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CH 10] Calculating Business 10-3

A personal loan is money borrowed from a lender that you pay back generally in fixed monthly
payments, typically over two to five years. If you have high balances on multiple high-interest
credit cards, a personal loan can consolidate debts into one loan with one payment at a lower
payment amount and lower interest rate.
Many small business owners use personal credit to run their business. However, doing so
could put them at risk if their business is not as profitable as planned and though the funds
borrowed were put to use in the business the owner is personally liable. If the business is a sole 10
proprietorship, then personal credit and business credit are closely linked for banks and other
lenders.
In business, there exist three types of credit accounts: (1) revolving credit, (2) installment credit
and (3) open-end credit.
Revolving credit is a line of credit with no fixed payments on monies borrowed but it does
have a maximum. Payment is made in accordance with business cash flow. It is usually issued for
operating purposes, facilitating business, and the amount(s) drawn can fluctuate each month
depending on cash flow needs. Revolving lines of credit can be taken out by corporations or
individuals.
Installment credit is a loan for a fixed amount of money. The borrower agrees to make a set
number of monthly payments at a specific dollar amount. An installment credit loan is typically
for the purchase of an item with a repayment period lasting from months to years until the loan is
paid off. Examples include purchasing vehicles and equipment. Computer equipment companies
use installment loans to induce buyers to upgrade their current computers to newer models with
more robust processors, expanded memory, and newer work software.
Open-end credit is a preapproved loan between a financial institution and borrower that may
be used repeatedly up to a certain limit and can subsequently be paid back prior to payments
coming due. Open-end credit often takes one of two forms: a loan or a credit card. In the consumer
market, credit cards are the more common form as they provide flexible access to funds, which are
available immediately again once a payment is received. A home equity line of credit is another of
the more common loan forms in the consumer market, allowing borrowers to access funds based
on the level of equity in their homes or other property.
All of these credit accounts involve finance charges which is interest to be paid.

Credit Cards
Credit and credit cards benefit the customer, the lender, the merchant, and government.
The customer is benefited in that it facilitates purchases even when they do not have sufficient
funds immediately for their purchase. Selling on credit benefits the merchant because he will often
sell more inventory and increase the turnover of his inventory which increases his profits. The
lender is benefited from the interest charges that they earn on the unpaid balance of credit card
holders. Government is benefited as increased profits increases tax revenues derived from that
profit.
Merchants who accept credit cards for payment of goods and services from their patrons take
those credit receipts to their bank and discount them for cash; the discount value of the credit
sales. The discount they pay varies from 2% to 5% on the total value of the credit receipts. Presume
you own a restaurant and your customers routinely pay with their credit card. If the evenings sales
amounted to $4,000 then you take those receipts and discount them at your bank to receive (100%
− 5% =) 95% of the value of the evening's sales. This would amount to (0.95 x $4,000 =) $3,800
cash, and the bank retains $200 for the guarantee of the credit purchases. The cash received from
the bank on the credit card receipts allows the restaurant to open for business the next day.
The banks and credit card companies will charge their customer, the credit card holder, from
0% to 26.99% on the unpaid balance of the credit card. Of course the 0% interest charge is offered
to people for a short period of time and will change immediately if one payment is missed or even
late. The Federal Reserve reports that the total credit card debt is surpassing $1 trillion. Various
credit reporting services note that the average American has 2.7 credit cards, a credit card balance
of $6,375 and the average finance charge is 15%. As banks and credit companies are in business,
their business is lending money; money being their product they intend to make a profit on their
product, and that profit is the interest paid on all loans regardless of their source.
The economics of money remains as for any product in that it does have a supply and demand,
its equilibrium price/cost is the interest that is paid and received.
Credit and credit cards advantage people in a capitalistic system. Socialist systems that do not
utilize credit as in a capitalistic system and disadvantages the citizen who has a lower standard of
living as dictated by their government.
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