1.4.3 types and sources of credit + impact of credit within the economy Flashcards
(22 cards)
What are some types of finance? [11]
- Trade credit
- Overdraft
- Loans
- Venture capital
- Share capital
- Leasing
- Personal savings
- Retained profit
- Sale of assets
- Individual investors
- Online collaborative funding
What is a loan?
Borrowing money for a short period of time, which is repaid over time with interest.
What is an advantage of a loan for firms?
They are guaranteed money for a certain period of time. Some interest rates are fixed so it is easier to know how much interest the firm has to pay.
What is an overdraft?
Allows a consumer or firm to temporarily borrow from the bank by spending more than is saved in the account.
They are at a high interest rate and the amount that can be borrowed is limited.
What are the advantages of an overdraft? [2]
- Interest is only paid on amount of money borrowed
- Amount borrowed is flexible
What are the disadvantages of an overdraft? [2]
- Cannot be used for large loans
- Interest rate is much higher than on a loan.
What is trade credit?
Credit extended to a firm by suppliers, so a good can be bought immediately and paid later.
What are the advantages of trade credit? [3]
- Especially useful for small firms to finance their growth
- Allow sellers to generate more sales
- Easy and fast source of finance
What is the disadvantage of trade credit?
If it takes the buyer a long time to repay the debt, could lead to lower profits for supplier if debt is written off
What is venture capital?
Funding from specialist firms in return for a share in a company. The investor receives a return on their investment in the form of dividends.
Is venture capital a long time solution?
No, it is for the short to medium term to help new firms establish themselves.
What is share capital?
Can be raised by selling shares to investors. This is applicable to both private and public limited companies.
What is leasing?
A long term agreement for rent that allows firms to use an asset without paying the full amount up front. The firm can own and control the asset during an agreed period of time.
The firm pays rent to cover the depreciation of the asset and they pay interest to cover the cost of the capital
What are the positives of using personal savings as finance? [3]
- No costs involved in obtaining capital
- Interest does not need to be paid on a loan
- Dividends do not need to be shared with shareholders
What is the major disadvantage of using personal savings as finance?
If the capital is lost, then the owner loses it.
What is retained profit?
Money left after deductions, taken from total sales revenue. This can then be reinvested into the firm.
What are the advantages of using retained profit as finance? [2]
- Cheap source of finance, saves paying high interest rates on loans
- Firms are not increasing their debt burden, giving them more control over their firm
What is the disadvantage of using retained profit as finance?
Required careful saving of a business’s funds, which could be both slow and result in firms missing out on other opportunities.
Who is crowd funding useful for?
Firms which often find it difficult to gain access to credit from a bank.
What are the advantages of crowd funding? [3]
- Raise finance quickly
- Low cost
- Advertisement for their business
What are the disadvantages of crowd funding? [3]
- Have to raise funds to a certain target or will not receive anything
- Firms risk building a bad reputation if investment is unsuccessful
- Advertising idea on the internet with intention of raising funds, the firm risks having their ideas stolen
What percentage of small firms have a poor credit rating?
Around 60%.
