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[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]

  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.