Quote:
Originally Posted by pornguy
Can anyone hear explain how business are in trouble because they can not get loans from the bank to
" Pay Employees " Head this one a few times on the news.
" Buy equipment for production " head this one a few times as well
" Pay off orders they made from other companies "
Now maybe Im wrong, but I thought that all this sort of thing came OUT of the income BEFORE there was a profit for the Owner.
Just read today that the price of Coffee will be going up because the coffee companies can not as easily get loans to purchase Fertilizer. Hrm. Maybe the owner should that thought that over BEFORE he got the new Boat or Truck.
Anyone?
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As someone already said; cash flow. Also where you are in the "business cycle".
Let's say that your product this year is going to cost you more than last year to produce but that you also expect to be able to sell that product at a higher cost this year. In that case you might not be able to afford to purchase this year's inventory at current costs. So you finance your inventory. "Inventory-based financing".
Same thing for a manufacturer with increased input costs such as fertilizer.
Consider that a lot of businesses operate on a 10% profit margin. That doesn't leave much room to pay increased costs especially in a year where input costs suddenly rise. Like the last few years. High volume, low profit margin businesses often have this to consider. Thus they finance manufacturing or inventory purchases.
Also, sometimes such a business needs to finance the cost of new machinery. When the operating profit is only 10% that is difficult to do without amortizing the payments out over a number of years. i.e. a loan.
In addition to just the normal business needs above we are now in a recession. So a 10% profit margin might have become break-even (or worse). So the cash is not necessarily there for such purchases. Even though long-term the business might be completely viable short-term it may need financing for such things. Even for payroll possibly.