4.1

Question 1

What do banks do with people and businesses? [2]

Answer 1

• Take deposits if they wish to save
• Lend to people, businesses and govs that wish to borrow

Question 2

Why is lending risky? How can banks combat this? [2]

Answer 2

• Borrowers might be unable to repay
• Banks need to make a profit on these deals to cover themselves against the risk

Question 3

Explain providing credit [3]

Answer 3

• Big projects usually need to be paid for before they are sold/start generating cash
• For example for a stadium the construction company will need enough money to pay for raw materials and such
• Must be enough working capital to cover short term debts

Question 4

Explain working capital

Answer 4

Finance needs to keep the day to day business going

Question 5

Explain the role of banks [3]

Answer 5

• Almost all businesses need bank loans at some time
• Could be due to expansion or supporting with the costs of production
• In some situations, an overdraft is more suitable than a fixed loan

Question 6

List two positives of bank loans [2]

Answer 6

• Provides access to a lump sum of funds for specific purposes
• Fixed repayment schedule which helps in budgeting

Question 7

List two positives of bank overdrafts [2]

Answer 7

• Quick and easy way to set up, often linked to current accounts
• Flexible borrowing; access money only when needed up to a limit

Question 8

Explain borrowing for credit [3]

Answer 8

• Borrowing agreement will state the specified interest rate
• The rate might be fixed or variable depending on BoE rate
• Interest rates will also vary according to the extent of the risk involved

Question 9

Explain collateral on a loan [3]

Answer 9

• An asset that a borrower pledges to a lender as security for a loan
• Means that there is less risk to the lender
• If they cannot be repaid, the collateral assets can be sold to pay off the debt

Question 10

List two negatives of bank loans [2]

Answer 10

• Interest and fees can add to the cost
• Less flexible; you’ll receive a lump sum and must repay on a schedule

Question 11

List two negatives of bank overdrafts [2]

Answer 11

• Can have high interest rates, sometimes higher than loans
• Borrowing limit is usually low compared to loans