Sources of Funding and Central Banks

Why do corporations need external funding?
- To expand their business into new markets.
- To invest in research and development (R&D).
- To fend off competition.
How can retained earnings be used?
- To invest in projects.
- To reward shareholders in the form of dividends, which are defined as:
- A part of the company's profit returned to shareholders.
- To buy back shares.
What does "share buybacks" mean?
- A company buys back shares that it previously issued.
Find out what "debt issue" means in German.
- German: Schuldverschreibung (also called "debentures" in English) or Anleihe:
- A wide number of investors become creditors to the company.
- These creditors will get their money back along with interest at the end of the contract.
What is a disadvantage of borrowing money?
- Interest must be paid to the lender.
- Failure to repay the debt can result in bankruptcy.
What advantage do companies have with equity capital over debt capital?
- Shareholders don't require interest payments, which can be a significant advantage in managing cash flow.
What does a company give away when it issues shares?
- The company gives away some of its ownership control.

What does "lender of last resort" mean?
- A central bank acts as a "banker to the banks" and provides liquidity as the last authority.
- German: Kreditgeber der letzten Instanz.
What is a "systemic crisis"?
- A situation in which more than one bank is in trouble, potentially affecting the entire financial system.
- Key distinctions:
- Systemic: Related to a system.
- Systematic: According to a plan.
What other functions does a central bank have apart from being a lender of last resort?
- They implement monetary policy (in German: Geldpolitik), which includes:
- Deciding on the level of interest rates.
- Helping to regulate the financial sector.
- Acting as the banker to the government.
How do central banks influence the exchange rate?
- Exchange rate (German: Wechselkurs): Central banks influence the exchange rate by buying and selling currencies.
- Example: If demand for the US dollar is very high and supply is lower, then the price of the US dollar will rise (resulting in an increase in the exchange rate).
Important central banks:
- European Central Bank (ECB)
- Bank of England (BOE)
- Federal Reserve System (Fed)

Who owns and runs the public sector?
- The government, federal states, and municipal authorities own and run the public sector.
- Operate for the benefit of the country (e.g. schools, roads, hospitals).
Who owns and runs the private sector?
- Private individuals own and run the private sector.
- Operate for profit (e.g. sole traders, public limited companies).
What do non-profit organizations try to achieve?
- They try to address the needs of a specific group or community.
- Raise money for charitable causes and use the funds to provide services to those in need.
What is the difference between limited and unlimited liability?
- Limited liability:
- Only liable for the amount of money invested in the business (German: beschränkte Haftung).
- Unlimited liability:
- Liable with both business and personal assets (German: unbeschränkte Haftung).

How can companies expand internally?
- By expanding their product range (developing new products).
- By expanding marketing efforts to target new markets (utilizing e-commerce).
- Opening new stores.
How do companies expand externally? (Two types):
- Mergers (Fusionen):
- The joining together of two companies, typically operating within the same industry.
- Takeovers (Übernahmen):
- Acquiring another company.
Types of external expansion:
- Horizontal integration:
- Two companies in the same industry and at the same production stage join together.
- Example: Facebook + Instagram.
- Vertical integration:
- Two companies in the same industry but at different production stages join together.
- Types of vertical integration:
  - Vertical backwards integration: A company joins with its supplier of raw materials.
  - Vertical forwards integration: A company joins with an enterprise that sells the product/service.
- Example: A brewery teaming up with a hop farm.
- Conglomerate/Lateral/Diversified integration:
- Two companies in unrelated industries join together.
- Example: An electric car manufacturer merging with a social media company.

Translations or equivalents:
- Liability: Haftung
- Limited liability: beschränkte Haftung
- Memorandum of Association: entspricht dem Gründungsvertrag einer Kapitalgesellschaft
- General partnership: entspricht der deutschen OHG (Offene Handelsgesellschaft)
- Limited partnership: entspricht der deutschen KG (Kommanditgesellschaft)
- Silent partner: stiller Gesellschafter
- Private limited company: entspricht der deutschen GmbH (Gesellschaft mit beschränkter Haftung)
- Public limited company: entspricht der deutschen AG (Aktiengesellschaft)
- Registrar of Companies: entspricht dem deutschen Handelsregister
- Sole trader: Einzelunternehmer
- To raise capital: Kapital aufbringen/beschaffen
- SME (small and medium-sized enterprises): KMU (kleine und mittlere Unternehmen)
- Subsidiary: Tochtergesellschaft
- Parent company: Mutterkonzern
- Stock exchange/market: Börse/Aktienmarkt
- Takeover: Übernahme
- Hostile takeover: feindliche Übernahme
- Friendly takeover: freundliche Übernahme
- Merger: Fusion
- To merge: fusionieren

Statements on sole traders:
- A hairdresser is an example of someone who has a sole business: True
- Very large amounts of capital are needed to set up a sole proprietorship: False
- The sole trader keeps the overall control over their business: True
- It's very complicated to set up a sole proprietorship: False
- Decisions can be made very quickly in the sole trader business: True
- There is no risk that the sole trader will lose all their personal assets: False
- The sole trader doesn't have to share their profits with anyone else: True
Statements on partnerships:
- Partners usually draw up a deed of partnership which sets out the details of the partnership: True
- All the capital in the business comes from the partners: True
- Partners can specialize in what they can do best: True
- Partners are not liable with their personal assets: False
- Partners never disagree as to how the business should be run: False
- Lawyers do not often work in partnerships: False
Definition of incorporated vs. unincorporated:
- A partnership is unincorporated, which means it has unlimited liability and no separate legal entity.
- An incorporated business has limited liability and a separate legal entity.