Credit
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[edit]
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[edit]
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[edit]
- ↑ Consumer Credit. Cornell Univeristy Law School.
- ↑ 5 C's of credit. Investorwords.com.
- ↑ Why the credit crunch is about more than Wall Street. CNET.com.