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Posted by: Darrell Castle
February 01, 2010
Topic: Bankruptcy
According to an article in the business section of the New York Times, Sunday January 31, 2010, when small businesses and entrepreneurs lose their source of bank credit, they must go to unconventional lenders or close their doors. A great deal of employment in the U.S. is provided by small business and when financing for day to day operations is not there, many jobs are lost.
Often small businesses need what they refer to as purchase order financing. In the case described in the Times article mentioned above, a small business in New York had a solid order contract for one million dollars of business and needed a one million dollar loan to purchase that inventory. Today, most businesses are purchase order in that they purchase inventory in China or some other country, perhaps do some final assembly, and resell it for a profit. In the case presented, the business, by contract, would purchase one million dollars of inventory and resell it for one and a half million dollars. The business owner went to his old bank, Chase, which had always financed him before, but Chase said no and so did all the other large banks he approached.
Individuals face this same dilemma today. When denied credit to financially survive, what do they do? Often, individuals turn to unconventional sources such as pay day loans and title loans which provide short term financing usually at extremely high rates of interest. This type of financing is impractical for business but there are private lenders who specialize in short term, purchase order financing. The business owner borrows the money to make his purchase and repays it from his profit. If his can't miss product misses, he is stuck and so is the lender. I will add that all his employees are also stuck looking for jobs.
Contained in the new federal budget just out this morning, is a proposal for one hundred billion dollars to aid small business. I wonder what happened to the seven hundred billion dollars already pumped into banks to aid business lending. I wonder, but the Federal Reserve won't tell us because it's a secret. How presumptuous of us to question what happened to our money. Perhaps this time the banks actually will loan the money.
When individuals reach the point of needing pay day or title loans, it is quite often too late to financially recover. The high interest loan simply starts an unstoppable chain of events that leads inevitably to bankruptcy. It is usually better to deal with the problem instead of following the government example of search and avoid the problem. More trouble is on the way so get out of debt as quickly as possible.
