Friday, October 17, 2008

businesses “needing to access the credit market to make payroll

Capitalism Without Capital?

Not only is our nation on the verge of bankruptcy, but so are its people and private institutions. We are now repeatedly hearing about businesses “needing to access the credit market to make payroll.” This is an unmistakable sign of more dire consequences ahead for the economy. If businesses must borrow just to make payroll, this is evidence of a severe undercapitalization that cannot be sustained, even for the short run. Couple these facts with items such as the explosion of the “payday loan” industry and the unmasking of the false sense of economic well-being is nearly complete. These payday loan companies use preferred access to easy credit to inject cash into the hands of the working poor. They are nearly always set up in lower-income neighborhoods.

Posted by malct @ 02:19 PM (825 views)
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6 thoughts on “businesses “needing to access the credit market to make payroll

  • You just couldn’t control the urge, could you! 🙂

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  • cornishman – what a fright!

    sad innit – fact is the article made me wonder just how much of this is going on in the UK.

    It also reminded me of how close I came many times to not paying staff wages and had to miss out myself.

    The answer was then and should be now to chase creditors or even offer a discount for early payment.

    Tight credit control.

    But I suspect in this situation there are going to be a lot of instaces where this is just not possible.

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  • Quite a few payday loan shops have opened up near me recently. They charge 25% for a 3 day loan, which works out at an APR of 61,761,558,897,880%. In terms of wealth, my area is above average, bit certainly not the richest area in the country.

    Clearly a couple of % on the base rate in either direction isn’t going to make much, if any difference to their customers, on indeed the payday loan sharks themselves; and it wouldn’t take many cycles of these loans for the sharks to be able to finance their loan book entirely out of retained profits and not need to borrow any money to finance their operations.

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  • You could argue that if someone pays £5 to borrow £20 for 3 days – then that is 25%. Equally, you could argue that £4.90 of the charge is to pay for the time/labour involved in doing the deal in the first place and only 10p was interest.

    It’s just so sad that anyone gets into the position of needing cash that badly, that urgently…

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  • There will also be a marked increase in debtor days, especially where large outlets (Tescos et al) do not pay their smaller suppliers on a prompt enough basis. Poss stretching from 90 days to 6 months. This could drive many to the wall.

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  • Silly article. Silly Ron Paul.

    Think about the swing in working capital (go look it up) caused by a massive corporation paying all its staff on the same day every month. Now, they could hold that much in cash and then pay it out. But, level 1 of capital efficiency as any fule kno, is that holding cash on the balance sheet (actually a deposit at a bank of course) is inefficient. So why not borrow from the CP market instead, then gradually repay it over the month? Far more efficient.

    Of course, you would need a last resort for the eventuality that the CP market disappeared – hello, the CP standby line from your friendly bank, which is very cheap because you never expect to draw it.

    End of lesson, end of silly post.

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