Motley Fool Australia

The Cash Store runs out of cash

Irony is in the air. The Cash Store, one of the largest payday lenders in Australia, is out of cash. Payday loans or “cash advances” are usually small short-term unsecured loans that allow Aussies some extra funds before their next paycheck. Only this time, it’s the loan company itself that’s short on funding.

With 61 stores spread across the nation, The Cash Store and its Canadian parent corporation aren’t just in financial trouble. The company is currently being investigated by the Australian Securities and Insurance Commission (ASIC) for alleged credit act breaches, and its CEO resigned last Thursday.

Although The Cash Store won’t be giving out any more money (at up to 240% interest per annum, according to the ASIC), the company will continue to collect on its outstanding loans.

Foolish takeaway

Unsecured loans can destabilize an economy from the individual up, and The Cash Store’s practices were questionable at best. The company’s bankruptcy could have both positive and negative implications for other lenders like FSA Group (ASX: FSA), Cash Converters International (ASX: CCV), and Flexigroup (ASX: FXL).

Cutting out crooked competition is always a plus for companies with positive practices. If the ASIC’s investigations turn up dirt, it’ll prove that The Cash Store was giving itself an unfair advantage, disregarding rules that other corporations held themselves to. With The Cash Store and its 61 stores out of the market, that clears up more market share for the rest of the lending crew.

But a controversy in a sector can also create negative spillover effects. Public outcry could push down consumer sentiment towards loan companies, and overzealous regulators could slap down restricting rules that cut back on these companies’ capacities to conduct business.

More than anything else, investors should take The Cash Store’s closing as a constant reminder to invest in companies with excellent management, sustainable business models, and a legitimate value add to the economy and its stakeholders.

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Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.

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