Thursday, July 15, 2010

To borrow or not to borrow?

Interesting conundrum.

Bernanke has been lecturing banks about the need to start loaning to small businesses. But my question would be -- should small businesses be borrowing money?

There is a recent article about how some of the smaller, regional banks are having trouble paying back the Tarp money. Who'd have thunk? Borrowing money and having to pay it back only added to the amount of payments they have to make every month?

I realize that there are seasonal type businesses (though even those should probably strive to save up enough cash to pay for the seasonal swings themselves) but the main reason that I ever borrowed money from a bank was to grow my businesses.

O.K. I can understand how the government might want 'growth'. But borrowing for growth is another word for RISK, in my opinion. Living within the current parameters of your business would seem a wiser choice right now.

If you have to borrow money just to pay the bills, you're already in trouble and borrowing will only compound your problem.

I'm not an absolutist about this. I can come up with plenty of scenarios where loaning to small business would be a good thing -- both for the business and for the economy. I can even see loaning small business money just to tide them over until things improve. It would probably be much more efficient for everyone to keep already operating businesses alive than to have to start all over from scratch.

But as a small business, I'm trying to avoid adding any more payments to my monthly overhead, especially payments that involve compound interest.

Of course, if everyone thinks this way, we're probably looking at deflation for a long time to come.

So -- I'll be prudent.

You other guys borrow the money.


RDC said...

One of the things that drives recoveries is that new vibrate business grow to replace the failed businesses that dies in the recession. Loaning money to businesses that would not survive to tide them over is not a good thing. Businesses such as GM and other should not have been bailed out, all that does is to continue a failing business model and give a poorly run company an advantage against other companies that might fill that space in a more efficient manner and which during a recovery be far more robust and generate far more jobs. Loans should go for, as you indicated, growth and expansion. I would rather see a new company get a loan to startup a new business, then an existing, failing firm, get one to allow them to hold on.

Duncan McGeary said...

Within reason, RDC. There are times when an otherwise functional business is in need of captital, and won't be necessarily replaced by someone else soon.

Pedro Hemes Valdes Ortega said...

During the 1983-1986 recession many a new startup came out of the 1983 collapse, and most were off and running by 1987. Many a high-tech, and NADDA a one of them I know got their boot-strap by borrowing money from a bank.

This a GOD-DAMN fictious lie, ... like the story I told you other day about going to SBA and being told there was no future in computing, in 1985 banks wouldn't loan money to high risk, .e.g. high-tech biz, the only option was venture-capital, but then you had to turn over 50%+ of your control, which meant from day-one you weren't your own boss. Long story short virutally everone I know that started post 1986 did so by bootstrap with their own money, and came out on top in the 1990s owning a 100%.

Banks are the last fucking place entrepreneurs go, and rightly so as banks want to see INCOME, and by definition a startup has NO income.

Just another god-damn fucking myth, but sure, since banks go us into this mess, and since banks run the country, and the only way banks can make money is 'loans', ... yes I concur they want suckers to get into debt.

Dunc, only ONE way can a man 'survive' in biz over the long haul, and that is to MINIMIZE his fucking debt.

Enough said.

When I hear assholes like RDC say he would like to see startup's get loans I laugh my ass off here is a man like HBM who clearly has never had his own biz.

My favorite is the LOTTO were millions are marked in Oregon for business investment, and most of the money is funneled to political hacks for ivory tower biz models where all the money is always lost,... a few years ago the chairman of the pug party got millions to develop breast pumps, ... that's quite typical.

Startup's take years to have even enough income for the founder to see more than min-wage, ... this is a fact, ... any business model that see's a founder taking a loan and paying himself a prevailing wage at startup is a clear recipe for failure and fraud. Nobody learns about how to run a biz, unless he himself has had to live like a pauper for at least 3+ years.

Duncan McGeary said...

I think RDC's thinking 'small business' as in "less than 5000 employees."

I'm thinking (and probably Buster) small business as in Mom and Pop, or under 10 employees.

So you may both be right in some ways...

RDC said...

As usual PHVO you are blowing a lot of smoke but do not have a clue. I have been on advisory boards for several startups, I have taken more then one company through IPO stage, and have run my own company on more then one occasion.

There are very few companies that have gone beyond the 3 or 4 employee stage without some form of credit, especially revolving lines, for cash flow reasons if nothing else, at some stage of their development.

It sounds like your experience is limited to a business with one employee, which would match your current level of social and communication skills.

blackdog said...

"But borrowing for growth is another word for RISK, in my opinion."

No risk no gain, Dunc.

Not all businessmen are as risk-averse as you are -- which is a lucky thing, or we never would have had Microsoft, Apple, Intel, IBM or most other major American corporations.

As long as businesses risk their own money and not the taxpayer's (mine) I don't have a problem with it.

Pedro/Buster: "here is a man like HBM who clearly has never had his own biz."

I did have my own biz -- a small one, true, but it made a profit every year.

I also managed a million-dollar-a-year news department when I was managing editor of The Bulletin, so I know something about making a budget balance.

And how do we know YOU ever had a successful business, Pedro? How do we know that isn't a fairy tale like your stories about screwing 25-year-old girls 19 times a day in Thailand?

Oh, we're supposed to take your word for it? Uh, okay, sure, you bet.

RDC said...


The definition of small business is as defined by the SBA is

Manufacturing 500 to 1,500 Employees
Wholesale 100 Employees
General Construction $9.5 to $17 Million
Special Trades (Construction) $7 Million
Services $3.5 to $14.5 Million
Retail $3.5 to $13.5 Million
Agriculture $.5 to $3.5 Million

Now large business start out as small business so they also pass through the SBA target area.

A good example of what I am talking about is I was on the advisory committee for a company that provided a service processing and analyzing phone bills for large companies. They made their money from reducing costs by recommending changes in service and catching errors phone companies made in charges. The person that owned the companies bootstrapped it (using personal resources, which by the way also included credit, but of the second mortgage and credit card variety)until it got to about 20 employees, then he ran into a wall. good cash flow, but he never seemed to get enough cushion to fund the next stage of growth. Basically the solution in his case was a line of credit that he could tap or not that enabled him to make the jump to the next level (move into larger office space, fund 5 employees at a loss for a year to develop additional service offerings. End result his 20 person company is now a 150 person company and revenues have gone from 1.8 million to around 26 million per year with profit going from 8% of revenue to 10.5%.

Duncan McGeary said...

I disagree, Bruce.

There are the risk-adverse and the out of business. It isn't necessary to take too much risk to succeed; you can be prudent and cautious and grow your business. Going into business is a risk; expanding is a risk; but you can do them in sensible ways or you can do them "yahoo look at my earnings!" this year CACB style.

And....believe me, if I'm risk adverse now, it's because of all the risk I've taken in the past.

Duncan McGeary said...

I should have read your whole message, Bruce, because you allow for sensible risk.

What amazes me is how little research people do before plunking down their life's savings....

Duncan McGeary said...

I spent my first three years trying to pull myself up by my bootstraps and not getting very far.

Our first loan launched us -- then again, I had three years experience under my belt.

Went back two more times, and expanded too much, but once I paid it back, I haven't been back since.

Duncan McGeary said...

And there, my friends, for perhaps the first and only time in history -- and as a sure sign of just how whoppsed the whole thing has become -- you have a comic store guy scolding a banker for not being financially prudent and conservative!

RDC said...

As far as I know there are not been a banker participating in this discussion. I am certainly not a banker. I have been an owner of businesses, a shareholder, a senior executive, but not a banker, I don't HBM has been one either and I doubt PHVO has been.

Duncan McGeary said...

Sorry, RDC, I said I was scolding a banker.

Wasn't saying she was listening.

I've been kind of dubious of CACB for years now, because it seemed to me that they were charging hellbent for leather into the bubble.

They were getting headlines and hooplah for doing what they should have been avoiding.

And they are going to get all hell bent and leathered, I do believe.

RDC said...

I would not be surprised if we see over 200 banks fail this year.