Question

1. 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?

2. When it comes to working capital, there are several things to manage. From the cash conversion cycle to the floats for disbursements and collections to the age of your accounts receivable and cash discounts on both your AR and AP; it’s all about the cash. What are the factors in a business that are going to make turning an item into cash quickly critical, and are there factors that make turning your capital into cash quickly less important?

Answer 1

1. Just like payday loans, working capital loans claim to provide a solution to a company's short term financial needs. Working capital loans can be both a boon and a bane for companies depending on how they are utilized. When a company is starting up and does not have alot of cash reserves, working capital loans can be very useful for efficient operations. However, if the company gets into the habit of taking short term loans to finance its operations over and over again, the interest will keep on piling and further to service this interest the company will take a loan again. This might end up being a vicious cycle. Thus, the working capital loan is an efficient tool if utilized properly.

2. The factors that might make turning an item into cash quickly critical are as follows:

- The company might undergo a slump in sales and the cash flow from customers might reduce. However, operating expenses might require the company to convert its items into cash.

- A lucrative investment option which requires cash investment.

The factors which will make turning capital into cash quickly less important are as follows:

- The company might have less credit period making the payments from customers prompt thus requiring less need for cash inflow.

-The company might sell off an asset which will result in ample cash flow so that no capital is required to be converted into cash quickly.