Anti-bailout sentiment certain runs high these days, and I think it’s because people don’t see the effect that the credit crisis in the fall of 2008 was having on non-financial businesses. In an article in Inc explaining why he sold the company to Amazon.com, Zappos founder Tony Hsieh talks about the effect of the credit crisis on his company:
At the time, Zappos relied on a revolving line of credit of $100 million to buy inventory. But our lending agreements required us to hit projected revenue and profitability targets each month. If we missed our numbers even by a small amount, the banks had the right to walk away from the loans, creating a possible cash-flow crisis that might theoretically bankrupt us. In early 2009, there weren’t a lot of banks eager to give out $100 million to a business in our situation.
That wasn’t our only potential cash-flow problem. Our line of credit was “asset backed,” meaning that we could borrow between 50 percent and 60 percent of the value of our inventory. But the value of our inventory wasn’t based on what we’d paid. It was based on the amount of money we could reasonably collect if the company were liquidated. As the economy deteriorated, the appraised value of our inventory began to fall, which meant that even if we hit our numbers, we might eventually find ourselves without enough cash to buy inventory.
These are the problems most businesses were facing in late 2008. You can oppose the bailouts on principle, but doing so is a luxury afforded by the practical effects of those same bailouts.