I was playing the game Capitalism 2 the other day (for those that have not played it, it’s amazing)
Anyway, you are in control of a major corporation you create blah blah blah.
When your company runs out, or is running low on money you have a few options.
Take out a loan…Not sure how the game determines how much to borrow to you, but you take out say $10MM at 7%. Every month you pay the interest on the loan and no princepal. In real life is this how large corporate loans work? Are they really just interest only and then the company just pays it back whenever.
Issue more stock…your company can issue more stock based on the equity of your current stock. If you issue 10,000 new shares at $5 a piece you automatically get $50K in your bank account. Is this realistic? Does issuing stock give a company instant money?
Companies can certainly take out lines of credit and pay interest only if the terms allow that. That doesn’t necessarily make it a good idea; if you’re going to borrow money on revolving account it’s a good thing to pay down some of the principal if you can.
Yes, issuing stock gets you instant money. It also gets you more owners and more people to pay dividends to, if you pay dividends.
The price, of course, is that existing shareholders lose equity in the company. Issuing new stock is essentially equivalent to every shareholder agreeing to sell a certain fraction of their shares and then turn over the proceeds to the company.
Another “Yes” on number 1. My company has done that as well. We’ll request a line of credit and when we use it we get a bill each month for the interest only, but not the principal. The terms for paying back the principle are different for different loans. In our first loan we could have kept the principle as long as we wanted. The second time we did it we had what was called a ‘resting line of credit’ where each year the balance had to go to 0 for 30 days.
You, a non business owner, can do this as well. Many banks will allow you to take out a loan against your house and make interest only payments. I have a mortgage on my house, but my HELOC is has an interest only minimum payment each month. IIRC there is a due date for the principle (either 7 or 15 years). Some people also have interest only mortgages. My banker mentioned to me that the only people that really get ahead with that system is people that are buying a house but only planning to live it in for a few years and aren’t concerned with paying down the principle and would rather have the extra money to themselves.
In real life this is how any sort of loan (large or small, corporate or personal) can work, provided that both parties agree to it. It is, in fact, an extremely common way of arranging a home mortgage in the UK. The Wikipedia article on interest-only loans has further details.
A loan or credit, whether between a bank and an individual, or a bank and a company, still basically boils down to trust:
If the bank trusts that the creditor won’t default by going broke or becoming unemployed, than only paying interest is a good deal for the bank, because they earn far more that way.
I see this mostly with overdraft checking (giro) accounts. Everybody knows (or should know) that the rate of interest for overdrawing your account is between 12 and 15%, which would be outright daylight robbery if not: that the banks advertise it (but not everybody reads it) and that the banks claim they have to rustle up the money quickly, because it’s unexpected. Obviously, a smart financial person whose account is overdrawn for months on end would apply to a loan for around 6% interest, pay off the overdraft and pay back the normal interest loan, and save quite a bit on interest. (Most people who are overdrawn have either bad money management, or not enough income to cover their expenses).
The banks have to strike a balance between their greed at wanting the high interest from overdraft, and their fear that at one point, the customer no longer has the money to pay them. Usually, their rule is that overdraft limit for the account is 2 times the netto monthly income; but if you’re a long-time overdrawer (every month you wobble from red to black and back again), they may give you more rope to hang you with. Until one fine day, when you go broke and eat the loss, or shape up and pay everything back.
Same principle for companies. A bank that gives loans to companies - even in games like Monopoly - can cover a dry stretch after which the company recovers and pays off the loan; or the company recovers and decides it will get more profit from new investments instead of paying off old loans, and let the loan stand.
Or the company will keep spiraling down, and the bank looses the loans.
In “The moneychangers” Haileys novel about a banking house written in the 70s, he describes the process of loan approvals by the bankers, and that a perfect record of no credits gone bad would raise a warning sign that the employee was too cautios. It was better to risk a few than let a lot slip through your fingers. (If too many went bad, obviously that was also bad jugdment). A few bad loans are caught up in the interest calculated with risk in mind.
Banks can arrange loans as sophisticated as the client is capable of managing, and corporate finance departments can be fairly creative. The term used is “sculpting” the debt (i.e. the terms such as interest, amortization, payments, and refinances). As noted by others, the arrangement must be amenable to the both parties before it will go forward.
Companies can always issue more stock, but in times of distress you get diminishing returns (i.e. less money for each percent of ownership sold). Also, as a current owner you are giving up more of the company. Essentially if the profits of the company are a pie, selling shares means you’re splitting the pie more ways, but hoping that the overall pie is much bigger than otherwise, so everyone wins… or at least that’s the plan. Now, who want’s pie?
Quite a bit off topic : I think that Capitalism+ (not 1, plus) was better than Capitalism 2.
C2 offers more options in theory (like investing in real estate, etc…) but they’re mostly pointless (low return on investment, secondary to your main activity of producing, selling, etc…). Also, there are less products available (I guess they expected to add some in an add-on, but never released any). Not that I’d advise you to buy C+ if you already own C2, but if someone wanted to buy the game, I think the earlier version is better.
Also, if someone could explain to me someday how the reputation of your brands works when you sell several products under the same brand name in the game, it would significantly improve my game experience. I always end up with a poor reputation, regardless of my efforts to maintain a roughly similar quality for all the products sold under the same brand name. So, I always end up having one brand for each product, which of course means I must spend tons of money on advertizing, etc…
Quite a bit off topic : I think that Capitalism+ (not 1, plus) was better than Capitalism 2.
C2 offers more options in theory (like investing in real estate, etc…) but they’re mostly pointless (low return on investment, secondary to your main activity of producing, selling, etc…). Also, there are less products available (I guess they expected to add some in an add-on, but never released any). Not that I’d advise you to buy C+ if you already own C2, but if someone wanted to buy the game, I think the earlier version is better.
Also, if someone could explain to me someday how the reputation of your brands works when you sell several products under the same brand name in the game, it would significantly improve my game experience. I always end up with a poor reputation, regardless of my efforts to maintain a roughly similar quality for all the products sold under the same brand name. So, I always end up having one brand for each product, which of course means I must spend tons of money on advertizing, etc…
On topic : as everybody else stated, yes, you can always issue more stocks and sell them in real life, like in the game. Note that when you do that in the game (like in reality), the value of each share is reduced, and if you own part of the company yourself, you’ll see that your share, in %, drops after you issued more stocks.
There’s a third way of raising money, by issuing bonds. A bond is essentially a fixed-rate, fixed-term loan. Investors buy the bond for a fixed amount, and you agree to pay back a fixed amount for a fixed term. When you’re finished, the investor has made back principal and interest.
I don’t know how it works in the game, but in the real world, your brand is only as strong as the weakest product under that brand. If all of your products are the same quality, but one product is weak compared to its competitors, the weak product tends to pull down the reputation of the better products under the same brand.
Yes. You can arrange this sort of financing either through a bank or with private investors. Our personal corporation loaned a lump sum to a computer parts supply company so they could purchase inventory and all that’s paid monthly is the interest. The inventory is the collateral for the loan. The principal is due at the expiration date of the contract, unless the contract is extended.
IIRC, there aresome legal loopholes to jump through to issue more stock, especially for large (listed on stock exchange) companies. Essentially, the board of directors have to approve (IIRC) and they heoretically represent the investors - although in reality they tend to be trained seals bought and paid for by the management, until their own butts are in the sling. (Read Barbarians at the Gate)
More shares create more money which can be invested in more capital (factories, bigger fleet, etc.) thus making the value of the company bigger, so every shareholder still owns a share worth $X. That’s the theory…
Sometimes, a desperate company may strike a deal to convert cash debt (that bank loan) into shares - because otherwise, it woul go bankrupt and close down trying to pay off the debt; so neither the ones making the loan nor the shareholders would have anything substantial. (Think Chrysler… GM). If relieving the debt costs allows the company to get back on its feet, both shareholders and creditors benefit.
OTOH, there’s bankruptcy, where esentially the company sells off its assets to pay (part of) its debts, shuts down, and the shareholders end up with worthless pretty wallpaper (or used to, in the days of paper shares.)
I suppose there must be some bonds out there that are structured like this, but almost all corporate bonds are set up like the loan in the OP. The company will pay a percentage of the bond face value each period, and then at the end of the bond will repay the total face value. I would guess that the “loan” feature in the game is really intended to model issuing bonds, rather than taking out a bank loan.
Regarding point two, one effect of announcing you are issuing new stock is to cause the price of the current stock, and what you can get for the new stock, to fall. Companies are reluctant to issue new stock because of this problem. Does the game take that into account? There are mathematical models to calculate how much the stock price “should” fall when the new stock is issued.
