Some small businesses trade in cash – and nothing else. Customers pay in cash and the expenses and costs of the business are settled in cash. There is no need for credit.
However, most businesses cannot survive simply with the cash they have in the bank. They need to borrow or lend from banks, suppliers and others in order to trade. So in business, credit is about borrowing – owing money to others for a period of time. For example, credit arises when:
The amount of credit that a business can raise will depend on several factors such as:
You may have heard about the "credit crunch" during 2008 and 2009. The credit crunch was about a reduction in the availability of credit for businesses. As lenders struggled to stay in business, they lost confidence in the ability of businesses to repay credit. So many businesses found themselves in financial trouble due to:
The effects of the credit crunch – notably an increase in failed businesses – show just how important credit is to the business community.
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