Credit is essential for both consumers and businesses in the UK economy. It allows individuals to access goods and services before fully paying for them, and provides opportunities for people to pursue that may not otherwise be possible without credit. However, there are also risks if credit is mismanaged, as seen in cases like Northern Rock bank crisis in 2007. While small businesses benefit greatly from access to loans that allow them to get started, there are risks of not being able to repay large business loans. Overall, the advantages of access to credit for consumers, small businesses and medium enterprises outweigh the disadvantages if managed responsibly.

1. Lewis Appleton Module code CB311
Explain why and how the availability of credit is important to the UK
economy generally. Analyse further the importance of this for UK Small and
Medium-sized Enterprises (SMEs).
Whenwe referto credit,we refertothe abilityfora businessor individual tobe able tomake
purchasesor gainmonetaryvalue withouthavingtorepaythe value rightaway.Thisisotherwise
knownas borrowing,the mostcommonformsof creditthat youcan findusedbyan individual or
businessinclude suchformsof borrowingasloans,mortgage,hire purchase,leasing,overdraftsand
variousothermethodssuchas purchasesoncreditor partial credit.Formsof creditcan be seenin
everydaylife,evenwhentheyare notmade obvioustous,forexample some retail storescanoffer
highervalue itemsonabuy now,payin the future scheme.Toanynormal personthiscouldeasily
be seenas payinglaterandtheymay not actuallysee itasit is,a formof borrowing.InthisessayI
am goingto explainthe reasonsthatcreditisanessential partof the UK economy,todo thisI will
referto the resultof no available creditand itsimpacton the economy.Aswell asapplyingthisto
the economyingeneral,Iwill furtherthisapplicationof creditintothe impactonsmall andmedium
enterprises. Thisessaywillnotbe specificallyaboutthe impactof creditbutalso the impactof a
resultof no available credit.
To start off I feel thatit isimportanttoapplyhow importantcreditisto the consumer. There are
manyforms of borrowingavailabletothe consumeralthoughIshall firstdiscussloansand
mortgages.Loansare a verycommonform of borrowing,andthisisfor goodreason,youcan just
imagine howlongitcouldtake of savingmoneyto geta new car wortharound£5,000. It makes
sense tobe able to use it rightaway if it’spossible andashumaninstinctdrives,we wantthingsright
away,for example itisnotuncommonforsomeone topay£5 extraon a £10 itemjustto getnext
day shipping,asurveybyTrimble foundthistoalsobe true with40% of buyerspayingfornextday
delivery ( Econsultancy,2012),thisiswhyindividualsoftenturntoborrowingtogetthe thingsthey
desire rightaway,while true theymayhave toendup payingmore than the goods worththeyare
able to have the addeduse of the itemduringthe time theyhave torepay. Mortgagesare a longer
repaymenttermthan loans;these are usuallyamuch largervalue.Mortgagesare oftenusedto
purchase properties,theyhave alowrate of interestwhichtoanynormal personwouldseemnotto
make sense due tothe risk,the mortgage usually issecuredbythe propertyitistakenoutfor, this
meansif the borrowercannotaffordthe repaymentstheyhave the propertyassecuritywhichcan
be soldand moneyreturnedtothe lender,howeverthere are certainriskswiththiswhichIwill
explainshortly. Anotherwell-knownmethodof borrowingishire purchase,whereasleasingislike
rentinga goodor service,hire purchase issimilar,the wayhire purchase worksisjustasa lease or
rentexpense doesexceptforthe factthat afteran agreedperiodyouwill thenownthe good.A
classicexample maybe acar or a television,if anindividual boughtatelevisiononhire purchase
thentheywould notownthe televisiontillthe lastrepaymentismade,thereforeif theyfail tomake
repaymentsthe televisionthatisnottheirsistakenback, similartowhena lease expires.
I will furtherthisbyexplainingthe opportunitiesthatare gainedbygeneral individualshavingaccess
to credit. People don’talwaysborrow moneybecause they“want”something,itissometimes
necessarytogainmoneyinorder totake upa new opportunity,forexample if thereare verylittle
job’savailable exceptfordriving jobsthenitmaybe necessarytotake outborrowinginorderto get

2. Lewis Appleton Module code CB311
a vehicle forthe job,inthisexample we assume theyhave otherformsof income orsavingstopay
off the repayments.Thiswouldthereforeallow the persontomake moneywhile repayingthe loan
and overall atthe endof the loantheywouldhave earnedmore moneythannottakingouta loanat
all,therefore theirloanhasactuallyturnedintoaprofitbecause of opportunity. There are many
advantagestomortgages,mostnotablythatit allowsapersonor couple toown theirownproperty,
howeverone huge advantage isthatthe repaymentsthatwouldhave otherwisebeenspentonrent,
go towardsthe paymentof the mortgage,at the end of a rental agreementthe service isretrieved
and yougain nothingextraoutof it,similartoleasing.Atthe endof a mortgage agreement,the
house isyours,we can and cannot applya hire purchase tothis,youdo ownthe house whenyou
gaina mortgage forit althoughitisoftenusedas securityagainstthe mortgage,youcannotrelyon
it to still be inyourpossessionif youfail tomake repayments,inthiswayitissimilartoa hire
purchase.
NowI will explainthe otherside of credit,how itcango wrong,how it has gone wrongand what
implicationsthisoccurringcanbring.One of the mostfamouscasesof financial institutionswas
NorthernRockin 2007 (BBC,2007), what theyhaddone incorrectwas the fact that a large amount
of theirassetswasinthe form of loansto be repaidand as suchtheyhad little moneyinthe system
available,thiscausedproblemswhentheirsituationwasdiscoveredandcauseda run on the bank
whichiswhenmanycustomerswithdraw theirfundsortransferthemelsewhere due tothe
likelihoodof the bankbecominginsolvent.Thankfullythe bankwasbailedoutbythe governmentat
the time.Thishas howeverhadpositive effectson regulations,the FSA have since improvedtheir
regulationsbasedonthe eventswhichwouldprovide more securityforthe consumers(Guardian,
2008). The NorthernRock’seventshave alsoimplicatedeffectson otherbanks,thismade those
otherbanksmore aware and thiscausedthemto use ringfencing,thatis,keepingtheirborrowing
and lendingatspecificlevelssuchas33% moneybeingborrowedwhetherthat’sfromthe banks
borrowingsorthe banks customerdeposits,and66% moneybeinglentoutinthe formof loansand
such,while true thisdoesnotmake iteasyto repay customersshouldtheyall wish towithdraw the
likelihoodof thishappeningisslim.
To furtherexplainwhatIpreviouslystatedaboutthe risksof havingapropertyas securityona
mortgage,house pricesare constantlychangingatan unstable rate,if somethingisdeemedtobe
unstable it’snotthe bestof ideasto use itas securitybut beingthe highestvalue thingavailable
there isn’tanyotherchoice,whatcouldhappenisthat the consumercouldtake out a mortgage and
fail to repay,duringthistime the house price mayhave fell below the outstandingamountleftto
repay,thisisknownas “negative equity”.The consumermaynotbe aware of thisand thinkthatthe
value of the house will coverthe mortgage butthisisnot the case,he will have tocome up withthe
extraamountwhichcouldbe £1000’s and clearlyif he wasunable to repaythe mortgage payments
originally;thiswill notbe the easiestthingtodo. As of January2013 there are between1.6% and
6.3% of homeownersinthe UKwithnegative equitywithsome areasbeingsignificantlyworsesuch
as NorthernIrelandbeingat18-26% (Financial ConductAuthority,2013, p. 27).
NextIfeel Ishouldexplainthe importance of beingable tooffercredittothe consumer. Itis
importantforbusinessestobe able tooffercreditoptionsinordertomaximise theirprofitand
potential formore profit.Inthese economictimespeople cannotaffordtobuythingsthe instant
theyneedthem,forexample amotherwhoisstrugglingmayneedtoreplace abrokendown
appliance suchas a washingmachine,she wouldnormallynotbe able togetthisbecause she does

3. Lewis Appleton Module code CB311
not have the money,however,due torepaymentschemesandbuynow paylaterschemesitis
possible forhertoobtainthe washingmachine oncredit.Thisallowsthe businesstomake more
moneybecause theyprovide opportunitiesforthe consumertopayininstalmentsratherthan the
entire amountrightaway,of course in the short termthere islittle moneybeingmade sotheydo
have to put faithinthe consumerto payback withoutintervention.
An example of aretail businessofferingcreditisArgos (Argos),theyallowthe customertouse a
varietyof paymentmethodsincludingbuynow payX monthslater,theyalsoofferwaystopay by
monthlypayment,thiscanbe extendedwiththeir“ArgosCard”to allow longerrepaymenttimesas
such.
NowI’mgoingto explainwhycreditshouldbe availabletobusinessesstartingup. Whenbusinesses
start-uptheymay notactuallyhave anythingtostart from, or theymay have little tostartfrom.
There ishoweverformsof borrowingavailable forbusinessessuchasbusinessloans,these canbe
offeredbybanksaswell asthe government (DepartmentforBusiness,InnovationandSkills,2012).
Thisis essentialforsmall businessesbecauseitallowsthemfromthe startto dobiggerthings,if the
businessalreadyknowswhattheyare goingto be doingthentheycan investthe moneyrightaway
rather thansavingup formonthsout of theirownpocket. Thiscouldleadto bigthings for the
businessinasmall time period.
I will nowexplainthe risksinvolvedwithanew businesstakingcreditoptions. Asthere iswith
general peopletakingoutcreditthere are alsoriskswithbusinessestakingoutcreditandthisis
slightlydifferent.Businessloansare usuallylargeramounts,inthe £1000’s so theycan’t justbe
ignored,if abusinessisunable torepaythisthenthe responsibilityforthe baddebtfallsontothe
shouldersof the businessowners.Thiscanhave largerimplicationsdue tothe highamounts;the
ownersnotonlywill lose theirbusinessbutalsomanypersonal possessionsaswell.Thiswill also
have a significanteffectontheircreditscore andtheymay be unable toobtaincreditinthe future.
I’mgoingto again explainwhycreditshouldbe made available,thistime tobusinessesof medium
size. While itistrue that mediumsizedbusinessesdonotface the challenge of startingupitis
possible thattheywill require additional fundingforexpansionssuchasnew store locationsina
retail business.Attheirnormal budgetitmaybe difficulttopurchase rightawayandtherefore credit
seemslike agoodpath to take.Thiswill allow themtopossiblymake moneyatafasterrate than
before,notonlycanthismake the businessmore profitablebutitcouldalsoreacha pointwhere the
extraprofitsexceedthe amounttorepaythe loan,it’sa riskbut itcan payoff.A mediumbusiness
can use crediton a short termor longterm basisdependantonthe amountandurgencyof the
matter. For example amediumbusinessmayonlyhave £10,000 cash available,thismayseemlike a
lotbut it isnot due to the needtouse moneyto payfor expenses,inrealitymaybeonlyaround
£2,000 of that isnot neededforotherthings althoughthe businessmayneed£10,000 to acquire a
newpiece of machinerydue toan oldone goingbust.In situationssuchasthese itisa goodideafor
the businesstoborrowmoney,notonlydoesthiskeepthe businessfunctioningbutallowsthemnot
to use the cash it needsforotherthings.
To conclude Iwouldlike toevaluate the importance of credittothe UK economy,borrowingmoney
can be beneficial toconsumersif theywanttohave the addeduse of somethingbygettingitright
away,in some casesthiscan have significanteffectssuchasactuallysavingmoney;if someone
boughta car theywouldn’thave topaytaxi fares.Borrowingisalsobeneficial toconsumersin

4. Lewis Appleton Module code CB311
emergencysituations,timeswhenborrowingbecomesanecessitysuchasto replace a kitchen
appliance.Creditisnotonlyimportantto consumers;there are manybenefitstosmall businesses,
especiallythose startingup.Businessloansallowsmall businessestooperate rightawayratherthan
the initial struggle thatsome otherbusinessesmayhave had, the businesscanuse the debttoinvest
inpossible profits,the resultcouldbe thatthe additional profitexceedsthe debtamountbythe
time itis paidoff and the businesswouldhave made more moneythanwithoutthe loan.The same
istrue formedium business.There isadarkerside to credit,itcan go wrongbut overall the
advantagesandopportunitiesthatappearfromtakingcreditoptionsexceedthe disadvantages,as
longas the moneyismanagedwell there shouldbe noproblems.
Bibliography
Econsultancy.(2012, August2). 40% of online shoppersarewilling to pay fornextday delivery.
RetrievedNovember17,2013, fromEconsultancy:http://econsultancy.com/uk/blog/10468-
40-of-online-shoppers-are-willing-to-pay-for-next-day-delivery
Argos.(n.d.). ArgosCreditand Insurance.RetrievedfromArgos:
http://www.argos.co.uk/webapp/wcs/stores/servlet/CreditAndInsuranceView?langId=110&
storeId=10151&page=Credit%20%26%20Insurance%20homepage%7CArgos%20Card
BBC. (2007, September13). Northern Rockgetsbankbail out. RetrievedNovember17, 2013, from
BBC NEWS: http://news.bbc.co.uk/1/hi/business/6994099.stm
DepartmentforBusiness,InnovationandSkills.(2012,December12). Small businessesoffered £110
million of newfinance. RetrievedNovember17,2013, fromDepartmentforBusiness,
InnovationandSkills:http://news.bis.gov.uk/Press-Releases/Small-businesses-offered-110-
million-of-new-finance-684c2.aspx
Financial ConductAuthority.(2013). FCA Risk Outlook2013. Financial ServicesAuthority.
Guardian,T. (2008, March 27). Northern Rockfiasco leadsto FSA revamp. RetrievedNovember17,
2013, fromThe Guardian:
http://www.theguardian.com/business/2008/mar/27/northernrock.banking