It’s harsh but there’s no other way to put it. News broke this afternoon that Borders is delaying payments to vendors, and is concerned if their creditors do not help with a restructuring that they’re going to run into a “liquidity shortfall”. In other words, there’s no money in the bank to pay anyone. When you’re a person, it makes you a deadbeat. When you’re a large company, it makes you very, very nervous.
According to the Wall Street Journal:
The nation’s second-largest bookstore chain by revenue, behind Barnes & Noble Inc., said the delays were part of its efforts to refinance its debt and that it had notified the publishers with which it is seeking to restructure payments.
The retailer also said “there can be no assurance” that its larger refinancing efforts will be successful. The company reiterated an earlier disclosure that without refinancing, it could violate its existing credit agreements in the first quarter of 2011 and “experience a liquidity shortfall.”
Further down in the article they quote Hachette Book Group as one of the publishers being denied payment, with the ominous implication that no decisions have been made as to whether Borders will receive more product. This is very bad news. All companies need credit to survive; unless you’re Apple or Microsoft, with enough money in the bank to cover every expense, you borrow and pay as the revenues come in. Some quarters are bad, and others more than make up for the bad quarters. It’s part of the business.
But Borders is caught in a spiral they can’t escape. They can’t pay what they owe, and they have no cash to buy more product. No one’s being paid on what they already sent, so they aren’t expanding that credit further. Borders has bet all along that somehow the tide would turn, the cash would come in, and there’d be the chance to catch back up, but it’s just not happening. This is like a person who has a credit card, charges it to the limit, then demands an extension of credit on the line despite not even making the minimum payment.
This doesn’t mean the end of the line quite yet for Borders. There are many famous second acts in business history (even one-time Borders owner K-Mart has had a second chance). The problem is that Borders is heading into this as part of a weakened book industry in a weak economy. And while they’ve staved off their debtors before, at some point everyone from the banks financing their credit to the publishers supplying the books are going to need to get paid. Maybe it’s time to start fishing through the corporate couch cushions for spare change?