Penney Has Some Persuading to Do
J.C. Penney one of the biggest retailers is struggling to operate their business. The company’s decline in sales is making it hard for the company to cover cost and pay their suppliers. Suppliers who are skeptical of J.C. Penney’s ability to pay for the supplies want the supplies to be paid for quicker which can severely hurt the business operation. Having to pay off suppliers immediately would significantly reduce the amount of cash flow available to the company. Not having a strong cash flow is one of the biggest problems in a business and also the main reason why many companies have gone down. Circuit City is a prime example of a company that collapsed several years ago due to the stricter payment terms which led them into bankruptcy. To prevent this from happening, J.C. Penney has borrowed another $850 million from a credit line to increase their cash flow to around 1.85 billion.
Borrowing another $850 million from a credit line was a good approach for J.C. Penney to prevent the company from collapsing. With more cash available, suppliers will be less nervous about defaulting payments. The $850 could be used as emergency funds only if the company could turn around and make enough profits to cover their operating costs. J.C. Penney could also sell new shares of stock to raise more money but this method will lower their stock prices which might not be a good thing either.
Written by: Wilson Tang