Credit

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Credit means both the capacity of an individual or corporation to borrow cash or raise financing, and actual contracts - sometimes publicly tradable on credit markets - defining borrowing agreements.

The credit crisis of 2007-08 froze many parts of that market and restricted companies' ability to obtain credit.

Consumer Credit

Credit allows consumers to finance transactions without having to pay the full cost of the merchandise at the time of the transaction. The most common form of consumer credit is a credit card issued by a financial institution. Merchants may also provide financing for products which they sell. Banks may directly finance purchases through loans and mortgages.[1]

High Cs

For potential borrowers to gain credit, they must demonstrate a range of characteristics that credit experts have called "The Five Cs."[2]

  • 'Character' is the borrower's demonstrated integrity;
  • 'capacity' is the cash flow to service the debt;
  • 'capital' is the borrower's overall net worth;
  • 'collateral' is the assets needed to secure the debt; and
  • 'conditions' refer to the overall financial health of both the borrower and the economy.

Recently it's the 'conditions' part that has been killing corporate credit-seekers.[3] Franchise businesses are seeing their franchisees unable to gain financing to purchase or upgrade stores, while venture capital funds are under pressure from their investors not to fund risky start-ups while credit is drying up. Other companies are unable to fund payroll and inventory as money markets that offer larger players short-term credit also become illiquid.

References

  1. Consumer Credit. Cornell Univeristy Law School.
  2. 5 C's of credit. Investorwords.com.
  3. Why the credit crunch is about more than Wall Street. CNET.com.