Credit

Question 1

Credit

Answer 1

legal agreement between a borrower and a lender

Question 2

Types of credit

Answer 2

Loans
Overdrafts
Trade credit

Question 3

Sources of credit

Answer 3

banks

Question 4

loan

Answer 4

a set amount of money provided for a specific purpose, to be repaid with interest, over a set period
e.g. 5 years It may be secured against an asset and if there is a default on repayments the asset can be taken
Financial institutions can vary interest rates depending upon the amount of risk placed on the loan

Question 5

advantages of a loan

Answer 5

Get funds without giving up ownership.

Set repayment amounts make budgeting easier.

Loans can give a business fast access to a large amount of money, which can be useful for expanding buying stock, or making improvements.

Question 6

disadvantages of a loan

Answer 6

Loans come with interest, meaning the business has to pay back more than it borrowed. This can add to costs, especially if the interest rate is high.

The business has to repay the loan on time, even if it’s not doing well financially, which can put pressure on its cash flow.

Some loans require the business to offer collateral (like property or equipment) as security. If the
business can’t repay, it might lose these assets.

Question 7

overdraft

Answer 7

the facility to overspend on a current account up to an agreed sum The business in effect can withdraw money from the account that is not there meaning they go overdrawn or in the red Interest is charged on the overdrawn amount This is a good short-term source of finance.

Question 8

advantages of an overdraft

Answer 8

Allows businesses to get goods or services now and pay later, keeping cash available for other expenses.

Typically interest-free if paid within the agreed period, making it cheaper than loans or overdrafts.

Regular, timely payments can strengthen trust with suppliers, possibly leading to better terms in the future.

Question 9

disadvantages of an overdraft

Answer 9

Missing payment deadlines can lead to late fees, interest charges, or damaged supplier relationships.

Relying heavily on trade credit can strain relationships if payments are frequently
delayed.

Consistently late payments can harm the business’s credit score, affecting
future credit options.

Question 10

Banks

Answer 10

Financial institutions that are licenced to take deposits, pay interest, make loans and act as an intermediary in
financial transactions, as well as provide other financial services to their customers

Banks will have departments and employees who specialise in business banking including offering advice on
topics such as methods of finance and business planning