-1

Here is a question I have had for a long time:

Most companies typically sell stocks to raise capital or go to the bank for a loan. But doing the latter - at least to me - puts the company at a disadvantage. When someone in the U.S. borrows from someone abroad, they have to pay interest to someone outside of the country, so there is net drain of money from the U.S. When a company borrows from the bank, it has to pay interest on what it borrowed.

Yet, even profitable companies borrow from banks. Why wouldn't a company choose to borrow from its "savings" (profits). In this case, it would essentially pay "interest" to itself, as opposed to the bank - in other words money otherwise used to pay interest would stay in the company. Companies could still use the bank's interest rates to decide whether to fund an investment project (or maybe invest the money instead), but use their own coffers to fund the project to further maximize profits if they choose to go through with it.

closed as off-topic by ChrisInEdmonton, Dheer, Pete B., MD-Tech, Nathan L Jun 11 '18 at 18:10

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "Questions on economics are off-topic unless they relate directly to personal finance." – ChrisInEdmonton, Dheer, Pete B., MD-Tech, Nathan L
If this question can be reworded to fit the rules in the help center, please edit the question.

  • 1
    Why would a company borrow from itself if it had the money in the first place. And even if it did, where would the profit be in paying yourself interest with your own money? It would just be a shell game. The main ways that corporations raise capital is by borrowing from lending institutions, selling common stock, issuing bonds, issuing preferred stock, or using profits. – Bob Baerker Jun 8 '18 at 20:09
  • @BobBaerker Not really borrow, use their own money. I meant use the company's own $, not literally actually pay themselves interest (although it's kind of the same thing, no matter how much you pay yourself, you're back where you started). The difference is the $ used to pay interest to the bank is still there when you use your $ as opposed to the bank's. – InterLinked Jun 8 '18 at 20:13
  • 1
    What makes you think that companies with cash in the bank borrow money for their spending and investment needs rather than using that cash? – Mike Scott Jun 8 '18 at 20:22
  • 2
    I think you fundamentally misunderstand what a loan is... – quid Jun 8 '18 at 21:26
  • 1
    Profitable companies surely do borrow money for expansion and acquisition and they do it in many ways (from banks, insurance companies, hedge funds, as well as issuing debt such as bonds and preferred stocks). And for other reasons as well (for example, refinancing higher debt). The most extreme example of borrowing for acquisition is a leveraged buyout. – Bob Baerker Jun 9 '18 at 22:42
1

Corporations borrow for the same reason that people borrow: they want something now, but they can only pay for it in the future. If a company making $2M a year in net income wants to buy a factory that costs $10M + makes $1M in additional net profit a year, then a company can:

(a) wait 5 years to buy the factory, thus losing 5 years of profit, or:

(b) buy the factory now, earn $1M extra a year, and pay maybe $400k in interest. The company here still comes out ahead $600k extra every year.

If a company has no projects it wants to be involved in (for various reasons), then typically it will use excess cash to continually pay off its debt and / or pay dividends to shareholders.

1

I haven't heard of a company that has a stockpile of cash in the same country it gets a loan....

The reason that companies borrow money while stockpiling cash is that companies have profits in countries that they don't need money in, while at the same time needing money in countries they don't have (enough) profits in.

Take apple for example: They have a stockpile of nearly a quarter trillion dollars while at the same time getting a loan in the US because they need money. The reason is that they would have to pay tax to "repatriate" the money. Before Trump signed the new tax law, this would have been over 30%. It's much cheaper to get a loan than it is to bring the money to the US.

  • But what about the hundreds of profitable businesses that aren't multinational? – InterLinked Jun 8 '18 at 20:07
  • 1
    I have not heard of a company that got a loan while having cash lying around unused. Can you give an example ? – xyious Jun 8 '18 at 20:11
  • So there are companies that do use savings then, as opposed to loans? – InterLinked Jun 8 '18 at 20:14
  • Every company I've worked for so far.... I don't quite understand why it would be any other way.... – xyious Jun 8 '18 at 20:18
  • Okay, that makes sense then. I've always learned that companies borrow and it's never been even hinted that they could actually use their own money. – InterLinked Jun 8 '18 at 20:26

Not the answer you're looking for? Browse other questions tagged or ask your own question.