Essay: Costs of Borrowing Funds in Poor Economies

17 Oct

Essay: Costs of Borrowing Funds in Poor Economies

Sample Essay

In a poor economy, the interest rates are high hence making the cost of borrowing funds from banks or lenders very high. In this case, unless the entrepreneur has other sources of funds, such as savings and donations, it is not wise to being business operations in a poor economy.

Most businesses are not able to repay their debts making them to be put under receivership. Considering the busting of the housing bubble in the global economy,  it is not wise to start new operations since these were already existing businesses that had been ran over a long period but could not secure bank loans that were very expensive. To begin, the interest rates were very low and many financial institutions were offering mortgages at low rates, however, after the burst of the housing bubble, the value of the houses went too low making it difficult for the consumers to service their loans. The banking sector suffered massively since they have offered loans that could consumers could not repay. This forced the interest, rates, especially those for unsecured loans, to rise making it hard to secure loans (Dunnan, 2009). During the recession, many firms were closed down, therefore, for a new firm, it could not be economically viable to begin business during this period of poor economy.