Friday, March 15, 2013

Local Toy Store "Saved"

This post is going to rub some people the wrong way, locally at least, but that's okay.  If you're not from around here, this may not mean much, but it might still be educational. 

Let me just start by saying our family does shop at the toy store, and we do love it.  This is not an attack on the owners, or people who donated to the store, or anything like that.  I have no affiliation with the bank (I don't even know which one it is) or the store.  It is just an observation, and perhaps a little education for those who don't have any experience in the business world.  I certainly don't have any inside information on this, I'm just going by what I've read/heard from other people and the owners.  I intentionally waited until the campaign was either successful or time expired on it before posting this so as to not sway anyone away from contributing.  If you made a gift based on your desire to see the store remain open, then that's great, I'm not making any judgments - Mama donated.  If you made a gift because you thought you were helping fight some sort of injustice, I'm sorry I didn't post this earlier for you, but now you know, and...
The first time I read anything about the store having to close its doors was when I read a Facebook post by a friend.  The post (paraphrased) said the big bad bank is forcing this business to close by calling their loan five years before it's due. 

Then I saw a flier posted which said "The bank has called our loan and wants their money now" (I can only assume the use of the word "our" attributes this quote to an owner) and "We all love these stores and find it appalling that a bank is calling their loan 5 years before its up!".

Call me crazy, but I don't think it's appalling.  If I lend my car to a friend for the week, is it appalling that I want (or need) it back after three days?  No.  It's my car, not theirs.  They are just borrowing it.  Even if we have a contract where the friend is paying me to use the car, there are things my friend could do to breach the contract and allow me to legally get my car back, such as failing to pay me.

So let's start here.  Banks do not operate in the "Not For Profit" arena.  They are owned by investors who expect some sort of return on their money, or at the very least the return of their money.  Some are publicly traded while others are privately owned.  Regardless of that, the bank and the Board of Directors have a duty to the investors first and foremost, not to their customers.

As noted by the owner in the above statement, "The bank...wants their money".  Yes, it is their money, and if the risk they are taking is not worth the reward, they have every right to call the loan.  The bank loaned them the money at a point when the risk they were expecting to take was justified by the return on the investment, but things don't always go according to plan.  The bank also could simply have underestimated the risk and made a loan they shouldn't have.  They screwed up, so they're trying to make the best of a bad situation.  Who knows?   
It's capitalism.
Maybe they don't want to call it, but are being forced to.  Bank regulators can put pressure on banks to raise capital and reduce the risk of their portfolios if they believe the bank itself is struggling or could be exposed to more risk than they should be.  This could result from bad loans, a bad economy, or just bad luck.  Whatever the reason, they can't reduce their risk by calling the loan of someone who has made all their payments and is running a financially viable business.   

If a bank looks at the underlying financials of the business it lent money to, and sees only losses and other debts, they may call the loan to force the business to liquidate assets and repay them what they can.  If the business files bankruptcy, the entire debt may be forgiven and the bank loses.  From the bank's perspective, getting 40% of what they are owed is better than nothing.

Again, I don't know if that is the case here or not, but I think it is.  On the fundraising page, this quote is posted right under the update which shows $21,023 has been raised: 
"If $75k is raised, the plan is to use a large chunk of those funds to satisfy the bank.  The remaining funds would be used to pay toy vendors who are eager for their money". 
Obviously, there are many creditors here, not just the bank.

In summary, I think it's great that the community pulled together to save a struggling business they love.  It would appear from the rest of the quote on the fundraising page that the owners are doing what they can to stay afloat and are not the ones who initially started the campaign, and I applaud them for their efforts.  Other local businesses got involved and either did matching gifts or offered to donate a percentage of their profits for the day. 

SIDEBAR - What a great move on their part!  It's a great way to bring in income for their business that they may not have otherwise had and build goodwill in the community, but if someone really wanted to give to the fundraising efforts, it would've been more effective to give 100% directly instead of 10% of profits.  Why?  Simple.  If the company making the 10% of profits gift only operates at a profitability margin of 20%, spending $100 at their business puts $20 in their pocket and of that, $2 goes to the campaign.       

You have to wonder, though, if the business can't get a loan from any other bank, and hasn't been able to raise private equity from any investor, how viable is the business?  And next year are we going to see the Second Annual Save the Toy Store campaign?

Comment as you see fit.  I won't edit or delete anything unless you're inappropriate or vulgar.  Anonymous posts will be deleted, no matter their content, so if you have something to say, make sure you claim it.

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