Consumers use their credit cards daily to purchase goods and services, thus participating actively in the national economic growth. By using credit cards -- which, in essence, are debt products -- account holders indirectly finance the total value of goods or services purchased. In this case, the "amount to finance" is 100 percent.
"Amount to finance" means money a person or company must borrow to complete a transaction, such as buying an asset or settling a debt. From a creditor's perspective, the phrase refers to cash the lender must advance to close a deal. Financing an asset purchase or a debt settlement calls for the notion of credit. This is money a lender advances to a borrower with the promise that the debtor ultimately will repay the sum. Economists use the terms "credit," "debt" and "liability" interchangeably. Financial obligations often include credits, but can have a non-monetary nature. For example, in a personal-guarantee scheme, an individual doesn't receive loan proceeds but vouches for someone else's creditworthiness.
Financing the activities of businesses and the lifestyle goals of individuals has a direct effect on consumption, productivity and economic prosperity. Accordingly, companies specializing in business or consumer financing often come under the scrutiny of regulatory agencies. The goal is not to enact excessive legislation to discourage investor interest, but to put into place a regulatory environment conducive to fair lending and reasonable risk taking. Companies engaging in financing activities include banks, factoring firms, hedge funds, insurance companies, private-equity firms and savings and loan institutions. Factoring firms help finance the accounts receivable of companies that need cash and can't wait for customers to remit funds.
Personal Finance Implications
If you decide to finance an asset purchase, be aware that borrowing has a direct effect on your personal finances. The idea of taking out a loan to buy equipment is not bad in itself. You need to monitor your debt levels and make sure your debt-to-disposable income ratio does not rise above the 50 percent bar that personal finance specialists often recommend. If it does, you may experience financial hardship and see your credit score plunge, especially if you're unable to settle your debts.
Businesses borrow for a variety of reasons, from working-capital management and making vendor payments to expansion programs and market-gain considerations. Working capital is the amount of cash that a company will have in the next 12 months. The metric equals short-term assets, such as inventory and cash, minus short-term debts, such as accounts payable.
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