1.4.3 types and sources of credit and impact of credit within the economy

What is a loan?

Borrowing money for a short period of time, repaid with interest

What are the types of loans?

Cash credit, on demand, and short-term loans

What is a cash credit loan?

Based on bonds or approved securities; money can be withdrawn periodically

What is a loan on demand?

The full loan is paid to the borrower’s account and interest starts immediately

What are short-term loans usually used for?

Personal use or working capital

What is an advantage of a loan?

Guaranteed funds and fixed interest rates

What are disadvantages of a loan?

May require security; inflexible; interest paid on full amount

What is an overdraft?

A temporary borrowing facility allowing spending beyond the account balance

What are advantages of an overdraft?

Flexible amount and interest only on borrowed sum

What are disadvantages of an overdraft?

High interest rates; not suitable for large loans

What is trade credit?

Credit extended by suppliers to buy goods immediately and pay later

What are advantages of trade credit?

Helps small firms grow; allows purchases without immediate cash

What are disadvantages of trade credit?

Late repayment can reduce profits or become expensive

What is venture capital?

Funding from specialist firms in exchange for shares, usually short to medium term

What is the benefit of venture capital?

Helps new firms establish; investors get dividends

What is share capital?

Raising funds by selling shares to investors

Who can raise share capital?

Private and public limited companies

What is the reward for investors?

Dividends and a say in how the firm is run

What is leasing?

Long-term rental agreement to use an asset without paying full cost upfront

How does leasing work?

Firm pays rent covering depreciation and interest; can use asset during the period

What is owner’s capital?

Money invested by the owner from personal savings

What are advantages of owner’s capital?

No interest or dividends; no debt

What is a disadvantage of owner’s capital?

Owner risks losing personal savings

What is retained profit?

Money left after taxes, interest, and dividends

What are advantages of retained profit?

Cheap finance; avoids borrowing; owner retains control

What are disadvantages of retained profit?

Slow accumulation; may miss other opportunities

What is sale of assets?

Selling buildings, vehicles, or land to raise funds

Advantages of sale of assets

Immediate finance; reduces maintenance costs

Disadvantages of sale of assets

May sell at lower price; limited if few unused assets

Who are individual investors?

Friends and family who invest in a business

Advantages of individual investors

Spread risk; can bring experience

Disadvantages of individual investors

May require sharing control and profits; potential conflicts

What is online collaborative funding (crowdfunding)?

Raising finance from a large number of people online

Advantages of crowdfunding

Quick, low-cost, advertises the business, access for new firms

Disadvantages of crowdfunding

Must reach target to get funds; risk of failed reputation or stolen ideas

Why do new and small firms struggle to obtain credit?

Poor or no credit rating; high interest rates and strict conditions

What percentage of small firms have poor credit ratings?

Around 60%

How does credit rating affect borrowing?

Better ratings = easier access to cheaper credit; poor ratings = limited, expensive loans