Credit crunch is a situation where an economic condition in which investment capital is difficult to obtain. Normally banks and investors become cautious of lending funds to corporations which drives up the price of debt products for borrowers. A credit crunch is generally considered to be an extension of recession. A credit crunch makes it nearly impossible for companies to borrow because lenders are scared of bankruptcies or defaults which might result in higher rates of interest. The result is a prolonged recession which occurs as an outcome of shrinking credit supply. A credit crunch is also known as credit squeeze, finance crunch or credit crisis. This is a situation where reduction in the general availability of loans or sudden tightening of the conditions availability of credit independent of rise in official interest rates. In such conditions, the relationship between credit availability and interest rates has absolutely changed, either credit becomes less available at any official rate of interest or there or it is not available totally. Many times the credit crunch is accompanied by a flight to quality by lenders and investors as they seek less risky investments. The money lenders and financial institutions hesitate to invest into larger venture since they don’t find any security for their investments. Business credit crunch is an economic condition in which loans and credits for investment are become unavailable abruptly. This is largely due to the increase in cost of loans provided by the banks and other financial institutions in an environment in which large losses and asset value write downs are taking place.

A credit crunch leads to the increase in the interest rates which make it further impossible for the borrowers to secure credit. Banks and creditors cautiously disburse funds to the corporations fearing bankruptcies and defaults in payments by the borrower. A credit crunch is a product of a recession or negative financial environment. The shrunk credit supply during such crunch leads to prolonged recession in the economy. Very often a major cause of credit crunch is a long period of faulty and injudicious practices on the part of lenders. Reduction in prices of goods or assets in a particular market can also result in credit crunch. Excessive influence in borrowing against assets that had previously been going up in value worsens the situation. America credit crunch is different from a liquidity crisis. Liquidity crises happen when an economically well to do business enterprise is unable to generate finance that is required in order to operate or expand business.

There are certain strategies that may be adopted by a business enterprise when it faces a credit crunch inclusive of seeking to raise additional funds by new share of bond issues, the market approach to estimate the value of assets may lead to write down the actual value of the assets, liquidation of the business or certain assets and selling all or part of the business or assets.