Are Companies Able to Function Without Loans? | The Business Desk with Paul Solman | PBS NewsHour

ABOUT US \| LOCAL TV LISTINGS EMAIL PRINT

REGION: North America

TOPIC: Business & Economy

PBS NewsHour

Not a blog but a "q-and-a" (pronounced "quanda"), this page is about the basics of economics. Its premise: there are no stupid q's. And if some a's seem dim, take heart: I can brighten them up in response to objections, corrections, refinements. Comments on posts feature yours, and my responses. Enough of you now frequent and query the quanda that I post most every day. Haven't seen your q yet? Send it again. All a's should be taken with a shaker of sodium chloride, if not a Lot's-wife's-worth. And speaking of salt, the mustache and "hair" in the photo has a lot less of that condiment, and rather more pepper, than can be seen on TV. Think of it as time travel.

« Previous Entry | Main | Next Entry »

Are Companies Able to Function Without Loans?

Name: Dennis Long
City & State: Santa Monica, Calif.

Bank statement; file photo

Note from Paul Solman: We haven't had a "guest vetter" here at the Business Desk for some months. But interviewing MIT's Simon Johnson the other day for a piece on 'good bank vs. bad bank' and being an enthusiast of his financial crisis blog, I thought I'd ask him to weigh in on some of your questions. We'll be posting answers throughout the week.

Question/Comment: Borrowing money to buy new equipment, to upgrade, etc, makes lots of sense. Borrowing money to pay rent and to make payroll sounds a lot like an individual who has to use a payday loan center to borrow against his paycheck. With the collapse of the "Commercial Paper Market" last fall, it became apparent to me that ALL of the major corporations, banks, and many municipalities are unable to function without their SuperSize Payday Loan center. Am I wrong?

Paul Solman: Pretty much. The commercial paper market is for short-term borrowing. Say you're a new company with great people and a (seemingly) great idea. You can raise money either by giving away ownership in your company -- selling shares of it -- or you can borrow: for rent, to make payroll, etc.

And even if you're an old company, you want your money working for you, no? You're betting that you can earn more than the going rate of interest. So you put the money to work and borrow -- in the commercial paper market, say -- to tide you over.

Simon Johnson: Even the most solvent, profitable firms can do better with a loan. Think about your neighborhood grocery store - they've got to pay for deliveries before you pick the stuff off the shelf and pay. Of course, the grocery store can ask their suppliers to wait for payment, but then the suppliers are giving the store a loan and how do the suppliers finance that? (Answer: commercial paper or a revolving bank loan and the like)
And workers really like to be paid cash, so not much chance of a loan from them.

-- Posted February 10, 2009 | Comments ( ) | Permalink

TrackBacks

Listed below are links to blogs that reference this entry: Are Companies Able to Function Without Loans?.

TrackBack URL for this entry: http://www.pbs.org/newshour/mt4/mt-tb.cgi/1026

Comments

**Note from Paul Solman:** We haven't had a "guest vetter" here at the Business Desk for some months. But interviewing MIT's "Simon Johnson":http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=198&co_list=F the other day for a piece on "'good bank vs. bad bank'":http://www.pbs.org/newshour/businessdesk/2009/02/in-case-you-missed-it-bad-bank.html and being an enthusiast of his "financial crisis blog":http://baselinescenario.com/, I thought I'd ask him to weigh in on some of your questions. We'll be posting answers throughout the week. **Question/Comment:** Borrowing money to buy new equipment, to upgrade, etc, makes lots of sense. Borrowing money to pay rent and to make payroll sounds a lot like an individual who has to use a payday loan center to borrow against his paycheck. With the collapse of the "Commercial Paper Market" last fall, it became apparent to me that ALL of the major corporations, banks, and many municipalities are unable to function without their SuperSize Payday Loan center. Am I wrong? **Paul Solman:** Pretty much. The commercial paper market is for short-term borrowing. Say you're a new company with great people and a (seemingly) great idea. You can raise money either by giving away ownership in your company -- selling shares of it -- or you can borrow: for rent, to make payroll, etc. And even if you're an old company, you want your money working for you, no? You're betting that you can earn more than the going rate of interest. So you put the money to work and borrow -- in the commercial paper market, say -- to tide you over. **Simon Johnson:** Even the most solvent, profitable firms can do better with a loan. Think about your neighborhood grocery store - they've got to pay for deliveries before you pick the stuff off the shelf and pay. Of course, the grocery store can ask their suppliers to wait for payment, but then the suppliers are giving the store a loan and how do the suppliers finance that? (Answer: commercial paper or a revolving bank loan and the like) And workers really like to be paid cash, so not much chance of a loan from them.

December 2011

Sun	Mon	Tue	Wed	Thu	Fri	Sat
				1	2	3
4	5	6	7	8	9	10
11	12	13	14	15	16	17
18	19	20	21	22	23	24
25	26	27	28	29	30	31

» See All Entries

Program
Support
From: