Credit Crunch

During the past months, the worldwide credit crunch continues to wreak havoc in all financial sectors across the globe. Due to this, things have become very difficult for both lenders and consumers. Lenders find it really difficult and costly to raise money to fund their lending. But what is credit crunch?

A credit crunch is an economic condition in which investment capital is difficult to obtain. This is when banks and investors become unwilling to lend funds to corporations or have limited funds to lend. They increase the amount of borrowing which borrowers find it really too expensive.

Credit crunch normally happens when lending firms suffered losses from earlier loans they made. Due to this, they become generally hesitant or unable to lend money to borrowers. Additionally, when they recognize that the risk is high in the market, banks will increase their rates to counteract the risk. This often results to borrowers being unwilling to borrow because of the higher rates, and the banks in turn may not lend at all.

What does credit crunch do to the economy? Credit crunch can cause a lot of damage to the economy. It can limit the growth of the economy because of the reduced capital liquidity and the ability of corporations to borrow money is decreased.

Borrowing money from lending institutions is important for a lot of companies in order to finance and increase their operations. If they are not capable to borrow, companies will not be able to expand and worst, they might even stop operating. And if recession occurs at the same time, many companies might end up going bankrupt.

So how can companies protect themselves when credit crunch takes place? It is important that companies limit their spending. It also helps a lot if they control their debts. If the company’s credit record is clean, credit card companies and mortgage lenders will more likely to lend them money.

Companies must be able to save more instead of spend a lot. The effects on their company is lessened if credit crunch happens. Because they have saved a lot, they don’t need to borrow from lending firms. Lastly, it helps a lot if their investment is diversified.