An Ol' Broad's Ramblings
I’m Baffled
I keep hearing the talking heads, along with Bush and folks in Congress talking about how small businesses can’t borrow money to make their payroll. Now, here is where I’m having a problem. If you have to borrow money to pay your workers, you aren’t making any money….no profit. Maybe I’m not getting this right, but could someone explain to me why a company should have to borrow money?
Let’s say I start a business….a book store for example. I have a little capital, but need to borrow a few bucks to buy inventory and such. It’s just a small imaginary bookstore, maybe a used bookstore. Well, I already have half the inventory in boxes from my own stash (sitting in what’s suppose to be our dining area), so I don’t have to have much extra to get started. I’m starting small, so I’ve got a tiny building….a front where I’ll do the selling, a little buying, perhaps even trading of books. Then a backroom where extra stuff can be stored, like a itty bitty fridge and a coffee pot. And of course, a toity. Gotta have a toity, right?
Ok, let’s pretend business is fairly good, after a slow start, and I start making a profit, over and above bills being paid. Bills – those nasty things we all have to pay, right? We’ve got rent on the building, electricity, water (can’t forget that toity), insurance, and whatever else ya legally have to have. Business expands….gotta get a bigger place, and hire a helper. This pretend business has to be making a profit, otherwise I can’t expand or pay the helper, right? If I had to borrow money to pay this employee, why would I keep the employee?
Yes, this is an extremely simplistic scenario, but you get the idea. If I’m not making enough money with my business to pay my single employee, then I have a major problem.
My question: What the hell kind of business has to borrow money all the time to pay their employees? That’s digging a hole that you can’t get out of!
You do it for cash flow purposes.
Let’s say I have a $35,000 a pay period payroll.
I’ve billed my clients $200,000 for work we’ve done, but none of them have paid me, yet, and the payroll is due, today.
A bank will loan me the $35,000 for a few days so I can make payroll and I’ll pay them back as soon as my clients start sending me the money they owe me.
Make sense?
I had this discussion with a good friend today. Her husband couldn’t get a line of credit when he wanted it without putting up their house. She was furious. I suggested her husband might not be the businessman she thought. She was even more furious.
Money isn’t free. If you have to borrow, you should be expected to offer something of value in return. If you’re running a business and so highly leveraged that you can’t make payroll without a loan, that’s a problem.
@elliot:
Well, yeah….kind of.
Reckon I’m a tad simple minded. LOL
@Cindy:
Now see, I can understand that, and I agree…if you have to extend yourself that much, then there are major problems. Hmmm….
So, if what Elliot says with the $35K is a regular occurrence, doesn’t that put the company deeper into debt?
Some of the most successful businesses were started in times of financial crisis. I have a friend who now has about twenty locations (a staffing company) and he started in a recession.
Not all companies have to borrow money. Mine doesn’t. Businesses will figure out a way to make it happen. Or it won’t happen. And if it doesn’t happen, those really good business owners will go back to the drawing board, figure out how to retool, or perhaps partner with other businesses, and they’ll get it done.
Businesses don’t need government to keep running, that’s for damn sure. In fact, the more the government tries to “get into business” the worse it is.
@Stew:
EXACTLY! See? This is why I’m having problems understanding how such a business can actually stay in business for very long.
Generally speaking, it’s anathema to borrow money for “payroll”. Another way of saying it is, “stupid”.
If you’re billing 200k and don’t have the payroll for a 40k run rate, you FIRE PEOPLE.
That’s the real world.
Or if you know that a customer doesn’t pay on time, you don’t spend all the money from months before, you keep some cash on hand……(at least that’s what I do)
Olbroad,
What some people are missing is that the interest on the loans is considered as an expense, if I’m remembering my business classes right. Businesses include that expense into their costs and pass it onto the customers.
Also the interest is tax deductible, so the businesses either break even or gain a little advantage by getting the loans. It also helps them establish credit for when they want to get larger loans for expansion or new equipment.
Y’all have given me some great responses, and have helped me to understand a bit better. I still think it’s rather careless for businesses to get themselves so far in debt, but I think I get it.
I guess it’s a really good thing the Mr won’t let me open that book store….although it’s something that’s REALLY needed around here. Heh.