What is liquidity crisis?
Liquidity crisis is a shortage of funds to meet financial needs. It can affect banks, financial markets, businesses, states or even the whole economy bringing a domino or crisis. It is a negative financial situation characterised by a lack of flow of cash. In case of a single business, a liquidity crisis occurs when the otherwise solvent business does not have the necessary funds or liquid assets to meet its short-term obligations, including repaying loans, paying bills and giving salaries to its employees.
If the liquidity crunch remains unsolved, the company must declare bankruptcy. An insolvent business can also have a liquidity crisis. But in this scenario, restoring the cash flow will not prevent the business’s ultimate bankruptcy. To understand what it means for the economy as a whole, it is important to break down liquidity crisis. A liquidity crisis means that the two main sources of liquidity in the economy, banks and the commercial paper market, severely reduce the number of loans they make or stop making loans altogether. The fact that so many companies rely on these loans to meet their short-term obligations, this sudden lack of lending has a ripple effect throughout the economy, which causes liquidity crises in several companies, which in turn affects individuals.
How liquidity crisis can spread
A liquidity crisis may unfold when economic concerns drive the account/deposit holders with a bank or banks to make sudden, large withdrawals, if not their entire accounts. Reason may vary from concerns about the stability of the specific institution to broader economic influences. The account holder may see an urgent need to have cash in hand, if widespread economic declines are feared. Such activities are capable of leaving the financial institutions deficient in cash and unable to cover all registered accounts. For example, some of the banks in the US had significant portions of the cash coming from short-term funds that were put towards financing long-term mortgages but when the real estate collapsed, such arrangements forced certain institutions to face liquidity crises.
If a government in any country is confronted with a liquidity crisis and lacks the funding to pay for its obligations and debts, it might take on drastic measures, thus cutting spending. Such actions can and will affect the public as there would be less money in the overall economy. The lack of cash flow from government sources can affect small businesses, in most cases they rely on loans to help them cover growth costs as they conduct business. This can result in businesses closing temporarily or even permanently, spikes in unemployment and an erosion of economic growth within the country.
Raising funds, a way out
For Young Entrepreneurs, business loans are almost always secure in nature. You have to provide collateral. Although there are several options available to raise funds, it is better to get a business loan for most people in the business. If you are confused about how to get a business loan, you must check the interest rates, choosing the right tenure, suitable bank, documentation and online application and various other factors.
Venture capitalists take an equity position in your company to help it carry out a promising but higher risk project. They are investors who put in a considerable amount of money in exchange for equity in your business and get returns when the business goes public or just in case is acquired by another company. Venture capitalists only invest in businesses that have the potential of providing good returns. They not only provide funding, but can offer expertise and mentorship to help develop the business. What’s best about venture capital funding it that it gives Young Entrepreneurs immediate credibility and opens other doors to a wide network of important individuals, such as future investors and partners.
These are wealthy individuals or entrepreneurs or retired company executives who invest directly in small firms owned by someone else. They are often leaders in their own field who not only contribute their experience and network of contacts into your business but also provide technical and management skills. They reserve the right to supervise your business’ management in exchange for risking their money. In other words, they often demand a seat on the board of directors and an assurance of transparency.
Taking small business loans typically require a personal guarantee from the entrepreneurs. However, crowdfunding offers funding a business by taking small amounts of capital from a large number of people through the Internet. This makes use of the vast networks you have of your friends, family and colleagues via different social platforms to get the word out about the business, along with the goal of attracting new investors. It has the potential of expanding a business by getting a pool of investors who can help raise funds. This mechanism allows businesses to pool small investments from several investors instead of seeking out a single investment source. A cautionary note here would be the fact that some sites have payment-processing fees or require business to raise their financial goal to keep any of the raised money. Hence it is important to read the fine print of different crowdfunding sites before making your choice.
Small business loans are one of the traditional avenues for funding but they are often restricted to the ones with existing cash flow or some kind of collateral to put up. Now you can expand your business by investing in its infrastructure, stocking goods, building a new warehouse, and maintaining cash flow with a MSME loan for young entrepreneurs available on Finserv MARKETS. Bank loans are the most common source of funding for small and medium-sized businesses. All banks offer different advantages, whether it’s personalized service or customized repayment. Your business must have a sound track record and an excellent credit. A good idea is not enough as it has to be backed up with a solid business plan.
If you are a small business owner and require capital, it is better to get in touch with credible lenders. Alternative lenders provide tailor-made loans for small businesses with features like pre-approved business loans, improved flexibility and quick processing. Small business loans can be utilised for a variety of purposes ranging from the renovation of the office to machinery repair. At Finserv MARKETS, you can check your eligibility, calculate monthly instalments and apply instantly for small business loans. You can now prepay part of your loan anytime after paying 1 % prepayment charges and among other benefits you can opt for foreclose of your entire business loan anytime after paying 1 EMI’s at foreclosure charges at 4%.
Bajaj Finserv offers business Loan starting at interest rate of 18.00%. Bajaj Finserv offers you loan if you need a minimum amount of ₹ 5 Lakh to a maximum amount of ₹ 30 Lakh. You also have the flexibility to repay your loan in a period of minimum 12 months to maximum 48 months.
Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!