I'd rather own a small cash-based business than a large one that relies on credit from it's suppliers. It's such a shame that so many retail chains, which I've been familiar with since I was a child, are at risk of going out of business.
Borrowing money doesn't just get the average Joe in trouble:
. . . chains regularly borrow large sums to cover routine expenses, like wages and electricity bills. When sales are strong, as they typically are during the holiday season, the debts are repaid.
Fortunoff, a jewelry and home furnishing chain in the Northeast, relied on $90 million in loans to help operate its 23 stores, using merchandise as collateral.
But by early 2008, as the housing market struggled, the chain’s profits dropped, meaning its collateral was losing value and the amount it could borrow fell.
As Sharky pointed out this week:
It was the credit card companies who got the bankruptcy laws tightened to protect their own profit margins. In my view, it was this that sounded the death knell of the Housing Bubble.
He was talking about Chapter 7 or 13. Most retailers file Chapter 11, which allows them to restructure in order to save the company. But the bottom line is the same: it's the issuance of credit (secured or unsecured--because loans based on assets may not always stay that way) that is the current downfall to the consumers, the retailers, and the economy, as a whole. Maybe I will be seeing more stores closing in this area, after all, as the impact of this trickles down.
As the article points out, this is a far-reaching disaster with a chain reaction that may extend through many industries. Who would ever make the connection that UPS will suffer because Sharper Image is closing down stores? And why didn't Levitz pay Sealy the $1.4M for the merchandise it's selling? (I know the answer to that, but I'm just saying that it's a poor business practice to be saddled with so much stock). I can only assume that Sealy owes some furniture factories money, and that they, in turn, have outstanding debts to the suppliers of the raw materials. So whose paying the loggers and weavers?
The stores mentioned in the article are hurting because they can't get loans as easily as they used to. But would that have solved their problems in the long run? This is a challenge for society at large, but also, on a much broader scale, for store chains. So, they get to borrow a few million (or billion) dollars to stay open longer. What does that do to the value of their stock and how is the payback accounted for?
Our business is a microcosm of these huge conglomerates. We deal in cash only (okay, so we take checks, too). Most smaller retailers (and other institutions we do business with) don't want to pay us with a credit card. I don't know why, but that's the way 99% of them prefer to do business. They request the items, pay us half up front, we order the merchandise, deliver it, and receive the balance. The most we'll do is a Net30 (that's only for our biggest clients), which we also ask for from some of our suppliers. That means that we have 30 days to pay an invoice. The assumption is that the merchandise will move by then and we'll be paid for it. And we always have. Almost a year in business and we've never been stiffed. If we didn't pay our Net30, then we'd be cut off from the supplier, so there's not much opportunity to accumulate large debt that way.
Will we be making trillions of dollars? Uh, I seriously doubt it. But, we don't owe anyone anything and they don't owe us. Our business has no debt. I guess a good word to describe us would be "solvent". Can't say the same about the banks and some large retailers right now--and it's downright scary.