4 ms·

Since when is being able to turn a profit a prerequisite for getting loaned money here?

by saas_co_de 9y ago

geggam 9y ago
Evidently thinking someone should have a valid business model and a profit gets you downvotes... who knew ?
- narag 9y ago
  A business can start losing money and later become profitable. Also banks tend to ask for something to pray in case that never happens, so they sometimes profit from unprofitable businesses. Happy New Year from Captain Obvious ;)
  - bunderbunder 9y ago
    A business can, but it's much more likely to be the case in something like software where the majority of costs are fixed, and economies of scale are such that you can relatively easily grow into profitability. I'm no business expert, but I'm guessing the story is different for small town restaurants. If you've got one that's been open for 3 years, it's probably fairly safe to say that its growing days are over. By then, everyone in town knows about it, so there's not much prospect for expanding the customer base. If anything, I'd expect the company's business to slowly dry up over the long haul. Money is flowing out of small towns, so, even if every single customer is a loyal regular, they'll still be going out less and less over time simply because their supply of excess income to spend on things like eating out is shrinking.
    - narag 9y ago
      I'm no business expert either, but I know a handful of small town bar owners. Without too much detail: just consider the case in which someone buys a bar or rents a place that was already a bar before. The people that I know would make an inauguration party, adjust prices and renew the place and the offered products for a better fit with prospects. And suddenly a failed place becomes a profitable business.
- saas_co_de 9y ago
  Making wild unfounded claims like "Small town businesses cant turn a profit and as such shouldnt be getting a loan" without any support gets you downvotes.
  - chillwaves 9y ago
    >population 729 Did you miss this? These rural communities do not have the population density to support these businesses. Have you ever been to these communities? There are literally only 2-3 restaurants in towns like these and that is basically all they can support. Now, Wawas and Sheetz basically fill the gap for "eating out", but it is a very different business model needed to succeed in these places.
    - saas_co_de 9y ago
      I was born and grew up in a town with a few hundred people. There are businesses that were there when I was born and are still there (30+ years now) and there are plenty others that have come and gone over time. That is not any different than any city I have lived in and I have been all over the world.
CydeWeys 9y ago
That's the prerequisite for every loan. No one is loaning anyone money with the expectation that they're going to lose money on it. The expected value of a loan from the issuer's point of view is always positive. Around these parts, that's often because, even though the chance of losing it all is 99%, there's a 1% chance of making it back 1000X (to use an example). We're talking about profit to the issuer here, which in VC usually comes from selling the company at a greater amount later even if the company itself isn't yet profitable. That doesn't apply to lending money to money-losing small businesses. There's no small chance of making a much larger return than what you lent. The risk is still high for such a loan, but without the possibility of a much greater return. The interest on that loan is what it is; it's not like you're buying ownership in a company like with typical VC equity.
- pjc50 9y ago
  Equity is very different from a loan.
  - CydeWeys 9y ago
    And yet that's clearly what the person I was responding to was referring to when they said "Since when is being able to turn a profit a prerequisite for getting loaned money here?" Also, the principle I'm talking about, that of positive expected value, applies equally to equity and to loans.
- saas_co_de 9y ago
  > money-losing small businesses The original quote from the article said that the business was profitable, just not profitable enough to justify the owner's investment. In other words, they need capital to scale in order to be profitable enough to justify the owner's time spent on the business. It is only the poster who made the broad sweeping and wrong statement that small town businesses in general can't make money. That statement has no empirical support whatsoever and is just an unfounded assumption, which you are repeating, and seem to be basing your thinking on.
- realicysm 9y ago
  > No one is loaning anyone money with the expectation that they're going to lose money on it. The expected value of a loan from the issuer's point of view is always positive. Well put. But I also find wisdom in the expression "Banks will always be there for you when they need you. They will never be there for you when you need them." The psychology of loss aversion dominates the behavior of lenders big and small. I've seen people I otherwise consider quite smart expect that they can convince holders of capital in various forms (from credit unions and community banks to the giants) to lend to solid small businesses unable to grow due to cash flow constraints. As you point out, the VC world will place bets on expansion, but only with the prospect of exponential growth and exit. Banks increasingly seem uninterested in business lending at all, when they used to lend with the expectation of a reasonable but not extravagant return. I guess payment processing and retail fees are more lucrative and carry less downside risk - until the retail customers dry up and blow away because all the small businesses that used to use credit are gone. But I'll be retired by then, so who cares, right?
Broken_Hippo 9y ago
It depends on your ability to pay without the business loan. I mean, if you've income and can pay it anyway, turning a profit isn't as big of a concern. But that's not really how it is for a lot of places. If you have a history of a healthy profit after 3 years in business, you are more likely to be able to repay it. In the case of the restaurant, sometimes the improvements will make a difference but sometimes they won't. The bank is taking more risk at this point, and if things go sour, they lose.

Since when is being able to turn a profit a prerequisite for getting loaned money here?

geggam 9y ago

Evidently thinking someone should have a valid business model and a profit gets you downvotes... who knew ?

narag 9y ago
A business can start losing money and later become profitable. Also banks tend to ask for something to pray in case that never happens, so they sometimes profit from unprofitable businesses. Happy New Year from Captain Obvious ;)
- bunderbunder 9y ago
  A business can, but it's much more likely to be the case in something like software where the majority of costs are fixed, and economies of scale are such that you can relatively easily grow into profitability. I'm no business expert, but I'm guessing the story is different for small town restaurants. If you've got one that's been open for 3 years, it's probably fairly safe to say that its growing days are over. By then, everyone in town knows about it, so there's not much prospect for expanding the customer base. If anything, I'd expect the company's business to slowly dry up over the long haul. Money is flowing out of small towns, so, even if every single customer is a loyal regular, they'll still be going out less and less over time simply because their supply of excess income to spend on things like eating out is shrinking.
  - narag 9y ago
    I'm no business expert either, but I know a handful of small town bar owners. Without too much detail: just consider the case in which someone buys a bar or rents a place that was already a bar before. The people that I know would make an inauguration party, adjust prices and renew the place and the offered products for a better fit with prospects. And suddenly a failed place becomes a profitable business.
saas_co_de 9y ago
Making wild unfounded claims like "Small town businesses cant turn a profit and as such shouldnt be getting a loan" without any support gets you downvotes.
- chillwaves 9y ago
  >population 729 Did you miss this? These rural communities do not have the population density to support these businesses. Have you ever been to these communities? There are literally only 2-3 restaurants in towns like these and that is basically all they can support. Now, Wawas and Sheetz basically fill the gap for "eating out", but it is a very different business model needed to succeed in these places.
  - saas_co_de 9y ago
    I was born and grew up in a town with a few hundred people. There are businesses that were there when I was born and are still there (30+ years now) and there are plenty others that have come and gone over time. That is not any different than any city I have lived in and I have been all over the world.

CydeWeys 9y ago

That's the prerequisite for every loan. No one is loaning anyone money with the expectation that they're going to lose money on it. The expected value of a loan from the issuer's point of view is always positive. Around these parts, that's often because, even though the chance of losing it all is 99%, there's a 1% chance of making it back 1000X (to use an example). We're talking about profit to the issuer here, which in VC usually comes from selling the company at a greater amount later even if the company itself isn't yet profitable. That doesn't apply to lending money to money-losing small businesses. There's no small chance of making a much larger return than what you lent. The risk is still high for such a loan, but without the possibility of a much greater return. The interest on that loan is what it is; it's not like you're buying ownership in a company like with typical VC equity.

pjc50 9y ago
Equity is very different from a loan.
- CydeWeys 9y ago
  And yet that's clearly what the person I was responding to was referring to when they said "Since when is being able to turn a profit a prerequisite for getting loaned money here?" Also, the principle I'm talking about, that of positive expected value, applies equally to equity and to loans.
saas_co_de 9y ago
> money-losing small businesses The original quote from the article said that the business was profitable, just not profitable enough to justify the owner's investment. In other words, they need capital to scale in order to be profitable enough to justify the owner's time spent on the business. It is only the poster who made the broad sweeping and wrong statement that small town businesses in general can't make money. That statement has no empirical support whatsoever and is just an unfounded assumption, which you are repeating, and seem to be basing your thinking on.
realicysm 9y ago
> No one is loaning anyone money with the expectation that they're going to lose money on it. The expected value of a loan from the issuer's point of view is always positive. Well put. But I also find wisdom in the expression "Banks will always be there for you when they need you. They will never be there for you when you need them." The psychology of loss aversion dominates the behavior of lenders big and small. I've seen people I otherwise consider quite smart expect that they can convince holders of capital in various forms (from credit unions and community banks to the giants) to lend to solid small businesses unable to grow due to cash flow constraints. As you point out, the VC world will place bets on expansion, but only with the prospect of exponential growth and exit. Banks increasingly seem uninterested in business lending at all, when they used to lend with the expectation of a reasonable but not extravagant return. I guess payment processing and retail fees are more lucrative and carry less downside risk - until the retail customers dry up and blow away because all the small businesses that used to use credit are gone. But I'll be retired by then, so who cares, right?

Broken_Hippo 9y ago

It depends on your ability to pay without the business loan. I mean, if you've income and can pay it anyway, turning a profit isn't as big of a concern. But that's not really how it is for a lot of places. If you have a history of a healthy profit after 3 years in business, you are more likely to be able to repay it. In the case of the restaurant, sometimes the improvements will make a difference but sometimes they won't. The bank is taking more risk at this point, and if things go sour, they lose.