Question

Companies normally have a demand for credit due to the operating, investing and financing activities that they engage. For each activity provide a specific reason why a company would need credit

Answer 1

Companies need funds for many of its activities. Funds are arranged either by founders putting into their own money or arranging it on credit from other parties. Credit is arranged at different rates from different parties depending on:

1. Size of the firm and reputation

2. Need for credit

3. Credit history and repayment plan

4. General goodwill in market and industry

Credit is generally needed for operation of firm usually for payment of suppliers. Operation of many goods manufacturers happen as per the cash conversion cycle. Firm purchases raw material from suppliers on credit, manufactures good, sells them to customers who pays the firm which is then used to repay the suppliers. The cash conversion cycle can be long or short depending on the type of product, credit available to the firm from suppliers, credit provided to customers etc.

Credit is required for investment purposes generally for market participants like VC ( venture capitalists) who procure funds for investment in firm in the form of debt financing. Funds procured from debt providers are used my VCs to restructure or help growth of companies theyv(VCs) believe have good growth potential and reap the benefits once the invested firm grows

Credit for financing is the most commonly seen credit offering where banks or other market participants provide credit for financing procurement of things like car, house, appliances etc. The finance providers will earn an interest for the outstanding debt and maybe structured with clauses to prevent losses to finance providers