1. Interest Rates Interest Rates

2. What is credit? Credit is about borrowing – owing money to others for a period of time

3. Why do businesses need credit? To finance purchase of assets (e.g. stocks, machinery, computers) To allow customers to take time to pay their bills To support the growth of the business (e.g. new locations, extra staff)

4. Examples of business credit A business uses its bank overdraft facility – e.g. the bank account goes £50,000 “into the red” or overdrawn A business takes out a bank loan – e.g. £100,000 loaned over five years A business buys goods or services from a supplier and agrees to pay for them in 30 days – this is known as trade credit

5. How much credit can a business obtain? It depends on… Whether the business is profitable and is likely to remain so in the future The ability of the business to generate a positive cash flow to allow it to repay credit The strength of the relationship between the business and its creditors The industry or market in which the business operates

6. What happened in the “credit crunch”? Banks withdrew or lowered overdraft facilities Banks refused to provide bank loans, or made the repayments and interest charges worse Suppliers insisted on earlier payment of invoices Customers took longer to pay their bills

7. What is an interest rate? An interest rate is the cost of borrowing money or the return for investing money.

8. Interest payments & receipts Paid to bank when overdrawn Paid to bank on a bank loan Paid to credit card companies Paid to leasing companies Interest Paid Paid by bank on cash balances held Paid by customers if they are late settling invoices Interest Received

9. Who sets the interest rate? The base interest rate in the UK economy is set by the Bank of England. Each month, the Monetary Policy Committee of the Bank of England to decide what the base rate should be.

10. What has happened to interest rates? During the credit crunch, the base interest rate has fallen sharply to as low as 0.5%, as shown in the chart opposite

11. Business and interest rates Effect of a change in interest rates on business depends on: The amount that a business has borrowed and on what terms The cash balances that a business holds Whether the business operates in markets that depend on consumer spending

12. Examples of markets which suffer from an increase in interest rates Housing (mortgages) Motor vehicles Holidays “Big ticket” consumer goods – e.g. new kitchens, audio-visual systems

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