I wonder why such large companies NEED credit to operate. Don’t they have enough cash on hand to simply buy what they need?
"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus
good question.
Don’t fast food places do a lot of cash sales every day, as opposed to credit card sales that don’t clear the bank right away?
Years ago I had known somebody in fast food, and they typically made 3 bank deposits a day since they didn’t want too much cash on hand, they wanted to get it to the bank. This was before fast food places took credit cards.
I had heard the McDonald’s credit story too. You figure that McDonald’s is a huge profitable company, and if their bankers are nervous, what about the rest of us?
Who the heck makes up these stories? Several news outlets report this as the truth. We are influenced by what we hear in the news, even if we never eat a Big Mac and don’t care about fast food, news like this will influence people’s opinions of what’s going on on Wall Street.
If you borrow money to fund your business improvements, then the business must generate sufficient income to pay back the principle and interest on the loan. Anything over that amount is a profitable result of making the improvements.
If you make use of capital that you already have, you need to make exactly the same amount as above in order to be making a profit. Failing to make a profit but not seeing that you failed to make a profit (because you used your own cash) causes many businesses to make improper decisions.
Another way of looking at this is, "You shouldn't loan yourself money to do things that other people are unwilling to finance."
McDonald’s franchises are not large corporations. While most are owned by companies that own several stores, the loans are not made to the McDonald’s corporation but to the franchisee.
The reason McDonald’s is involved is that their control over the franchises is so great that they had to be involved in a standardized credit facility. One of my co-workers at BofA prior to the merger went through the training to be able to make these loans, and it even included a visit to the famous Hamburger U.
Not always. Often, even very large and profitable corporations must exercise lines of credit to stay current with expenses. It's about cash flow.
It’s easier to move credit than cash. Kinda like swiping your credit card at the gas pump vs. having to walk in, stand in line, hand the clerk cash, wait for him to make change, and then have a pocketfull of metal rattling around. For McD’s, easier to have a third party say “yeah, we’ll cover that later” than have to move thousands in cash before the deal completes.