Possibly-naive question for DUers with much more economic/business knowledge...

[T Wolf]

Why does our entire economy depend on credit? I am referring specifically to the message put out when the feds bailed out the banks and Wall Street so that "they could lend money to businesses so that those business could meet their expenses." I ask this for several reasons.

#1) It strikes me as akin to borrowing money every week to pay the grocery bill and then repaying it the following week after getting paid. Adding the interest (zero-percent loans do not seem to be widely available) to the principle, wouldn't the total cost be higher? This scenario is different from borrowing for a house or car where it is not feasible (for most) to come up with the entire price up front. But we buy houses rarely and cars only every few years whereas groceries are a weekly expense. Now, maybe if I wanted to but lobster and caviar every week and could not afford it, it would be necessary to borrow. But the next week when I planned to repay that loan (plus interest), I would be again buying more lobster and caviar. So, I will never "catch up." It would be worse than living "paycheck-to-paycheck" because of the added cost. At least, those living p-t-p may be trying to stay "within their budget" instead of deficit spending further and further into debt.

#2) My wife has recently fulfilled a long-held dream and bought a (very) small business (quilt shop where she has taught classes, as her second job , for years). It took very little "up-front money/down payment" money to get in. The income is expected/hoped to cover the expenses and, hopefully generate a small profit to justify her time and not drive us into the street. One thing we will not do is borrow even more to meet ongoing expenses. That would, to us, simply be adding an expense that is not necessary and could possibly put the net into the red. Plus, it would be very risky because if income is not enough, we would have the normal expenses plus the loan to pay.

I guess I am asking, "when did extra debt for operating expenses become a normal operating expense?"

Is the loan-for-expense ponzi scheme simply a matter of unrealistic expectations? Expectation that the business will always be expanding and that there will always be more income next month to pay off the added debt incurred this month?

So, DU money experts, where am I wrong in my reasoning?

Have we been so conditioned to want to be rich that all sense of reason has been thrown out in the quest for the brass ring?

Or, am I just too old-fashioned and want the "security" of staying within our budget?

To connect it to another thread today, I have bought (relatively) cheap cars because that is what I can afford to pay for. I could borrow against my home to buy a Rolls Royce, but I would not be able to make the monthly payments. So, by some reasoning, I should also borrow to be able to make the payments on that car loan. To me, that sounds insane.

[mrreowwr_kittty]

1. Well for one thing, if your wife ever hires anyone she will have to make payroll

She will have to pay the employee(s) and their FICA and whatever benefits every 2 weeks or whatever. She can choose to go without paying herself, if revenue coming in is less than expenses going out, as many small biz owners do but she can't not pay her workers. This is one of the main reasons businesses have to use credit.

[razors edge]

2. Every dollar in existence

represents a debt to the Federal Reserve that must be paid back with interest.

This is a debt based economy, pure and simple.

The truly wealthy make money the old fashioned way, they steal it in the form of interest.

[T Wolf]

18. As clarified by Steve Martin - how to become a millionaire. First, get a million dollars.

It is easier to score when you start with a lead off third base.

[razors edge]

38. LOL.

Thinking you hit a triple, no doubt.

[Warpy]

3. Look at a mom and pop store for the simplest example

A delivery truck pulls up and the stock they ordered, whether it's stepladders or cans of soup, pulls up and they offload their new stock. They put it out on the shelf. With the stock comes an invoice. They have 30 days to pay the invoice, and most stores on a shoestring rely on those 30 days to sell enough of the stock to cover overhead and pay for it.

Many larger companies that have customers who are dragging their feet on paying the bills have to pay their workers on lines of credit, for example.

If all stock suddenly gets delivered COD, expect stores to have a lot less of it and many of them to go out of business, altogether. Expect to see payless Fridays if larger companies have debtors who don't pay on time.

What happened starting in July 2007 is that banks started to notice how much hedge fund junk they had in their asset columns. That meant they really had a lot fewer assets backing their loans than the law called for, and that meant those lines of credit just dried up.

That's the simplest kind of credit the world runs on. It gets a lot more complicated and exotic than that, but that's pretty much it.

[Idealism]

4. There are a lot of misconceptions about the standard of living

in the United States. The average worker isn't out buying Vuitton bags or Gucci loafers (although there are some who are so materially obsessed), they are simply not making enough money to pay for the continuously rising cost of living. Real wages in this country have not kept pace with inflation since the 1970s, actually they've lost ground. People are making less today than they did 35 years ago (after inflation), yet the cost of living has gone up exponentially. That comes down to companies just not giving pay raises that correlate with inflation, if they even give you a raise at all. Yet, starting in the 1990s, year after year you see record corporate profits (and record executive compensation). Credit was a way to sustain our basic needs, and it helped fuel the record economic boom in the 1990s. Problem was it was a superficial measure of purchasing power, and in an economy that is 70% consumer spending based, when people can no longer afford to pay their credit cards that allowed them to buy that which they didn't have to money to buy already-- we are in for a long recession.

[napi21]

5. Some businesses, specifically manufacturing, always have borrowed

money to buy the materials and repaid the loans when they sold the finished product. Large retailers borrow to buy inventory and repay when the product is sold. The problems occur when there's a business slump. THEN they need money for operating expenses too.

As for the average person "living on credit"...IMO it's become an "I want it. I want it all, and I want it all" society!

[kirby]

6. Cash flow...

I would not call it a ponzi scheme. A business does not always get paid right away for something. If your quilts were sent out to stores you might not get paid for a while (90 days?). It they are on consignment, you might not know whether they will sell at all. You could either close up your business for 90 days until you have enough cash to continue buying your supplies, or you could borrow short term and pay it back.

The real issue is what happens after your initial 90 days. In your case, you want to stow away enough profit to cover supplies for the next round of quilts. As a business you are making a decision of doing that versus borrowing short term. Here is where it gets funky. The Fed has kept interest rates so low for so long that it has been pretty cheap to borrow that money. So when you do a cost/benefit comparison, it might make sense to borrow money to make even more quilts and grow your business. I think the Fed policy has steered our economy (and the world) into this short term borrowing mentality. Everything becomes 'just in time'. As long as you keep growing it is fine.

There is also the 'opportunity costs'. Rather than stow your profits. You could take your profits, but them in real-estate or the stock market, and earn more than it costs to borrow and repay. The Fed has steered us in that direction with such low rates.

Of course this this is system with a poor design. When the economy / market is doing poorly, it doesnt work so well. In those cases, only businesses with large enough 'rainy day' fund can survive. Or they can get a gov't bailout.

[T Wolf]

20. I do see where large corporations, in the system we now have, would have to borrow to

meet expenses. Maybe my problem with it is the degree to which they do so.

In our instance, all sales will be directly to retail customers, not third-party resellers. So, the money will come in directly and there will not be any "pay-in-30-days" thing. Unless - does waiting for credit-card deposits from Visa, etc. count as that delayed income?

And again, we are not really looking to "grow the business" especially if that growth brings worrisome risk. Now, we are in a relatively-good position because it will not be our primary source of income. And I can see that requiring cash-up-front as an operating policy does limit the possibility of opening a business to those who already have money. Fortunately, we have enough to get started and our exposure if pretty minimal.

So, maybe it really is different on Main Street versus Park Avenue versus Monster Corporateville.

[sandnsea]

7. Lots of reasons

Payroll, as already mentioned. Take advantage of sales and liquidations. Expansions, new products.

For new businesses, start-up costs. Then there are businesses that make the bulk of their income at one particular time of year, farmers, summer tourism, holiday, construction, etc. They sometimes use loans to operate throughout the year and then pay it off during their peak season. I worked for a business that just rolled everything, every 3 months. They didn't spend anything for 3 months except basic bills and payroll, that way they would never over-spend and come up short later. All the deposits went in a separate account. Then every 3 months they would pay off the operating loan, take any profits, and usually re-invest the bulk of it. It's a method of keeping your business on an even keel.

[lutherj]

8. Does anyone seriously believe that all this debt will be repaid? It's a commonplace

to complain about all the debt that our children will have to pay back, but I seriously doubt they would even if they could. We won't be handing them a big pile of bills, we'll simply be handing them a ruined country.

[kirby]

10. What is the alternative?

Will the US simply tell everyone who owns T-bills to fuck off? If so, who would want to lend to us ever again?

[Idealism]

13. We will keep paying interest on the debt, but never the debt itself

T-bills get re-upped, so the speak, by most of the people holding them, so the bonds never mature to full repayment. The interest is a steady thing, especially in these turbulent times.

As to your question who would lend to us again, think about this situation. Say you have a friend named America who is a sugar-fiend, and he asks you to borrow 10 bucks and he'll pay you back $11 dollars in the future. Now supposed you own a candy store, and know he will spend at least $7 or $8 dollars on candy, and because your store has the biggest stock of sugar, you are sure he will spend it on your goods. Do you really mind giving your friend $10 dollars, especially when you know he will be patronizing your store, buying lots of your candy, and pay you interest on that debt?

China is the US' candy store, and they are acting in their interests as well in lending us money. China needs anywhere from 10% to 15% growth per year to sustain their economy, and it is export based.

[ipfilter]

14. Funny thing, right now with a 3 month T-Bill

you can loan your friend $10 and he will give you $9.99 back.

[Idealism]

15. Yeah thats some crazy shit eh

Investor confidence is an oxymoron these days...

I'd soon as keep it under the matress than to park my money in a 3 month t-bill, even the 1 year bill is shite

[lutherj]

23. Countries have gone into default, and the US could eventually too.

China and other creditor nations could decide we are no longer worth the risk, and stop lending to us. The US could decide to flood the market with dollars and inflate our way out of debt. Or we could see a collapse of the world economy, starting in smaller countries like Iceland or Indonesia, which starts a cascading effect. I'm not an economist and don't want to pretend to be, but I've heard that economists have a saying: that which can't go on forever won't.

[kirby]

28. Not the same thing...

Others stoppping lending to us is not the same thing as us not repaying our T-Bill obligations. I think the former is certainly the bigger risk at this point.

[ipfilter]

30. This is supprted by the fact that last Tuesday's auction

brought a negative interest rate on 3 month T-Bills. There are a lot of buyers for US debt right now. So many that people are willing to pay for the privilege of loaning to Uncle Sam. It will be interesting to see what next Tuesday brings.

[kirby]

34. An odd paradox...

People are scared with their money. They figure since the US Treasury will not default they would rather park their money there rather than in money market or corporate bonds where there is too much uncertainty.

At some point though China will need to spend that money at home to prop up the population who are being laid off from the factories and prevent unrest. When they do that, they will not be so willing to lend money I believe.

[T Wolf]

21. I wonder about that, as well. But, in lieu of collecting the debt, will the wealthy simply

own us outright?

[lutherj]

25. I'm sure some will want to try. Personally, I think the whole system will implode.

[SheilaT]

9. I'm not an economist so I can't

fully answer your questions, but just make some comments based on my own experience.

First of all, home purchases have almost always depended on borrowing money, because very rarely (at least in the last century or so) has it been possible to save up all the money needed to buy a home.

By the 1950's Lay-Away plans became very common in department stores. You'd chose the item you wanted to purchase, make a down payment, and continue making payments, usually on a weekly basis, until the item was paid for and then you'd take it home. But there were no service fees connected, and the store had to do a certain amount of paperwork to keep track of the layaway items, and so at some point they started issuing their own credit cards.

The general purpose credit cards, Visa (originally called Bank of America Card) and Master Card did not come about until the mid or late 1960's, and originally the issuers were pretty strict about who could get them. Even with what today we'd consider strict credit requirements, in 1969 I worked for a company which felt that these credit cards were being issued to too many people who might not be able to pay their debts, and refused to take them, although this company did accept Diner's Club, American Express, and Carte Blanche. Those credit cards had relatively high income thresholds to obtain.

I would actually blame the huge increase in credit purchases on a combination of mass media, mainly advertising on TV, and a huge increase in all sorts of consumer items. This has actually been going on for about a hundred and fifty years, but none of us is that old. If you go back and look at issues of magazines at the beginning of the 20th Century you will find many, many ads for many, many things. The desire to purchase and own has been put into us for a long time.

We humans are naturally competitive, even though we may all display it in different ways. The desire to "keep up with the Joneses" is ancient, and found pretty much in all cultures. It's just that ours has shifted much of he competition to the owning of objects.


Buying a car that you can actually afford to pay for outright means you resisted both the car manufacturers' attempts to make you desire a brand new one and a car salesman's blandishments (if you bought from a dealer, not a private individual) that if you only spent little more on the car payment you could afford a bigger/newer/fancier vehicle. Most people, as someone once pointed out to me, are actually buying a car payment, not the car.

I'm also very interested in your wife's new business. Since it sounds as if she's running it because she loves quilting, have you thought how it would be different if she needed to support herself, or even the whole family, from it. I, too, don't completely understand the need for so much credit in the business world, and I suspect that if we go back forty, sixty, eighty, or more years we will find that the farther back in time, the less use of credit. However, I doubt that there was ever a time when a large business actually paid up front in cash for everything that the business was going to turn around and sell. There may well be some kind of economic history books out there that would be fascinating to read on this topic.

[T Wolf]

22. Thanks for the info on economics past. Yeah, there is much very fucked up

about the economic system we now have. And maybe about "business" from day one.

Or maybe, big (however you want to define that term) business cannot exist without the abuses we are now experiencing. Maybe, like democracy, it only works well, as it "should," on a small scale.

And maybe if we consumers went back to the law-away orientation, the business would not have to pay for the product until the consumer had paid for it. Would that negate the need for credit, at least in those instances?

I realize how fortunate we are to not have to depend on this business for our survival.

Note - I had a Master Charge back in the day. Eventually cut it up and reformed it into a "Marge" card that no one wanted to accept. Damn them.

[HamdenRice]

11. It's a very simple mathematical property of corporate finance. Here's how it works

and if credit markets ever return to normal, you may want to rethink your wife's commitment to not borrowing.

It's called leverage.

Let's use a landlord's rental property as an example. Assume that he owns the building outright (paid off mortgage), and paid $100,000 for it. Let's assume that at the end of the year his profit is $10,000.

His equity in the house, therefore is $100,000.

That's a rate of return of 10,000/100,000 = 10%. So his rate of return is ten percent.

Now, let's suppose he can borrow money at 5% in an interest only loan. If he refinances 1/2 the value of the building for $50,000, then he will have to pay interest of 5% on $50,000, which is $2,500.

So now his investment or equity in the property is $50,000. The $2,500 interest has become an expense. The house now earns $10,000 - $2,500 for the landlord, or $7,500.

Notice that his rate of return is now 7,500/50,000 = 15%

He has increase his rate of return just by borrowing. That's because the amount he pays in interest is less than the amount he makes on the building; or in other words, interest is less than the rate of return on the whole business.

Borrowing money is like getting a partner (the bank) who doesn't want as much from the business as you do -- he just wants certainty that he gets paid.

If that same landlord refinanced $80,000, the landlords investment or equity in the building is only $20,000.

His interest cost is 5% of $80,000 or $4,000.

The total return on the business is now $10,000 - $4,000 = $6,000.

The landlord's rate of return on equity is now $6,000/20,000 = 33% !!!

That's the "magic of leverage".

But, you may ask, if the landlord only has $20,000 equity in the building, what happened to the other $80,000? He can keep it in safe cash. Or more likely, he can own 5 times as many buildings, all generating 33% returns instead of 10% returns.

Instead of earning $10,000 on a single $100,000 house, he is now earning $30,000 on five $100,000 houses -- $500,000 worth of houses -- in which his equity or investment is only $100,000.

$30,000/$100,000 = 33% rate of return. Most people would rather earn $30,000 than $10,000.

The problem is that this increases risk. If in any year, the amount earned on the house slips below his interest costs (eg if all the tenants move out or can't pay rent), then he goes bankrupt -- something that would not have happened if he had never refinanced.

This is what's happening across the economy right now.

So corporate finance is all about figuring out how much debt to take on compared to equity, to boost the rate of return without taking on too much risk.

Even mega profitable companies take out loans. Not because they need the money, but to boost profits. In that way banks are silent partners in most businesses. They usually quietly earn lower rates of return in exchange for the certainty of getting paid.

This is entirely separate from unexpected expenses, needing to make payroll, financing short term inventory expansion or so on.

This is a permanent structural, mathematical reason that businesses always stay in debt -- to boost profits.

[T Wolf]

24. This leverage you talk about. That would seem to be necessary only if you wanted to

grow beyond "safe" parameters. Depending on future events to such a degree just seems damn crazy to me. But then, I tend to be conservative (sorry, but I had to use that accursed word) when it comes to money matters. That was impressed on me by my father who lived through the depression. Live within your means. Don't take unnecessary chances. Don't risk your principle. Etc. He did not get rich, but was comfortable. I strive to be that "comfortable."

I also feel that the more complicated the system is, the more it only benefits those who run it. All of the financial "schemes" out there are just that - manipulative methods to take advantage of a system that only the rich can fathom. And have access to.

[anigbrowl]

31. No risk, no reward

If you never risk your principle, then you don't have much chance to gain either. You might be comfortable, but you're probably also leaving yourself in others' hands - eg you are dependent on your employer continuing to be solvent and so on. You could still lose everything in the case of high inflation or whatever, even if you stuff it under the mattress or in a safe deposit box.

[HamdenRice]

33. That model is day 1 of Corporate Finance 101. Days 2-100 are building

more precise models to measure the trade off of risk and profit.

Obviously in the current climate, many businesses did not accurately calculate risks, especially risks of unprecedented conditions. But generally, this model of finance made a lot of people quite rich.

If it's not for you, that's fine. Most Mom and Pop operations don't like lots of risk.

On the other hand, when you read about how farmers are constantly in debt to the bank, it's not because they necessarily "need" the money; it's because loans help them leverage their profit ratios, and for hundreds of years, farmers, who are basically small businessmen, have taken loans every year to achieve leverage.

[SheilaT]

35. This is also the argument that has been used

to persuade people to take out the largest mortgage possible against the smallest possible,sometimes no, down payment. The assumption was that the value of the house would always rise. Always always always.

And see how that's working out right now.

[HamdenRice]

36. That's somewhat different. Leverage only applies to loans to enterprises

that is, to some money making venture that has profits, or rate of return. That's different from telling a consumer to buy land with no money down because the land will appreciate.

This only applies to businesses -- any time the rate of return is higher than the cost of borrowing.

That's why recently, despite its massive cash balances, Microsoft was considering issuing bonds for the first time.

It's just about a mathematical calculation of how to maximize profits.

Consumers don't earn profits, so it doesn't apply to them.

[anigbrowl]

37. That's a speculative rather than a productive investment

Getting a loan to buy an asset you believe will appreciate in value is very different to getting a loan to buy an asset from which you expect to gain a regular income (whether it's a house or a bag of tools or even an educational qualification).

[ipfilter]

12. We depend on debt through

the miracles of fiat currency and leverage.

[TechBear_Seattle]

16. A few answers

#1) The main issue is with very large corporations, who work on a scale that makes cash-only very difficult. Take, for example, payroll. A very large company might employ tens or hundreds of thousands of people. The amount needed to pay everyone is not necessarily going to be known very far in advance, so the company will calculate a payroll of X dollars, get a very short term loan on credit, put the money into the account that pays the checks, and then repay the loan over the next week out of company revenues. Two weeks latter, payroll is a different amount, and they repeat the same thing. The alternative would be to accumilate a lot of money into a cash account where it does nothing but sit around. It would have to be enough to cover the largest possible payroll amount, plus a prudent reserve. In short, it just becomes more cost effective to get a loan and free up that vast pile of money for other uses; the revenues the cash helps generate is normally going to pay the interest on the loans and leave some extra money behind.

#2) Again, the above type of situation only applies to very large corporations where large scale cash transactions become extremely unwieldy. Small and medium size businesses normally do not need these kind of loans to meet operating expenses. (A distinction should be made, however between operating loans and equity investment loans, which are sums borrowed to get the business started or to expand an existing business. Equity investment loans, either from banks or partners, are very common and often necessary.)

Does this answer your questions? :hi:

[T Wolf]

26. I do get the difference between our little shop and GM. But just maybe that is another reason

why enormous entities like GM should not exist in the private sector. That is how we got the "too-big-to-fail" crap that has polluted capitalism.

I do think that capitalism always, eventually, morphs into monopoly capitalism/fascism where the risks are socialized and the gains are privatized.

[anigbrowl]

29. Bear in mind...

that when you borrow money from the bank, you're handing off some of the risk to the bank's shareholders. You pay a fee (interest) to do this but in return you get more cash to work with. If you screw up and the business goes bankrupt, the bank takes up some of the losses. So you too are socializing part of your risk if you get a loan or use a credit card.

People say banks don't do any work or create any value, but the business of a bank or similar business is rent money to specialists who know their own line of business but don't have enough cash to put their business ideas into practice. In your wife's case, she knows about making money by selling the quilts or quilting materials. They lend you some money, in return they get paid interest which goes to pay for their branches, interest on deposits, and their shareholders.

[T Wolf]

17. Thanks to all who responded. And especially thanks for the thoughtful answers - not one attack.

First - why is it always necessary to "grow the business?" Isn't keeping pace and making a steady profit enough? It seems to me that it is that "gotta get rich" drive that causes people to take unreasonable chances.

Second - if the business is not profitable, it will close and both the one employee and we owners will be out of luck. I can see occasionally needing to borrow if a particular month is bad, but not as a matter of course. If the income is not enough to at least break even, then the business should not remain open.

Third - I kind of get the seasonal or irregular income stream thing. But again, it seems a pretty risky way to set up a business in the first place.

Fourth - why cannot a business operate on a sell-then-buy basis instead of a buy-then-sell one? You need to have the money to buy, e.g., the first month's inventory. The income from those sales buys the goods for the next month.

Here is a specific example of my prejudice: We have a partner (with small business experience) who is handling most of the "business" planning and set-up (taxes, accounting, legal agreements, etc.). We want to increase the web-presence of the shop and need tech assistance for that. We have gotten estimates of up to $5,000 for that. The "normal" business model seems to be pushing us to do that right away and incur additional debt to do so. My approach is to put a minimal website together (cheaply) at first, and then , IF income allows it, build a better website later. But I am certainly not going to spend what would be 10% of the total purchase price of the business to do that before we have sold one spool of thread. Maybe I am just too cowardly to risk everything.

And, as some have pointed out, and I agree, the entire system that has been set up seems to be rigged to create conditions that benefit those already with money. But, that is not new.

Again, thanks DUers. This is a totally new world for us, having never worked (at our primary job) in the private sector. Thank goodness cancer researchers and guidance counselors are still in demand.

PS - I have to also confess that the idea of associating with Chamber of Commerce types is a little scary. Back in 2000, they sponsored a GWB rally at the town square where the shop is located.

[anigbrowl]

27. Some (simple, incomplete) answers

1. growing the business - because if you don't, someone else will move in on your patch and take your customers away. It does seem attractive to say 'well, $xxx per year is plenty for me, peace of mind is priceless', but unless you are in a tiny village or suchlike, sooner or later someone will notice that there's more demand than you are willing to supply and go into competition wih you. Growing the business is what you do to keep pace; if you do it well, you outpace your competitors.

2. You're assuming nothing ever changes. At the local level, what if you decide that the shop is looking a bit dull, and have reason to believe that a new coat of paint would attract more people? Well that means paying for paint, a painter, and maybe being closed for a day or two. It might take 2-3 months to balance out those expenses. Or suppose the price of oil had stayed sky-high...so this year, more people need cosy sweaters because they can't heat their homes as much. The price of wool goes way up, nd this might push up the price you can sell quilts for too but it might take months to even out. You want a cushion available for unpredictable fluctuations. It's a basic mistake (one I've made more than once...) to assume that you business model is stable and immune to change just because there's a nice cash flow at the present.

3. Seasonal income - but a lot of businesses are seasonal by nature. Turkey farming, for example. Most agriculture is seasonal since you plant in the spring and harvest in the fall. If you manufacture fireworks your biggest sales come in the leadup to Jul 4th. Ice cram sells best in summer. And so on. There are not that many businesses that are absolutely consistent all year round. Take your quilt shop - you think more people buy quilts heading into winter or summer? Maybe it evens out if you cater to hobby quilters, but I'd still bet the biggest time for quilt-giving is fall and winter.

4. As pointed out earlier, that means you have more of your equity tied up, and cash in hand that you can do business with is more valuable than cash to be paid to the bank in a month's time. Also, if you need to sell everything out in order to buy more, then that means your shelves are going to empty more than half the time, and nobody keeps going to a store where they can't get what they want to buy. Your business model is literally that you 'store' stuff people might want until they're ready to buy it, your risk is in having a certain amount of your money sunk into quilts or wool or whatever it is that actually sits on the shelves. Your profit comes from getting a discount by buying in bulk and then marking the products up for individual sale.

Web example - so you don't want to borrow to set up a web page. OK...but the purpose of the web page is to advertise your business. If people don't know you're there they can't buy from you, right? So your job here is to estimate what level of business you expect the web page to bring in. If that amount is greater than the cost of the loan over the repayment period, then it's a wise investment. By the way, you should be looking into small business administration loans if you haven't already.

Your cheap minimal website has a disadvantage: it presents you as a cheap minimal business and people will assume that you sell cheap, minimum-quality products. So doing it super cheap and not being willing to spend money on the website is like deciding that it's not worth your while to maintain the store and make it look like a place where people would want to shop. Now this is a decision only you can make, but most businesses budget about 10% for advertising. Think of the web development as capital cost and maintenance fees as part of your advertising budget.

You feel like the system is rigged to benefit people with money, and of course it's true that in order to lend you their money they want to make a profit back on it. It appears they're getting this without performing any work or taking any great risk, but they are taking a risk in lending to you. That is, why should they give it to you rather than leave it in the bank? Because you're willing to pay x% interest on it.

You, on the other hand, hope to be able to make more with this money and pocket the difference. And thus, you ARE one of 'those already with money' - although you have little experience, you do have enough capital to purchase a small store, buy stuff at wholesale, jack up the price, and sell it profitably (assuming that you make intelligent decisions about what to buy and how much to sell it for). Yes, it's risky and nerve-racking but it also has the potential to make you a good amount of money if you play your cards right.

If you're selling the actual quilts, by the way, I suggest your marketing angle should be 'lasts a lifetime', since people (even wealthy ones) are looking for good value in hard economic times. Use children in your advertising.

[anigbrowl]

19. To take your Rolls-Royce example

Yes, it would be insane to borrow the money just to drive a fancy car for a while. But suppose you were connected with a wedding planner, and you knew that there was a market to rent that RR out to newly-married couples for the drive to the wedding reception 300 days a year, and that there was a steady flow of people willing to pay (say) $600 for the privilege (not in this economy, but it's just an example). You learn there's only one other RR owner in town and you see that his car is starting to look a bit tired, it's 20 years old.

We'll say a new Rolls Royce costs $500k, but you think (thanks to your friendship with the wedding planner and so on) that you can pull in $150k per year renting it out, and after spending some money on maintenance, insurance, a driver etc., you could make $75k a year in operating profit. At that point, you realize you could pay back a loan for the car in a bit under 10 years. In this case, it might be worth taking on the debt.

Or take another very common business situation: you pay your employees every 2 weeks, but your customers only pay you monthly. It might be cheaper to borrow the money in the middle of the month and pay it back, rather than have that money set aside but be unable to fill all your orders (and see business go to competitors) because you don't have quite enough to pay your suppliers for whatever your inputs are.

[Citizen Number 9]

32. Nope. You're right.

Always live within your means and you will be more secure and better off in the long run.

Borrowing represents additional risk and cost. The risk may be worth it if things go well, but it's still a risk.