
What happens is the effect of businesses when their are lower interest rates
Expansion is cheaper so it makes it more likely
Businesses with existing loans have to pay less in repayments so competitiveness increases
Costs are lower so more employment
Less likely to save more likely to spend
What is the effect of interest rates on the supply of goods and services
The cost of borrowing increases so it becomes more expensive to invest in capital e.g machinery
B2B transactions become less likely as some businesses go out of business and less capital is purchased
Suppliers may increase prices to compensate
what is risk
Risk is the probability of damage, loss or injury occurring
like an entrepreneur
what are features of risk
it is possible to quantify the degree of risk
It is measurable
Can be anticipated by entrepreneurs- through market research and business planning
What are features of uncertainty
It is not possible to quantify
It is not measurable s it is very unpredictable it is harder to anticipate and controll
What is limited liability
Limited liability means if the business was to fail and they were to have debts the investor loses the amount they invested but personal belongings are protected.
- don’t have to sell personal assets to repay debts
What is unlimited liability
The owners of the business is responsible for the total amount of debt of their business. The owner may lose their personal belongings e.g home and cars
Therefore a risk
The owner and the business are one entity
What is a sole trader
A sole trader is a business that is owned by one person but they may have people working for them
e.g hairdressers, cafes
What is the advantage of being a sole trader
Any profit belongs to the owner
Can make all decisions, quickly
flexible working hours
often small size so less capital needed
Easy to set up
Business can be kept private
What are the disadvantages of being sole trader
Lack of people to share decision making with
Long working hours
Borrowing money , can be seen as high risk
May lose money through sickness and holidays
If owner dies the business can seize to exist
What type of liability is a sole trader
Unlimited Liability
What is partnership
Partnership is where people with similar goals come together to form a business
partners can range from 2-20
must share the partnership between them
E.g estate agents.doctors and accountants
What are the advantages of partnership
More partners=more capital
decision making and Responsibility is shared
Partners may disagree
Profits must be shared between partners
Partnership ends when one dies
Each partner is equally liable for debts
What type of liability is is partnership
Unlimited (joint)
What is a limited company
A limited company gets their name because they have limited liability. The owners personal possessions are not at risk.
They have share holders
What does a company need to do to be lc (limited company)
the firm must register in Edinburgh or London and complete two documents: Articles of association and Memorandum of association
What does the articles of association include
states how the limited company will be run
Includes rules and regulations governing a firm
aims at defining rules and regulations
subordinate to MoA
Not a compulsion
What does the Memorandum of association include
States the company name and address of office and authorised equity
Includes fundamental information vital for incorporation of a firm
Aims at defining objectives and conditions
Subordinate to the companies act
compulsory to fill in
What are private limited companies
Private limited companies are controlled by a board of directors who are managed by a managing director
They are owned by shareholders. Shares aren’t available to the general public and are sold privately to investors
What are the advantages of being Ltd (private limited company)
owners (shareholders) have limited liability
Shares are only sold to invited parties all shareholders must agree on. Which is an advantage because it means the firm doesn’t lose ownership to an outsider
Usually a tight knit friendly feel and a high level of customer service An experienced board of directors
What are the disadvantages of being a private limited company
profits have to be split with the many shareholders through dividends
Complicated legal process to set up
Limited capital as shares arent sold publically
Finances arent private
what are public limited companies
They are controlled by a board of directors
owned by shareholders who have limited liability
shares are sold publically through stock market
Ftse 100 - tesco,vodaphone, sky
What are the advantages of public limited companies
share holders have limited liability
large amounts of finance are created through stocks
Less risk to banks so get loans
can easily dominate market
shares can be sold at any time so people are more willing
What are the disadvantages of public limited companies
dividends are shared with many shareholders
controll can be lost due to shares
annual accounts are published to competitors
Costly and complicated to set up
What is a franchise
is a buisness model that allows buisnesses to pay a sum of money to own a branch of a well known buisness ( franchiser to franchisee)
e,g mcdonalds, subway and papa johns
What are the advantages of being a franchise
they have to pay a buy in fee, low risk growth
recieve a percentage of franchisee profits (royalties)
constant source of alternate suggestion
has to abide by conditions, therefore dont lose controll
have the right to buy it back if not operated sucessful
What are the disadvantages of being a franchise
reputation of whole franchise can be tarnished
only a share of profits
What are the advantages of being a franchisee
EXISTING CUSTOMER BASE
LESS likely to fail than a starting up buisness
Knowledge and training is provided by franchiser
advertisment from franchiser
What are the disadvantages for the franchisee
little controll over decisions like products, stores and uniforms
royalties
High initial start up fees
What are multinationals
multinationals are buisnesses which operate in more than one country e.g ikea and apple
have a head office in home country
What are advantages of multinationals
Can target a global market
wages and materials cost less in host countries- reduces cost and increases profit
can avoid legislation of home countries
Grants can be issued from countries to locate there
Avoid quotas and tariffs
lower transport cost if they produce in host country
Econmies of scale
What are the disadvantages of multinnationals
language barriers slow communication
Cultural differences e.g spanish siestas
Exachange rates effect purchasing and expenses
Time differences effects comms
Legislation in other countries may be stricter
What is credit
credit is a legal agreement between borrower and lender
What are types of credit
loans
overdraft
trade credit
from banks or other firms
What are loans
Loans are a set amount of money provided for a specific purpose
What is the effect of increased intrest to exchange rates
Increased intrest increases exchange rate meaning less trade with weak pound
What are overdrafts
overdrafts is a facility to overspend on a current account up to an agreed sum over a set period of time. Interest is charged on the overdrawn amount.
used short term
WHat is trade credit
trade credit is paying suppliers a period of time after receiving the goods/service
What is venture capital
Venture capital is the investment from an established business in return for a percentage equity in the business.
Also known as private equity finance. want high rate of return
benefits from expertise from venture capitalist
associated with high risk start ups
What is share capital
Finance raised from shares
the shareholder becomes part owner of the business
paid through dividends
What is leasing
leasing allows a company to benefit from an asset without owning it or buying it outright . They pay a set amount in installments to lease the installments for a predetermined period of time
Asset remains the property of leasing company.
Avoids the need to get finance for asset
Owners capital savings
when an entrepreneur invests their own money into a business
this is owner’s capital
-don’t have to repay
-no interest charges
-owners maintain control
-risk to savings is motivational
but
-limited to amounts available
-threat to personal finances and family
What is retained profit
profits kept within a business from profit for the year to help finance future activities
What is sale of assets
Assets are items of value owned by a business.
e.g stocks the value changes
benefits: no interest changes or repayments
may be turning an obsolete assets into finance
immediate lump sum cash injection
disadvantages: may be expensive in the long run
loss of asset and future value
is only a on off option
What are individual investors
E.g loan from family member or friends
amount may be limited
flexible repayments
danger is pressure on relationships
What is peer to peer funding
The practice of an individual lending to other individuals with whom there is no relationship or contact
borrowers are given credit rating
cuts out banks
lending is online
What is online collaborative funding
crowdfunding raises finance from a large number of people each investing different, often small amounts of money
what are the challenges to obtaining credit
accessing credit isn’t easy
individuals and businesses have credit ratings
these provide the amount of risk to the banks. the higher the risk the more interest paid
using collateral makes it easier
