Mailbag – No, credit isn’t responsible.

By | May 4, 2009

 

Let’s answer an e-mail question:

Dear Fletch,
I read a few of your posts where you essentially make sure your readers know that equipment financing is a good thing, and that you’re still here financing equipment while banks pull back. Ok, maybe so, but isn’t “credit” the reason we’re in this mess in the first place? And isn’t egging companies on to finance equipment just adding fuel to the fire?
Justin G

Section 179 is a stimulus for the economy.Justin,
Thanks for writing, and thanks for reading the blog. I’m always encouraged when people read and take the time to write.

I understand the gist of your point, and while it’s valid on the surface, it’s a bit of an oversimplification.  It’s not “credit” that got us into financial trouble. It’s IRRESPONSIBLE credit. THAT’S what tipped the gas barrel over and fired up the flamethrower.

Credit, in and of itself, has been around since trading began thousands of years ago. It came into existence for one reason – it’s fully necessary for growth. Without credit, a business has a very hard time growing.

Let me use a simple example of an old time baker.  A particular baker makes the best bread in town – it’s so good that everybody wants his bread. Demand for the bread increases – to keep up with this demand, the baker needs a bigger oven… heck, he needs a bigger store. Otherwise, he will “top out” – there are only so many loaves he can make in a day, and so much profit per day out of his store. To “save up” and buy a new oven and store for cash would take years.

Enter the money-lender. He can loan the baker the money for the new oven and store. This will allow the baker to increase business (and profit) tenfold. Paying back the loan will be easy – the increased business makes this a very good risk. And, the moneylender profits to – he charges a fee (interest) on the loan. His money is making money… everybody wins.

That’s a simplified example, but that’s generally how it’s supposed to work. Credit allows those with sound business practices to expand their businesses (hopefully to make more money), and it also allows those who lend to make money on their money (which has been a staple of wealth building for centuries.) In fact, without credit, almost everything stops in regards to commerce.

No… credit isn’t responsible for this mess. In fact, we need credit to get ourselves solvent again.
But we have to use it wisely. The “let’s loan people with a terrible payback history LOTS OF MONEY to buy a house” stuff that happened was beyond dumb. And THAT’S what got us into trouble (it was more than just subprime mortgages – there are many more abuses of credit besides that, but it’s a handy example.)But equipment financing? Let me tell you, Justin – for a responsible company, financing equipment is easily one of the best uses of credit out there. It’s the baker story on a larger scale.

Now, I am not advocating that any old business go and finance equipment (the new startup “Dave’s worms and stuff” can pay cash for their dirt, ok?) What I am saying is that a healthy company with smart leadership and a solid track record can definitely put an equipment lease to good use, both right now, and for the future.

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