Howard_T

5 Things You Need to Know When Analyzing Corporate Debt

I can think of one more reason why companies take on debt, and it's especially prevalent in defense industries and others that do business with the government. A defense contractor doesn't get paid until it has performed on a contract. That doesn't mean the entire contract, but there are incremental stages that must be satisfied in order to earn partial payments. This means that the contractor has to pay his staff, keep the lights on, heat (or air condition) the buildings, buy the material necessary to build the product, and so on. In the meantime, the government hasn't given him a dime until he satisfies the necessary progress metrics. Thus, the contractor lives on borrowed money, paying it back with his returns from his customers.

When you look at R & D, the situation is worse. Now you haven't even got a contract, but you have to pay your engineers and scientists. The next time you want to scream about why the government has to pay so much for military hardware, consider "the cost of the money".