Credit crunch

From CopperWiki
Jump to: navigation, search

Credit crunch, which is are usually considered to be an extension of recession, is an economic condition in which investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, which drives up the price of debt products for borrowers.

Contents

Why should I be aware of this?

Get Involved!
CONNECT:
Money, Money, Money
SHARE:
Strategic Thinking: it works
LISTEN:
Rich or poor?
Greening your Money
LAUGH:
The pros and cons of being good with money


All the bad debts which have brought about the current market situation are now concealed somewhere in the world's financial system. Until these debts are dealt with, banks will be reluctant to lend to one other.

As lenders fear bankruptcies and defaults during the period of credit crunch, it becomes extremely difficult to borrow money for investment. This kind of shrinking credit supply results in a prolonged recession, or slower recovery.

If I am a small business owner I may be finding it difficult to get credit to increase inventory, meet payroll, and run my business. Until the credit markets ease up I need to think of creative ways of finding the cash I need. Using innovative ways and with proper research, this could be as good a time as any to start a new business or expand present business.

All about credit crunch

Credit crunch is a situation in which there is a sudden decline in lending, that is, credit. Borrowers are not able to find lenders and even if they do, the credit is available at unusually high interest rates.

Among the many reasons which bring about credit crunch the most important among them are the perception of risk on the part of lenders and imposition of credit controls or a sharp restriction in money supply. Risk perception increases when the lenders are not sure about the creditworthiness of borrowers. Nervous lenders stop lending and the flow of credit comes to a grinding halt.

Affects economy too

A credit crunch affects not only borrowers and lenders but also the financial markets and the economy. Interest rates shoot up and put a brake on investment as well as consumer demands leading to a slower economic growth. But even high rates fail to attract lenders to the market. When lenders start demanding their money back even sound borrowers may default due to sudden demand for repayment. This can surely set the financial markets on fire.

Fear and uncertainty

The credit crunch market is characterized by fear. On account of the beating they are getting on the existing loans, lenders fear that they will book bigger losses on future loans. To fear is added a great element of uncertainty.

A lender can raise interest rate, tighten credit standards or write more protective covenants into the terms of a loan in an effort to compensate for fear. But if the size of the losses is uncertain enough, lenders can't compensate for the additional risk because lenders don't know how large that risk might be. Lenders become afraid to make any loan because they fear that any additional return that they ask for will turn out to be inadequate to cover the actual risk, whatever it may turn out to be.

What can I do?

  • Try to get rid of old stock in any way possible, from selling as wholesale lots to possibly selling on market stalls and at car boots. This will help bring the cash in.
  • Try promotions, such as money off coupons, cash back, coupons and so on. Take a cut in your mark up and profit but keep the cash coming into your business.
  • Take up smaller premises if you are on rent, maybe even your own home, to help reduce and cut overheads and increase profits.
  • Tell the media your story and get some free press coverage.
  • Think up and offer something unique that your competitors don't offer. This could be superior customer service.
  • Develop networking. Through networking your business has a better chance of survival, as more people come to know about it.
  • You could try reducing your regular staff or workforce, and go for part time employees and agency workers

90 degrees

Until a credit crunch hits the consumer, the damage will remain confined to the most leveraged sectors of the financial markets, such as the market for mortgage-backed bonds, leveraged-buyout loans and high-yield bonds. And there the damage could be severe. But the economy as a whole will keep perking along at a reasonable growth rate. [1]

References:

  • Credit Crunch
  • What causes credit crunch in financial markets?
  • How far will the credit crunch spread?
  • Top Tips to Help Your Business Survive

Source

  1. MSN Money