My Financial Tips

During the past months, the worldwide credit crunch continues to create damage in all financial sectors across the globe. Because of this, things have become so hard for both consumers and lenders. Lenders find it really difficult and costly to raise money to finance their lending. But what is credit crunch?

A credit crunch is a condition of the economy in which investment capital is difficult to obtain. This is when banks and investors become reluctant to lend funds to corporations or have inadequate money to lend. They raise the cost of borrowing which borrowers find it really too expensive.

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

What is the effect of credit crunch to the economy? Credit crunch can cause a lot of harm 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 necessary for a lot of companies so they can finance and expand their operations. If they can’t borrow, companies will not be able to expand and worst, they might even stop operating. And if recession takes place at the same time, many companies might suffer bankruptcy.

So how can companies guard themselves when credit crunch happens? It is necessary that companies limit their spending. It also helps a lot if their debts are controlled. If the credit record of companies is clean, mortgage lenders and credit card companies will more likely to lend them funds.

Companies must know how to save more instead of spend a lot. When credit crunch happens, they won’t be affected that much. With so many savings, they don’t need to borrow from lending firms. Lastly, it helps a lot if they diversify their investment.

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