Wee Wully again

Mr. Hutton:

Nor are big banks good for the economy. They are not especially efficient as organisations, but they can lend enormously to allow companies to grow and invest – except that is not what they do. British bank lending is almost entirely mortgages, consumer credit, and commercial property lending. There is a tiny amount of working capital supplied to British companies, but almost no lending to support company innovation and investment. British banks never did this much, but they do even less today – an important reason why Britain has such an unbalanced economy and is slower to emerge from recession than others.

God will Willy ever get over his love affair with Rhineland capitalism?

It\’s true that British banks do not lend all that much to British companies for R&D and investment whereas German banks do to German companies. But this does not mean that British companies are starved of such funds. They simply raise them through either equity issues or bonds. Most of which are then held by insurance and pension companies.

Willy has been shouting for years that it should be the banks doing this job, not more free flowing markets. And he\’ll jump on absolutely any justification for his prejudices.

9 comments on “Wee Wully again

  1. I don’t understand why businesses need to continually borrow money. At some point the company should be able to fund new investment from surplus cashflow and past savings. Much better than having a bank manager telling you what to do.

  2. Emil, I’m guessing two of the main reasons are:
    * leveraging the return on their equity
    * tax benefits

    I’m sure debt is wonderful for making certain statistics look good in the annual report. I’m just not sure it is always so great for the actual operations of the company, particularly in a bad economy when borrowing suddenly becomes harder.

  3. It’s also because the company doesn’t belong to the company but to the owners of the company and these pesky owners want to decide themselves in which projects they put their money. (You see company’s exist to do what the owners of these companies want them do with the money they have invested in these companies.) Therefore these pesky owners want dividends paid rather than having the companies re-investing all of their earnings in said companies. (especially if re-investing them in the company means putting them in a bank account in order to have them for a rainy day, as money in bank accounts don’t provide very good returns)

  4. “* leveraging the return on their equity
    * tax benefits”

    Tax benefits? Eh? As a business owner with a SFLG loan and VC money, I’ll take a loan over equity investment: it’s much cheaper capital (VCs usually look for an IRR of 40%/year in early-stage). Tax doesn’t come into it.

    Oh, and if we had to grow from retained profits we’d be dead (since we don’t have any profits, and even if we did they wouldn’t be enough to fund the growth we need to chase).

  5. Therefore these pesky owners want dividends paid rather than having the companies re-investing all of their earnings in said companies.

    Emil, I’ve no problem with companies serving the interests of their shareholders or with paying dividends. In fact, I wish companies paid more in dividends these days, as it is a more honest way to reward shareholders than the shenanigans many companies engage in to hype up their share price.

    However, this doesn’t mean the company has to pay out all profits as dividends. An otherwise sound business going bust because it is suddenly unable to borrow will not benefit the shareholders much. The archives on this blog have some wonderful examples of companies who borrowed lots of money just to do share buybacks, with bad results

    http://jeffmatthewsisnotmakingthisup.blogspot.com/

    Kay Tie, I agree about VCs. The company I work for has got into some trouble over the years with bank loans, but fortunately we could never deal with VCs, as we are unable to issue equity.

    Oh, and if we had to grow from retained profits we’d be dead (since we don’t have any profits, and even if we did they wouldn’t be enough to fund the growth we need to chase).

    Startup? This is your situation now, but surely you plan to one day have sufficient profit to not just be self-sufficient financially, but to pay back the capital invested?

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