Explain spreading risk [2]
- The thing banks do to spread the risk associated with lending and borrowing
- The act as financial intermediaries
What do financial intermediaries include? What do they offer? [5]
- Banks
- Building societies
- Pension funds
- Inurance companies
- Offer a link between savers and borrowers
Explain evaluating risk. How do they prevent/combat risks? [4]
- Banks have to understand the risks before they offer loans
- Find a range of borrowers to spread the risk
- Banks lend to each other to cover deficits and surpluses
- Some banks specialise in certain areas
What is unlimited liability
Where the responsibility of all debts of the business rests with the owner(s)
What is limited liability?
Where the responsibility of all debts is limited to the amount invested by a shareholder
Why are risky loans more profitable?
Higher rate of interest
What does sole trader mean?
Business owned by only one person
What are the benefits of a sole trader? [4]
- Easy and cheap to set up
- Owner has complete control
- Keep all the profits
- Financial info is not shared
What are the negatives of being a sole trader? [5]
- Unlimited liability
- Hours of work may be long
- No continuity if the sole trader dies
- Shortage of capital
- Skills shortage
What are Private Limited Companies (Ltd)
A business owned by at least two shareholders
What are the benefits of being an Ltd [4]
- Limited liability
- Continuity
- Can raise more money
- Control over share sale
What are the negatives of being an Ltd [4]
- Some financial info is available
- Admin
- Sales of shares is restricted
- Dividends
Explain a Public Limited Company (plc) [2]
- A business owned by shareholders
- Shares in the business can be bought and sold on the stock exchange
What are the benefits of a plc [3]
- Ability to raise large capital
- Easier to borrow
- Limited liability
What are the negatives of a plc [4]
- Possibility of a takeover
- Costs
- Big businesses can be inefficient
- Financial info is available
