Theory question 101
BankingCommerce 2 (answer five questions)
(a) What is credit?
(b) Explain three ways by which banks grant credit to customers.
(c) Give two advantages and three disadvantages of credit sales.
Show the model answer
(a) Credit is getting goods, services or money now and paying for them at a later date.
(b) Three, explained: loans – a fixed sum credited to the customer's account, repaid with interest over an agreed period, usually against collateral; overdraft – current account holder allowed to draw more than his balance up to a limit, interest only on the amount overdrawn; discounting bills of exchange – bank pays the holder the value of a bill before maturity, less a discount; also advances against produce, bank guarantees, letters of credit, credit cards.
(c) Advantages (two): increases sales/turnover; buyers enjoy goods before they can pay in full; attracts and keeps customers; helps small traders to stock goods.
Disadvantages (three): bad debts; seller's capital tied up; credit price higher than cash price; encourages buyers to overspend and fall into debt; cost of collecting debts; goods may be repossessed on default.
Give three bank methods in (b) and explain how each works.