Question

Why is it difficult for a company to raise capital when the economy is in recession?

Answer 1

Recession is called to that economic conditions when industrial growth,industrial output, & per capita income is low to the level and there is a atmosphere of pessimism in the economy. In this situation demand for products are low and deflation occurs in the economy.

In recession Generally interest rate on deposits are higher in comparison of lending rate, people prefer to invest into safe deposits into banks. Capital market performs poorly due to low demand of funds from industry and people avoid to invest into public offers due to low and slow growth in business. People prefer to invest into banks deposits and debts due to assured returns so companies planning for public debts generally face problem in raising capital from capital market due to poor profitability and growth rate in business. In this situation companies generally prefer to raise money by long term debts as lending rates are low by issuing long term debts.

So in recession it is difficult to raise capital by tapping capital market due to low demand or undersubscription of issue and high cost of raising funds.