Discussion and 1 reply | Business & Finance

Payday loans are one of the most insidious business practices, and  their customers seem to end up with a payday ball and chain around their  neck that never seems to go away.  This is because the interest and  fees associated with these loans are so high that many people get  trapped into taking one after the other over and over again.  Rarely do  payday loans end up being the short-term solution they claim.  On the  business front, there are working capital loans.  Do you think that  these are a good idea and a valid solution to help manage working  capital, or do you think that these are the business equivalent of  payday loans?
Post by classmate
I look at payday loan and working capital loans differently because  of how the debt to income or net working capital is calculated.  Funding  circle talks about businesses looking at their capacity to repay a loan  before taking a working capital loan.  “Capacity, in this context, is  your business’ ability to repay the loan” (DeNicola, 2021).  I would use  the formula for net working capital to determine what I am able to pay  off.  A business also needs to look at their historical records to  determine if they would be able to cover the loan with profit or if they  would need to dig into their cash before taking the loan.  In this case  I don’t consider it a payday loan because the company has assets to  cover the loan they are just looking to capitalize on the time between  payments to make as much money as possible.  When individuals get payday  loans they normally get them to cover bills because they have  overextended themselves without a real plan in place to make up the  money and the loan for not only the payday loan but the other loans they  have in place that continue to build interest.  Working capital loans  are used for many reasons outside of paying off debt.  Some of the  different reasons for these loans could be to meet seasonal demands for  employees, supplies expansion of a business, and can even be used to  refinance existing debt with higher interest rates (DeNicola, 2021).   Being able to efficiently and effectively manage your assets and  liabilities is critical to becoming a successful business (Adelman &  Marks, 2014).  Truly understanding your financial statements and where  you can find efficiencies so you don’t have excess money just laying  around will allow you to execute a working capital loan to benefit your  business and not put you into a cycle of more and more loans.  

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