Risk in these transactions is a very real thing. The most skillful and best informed in these matters may fail to estimate cor rectly the appeal a particular issue of securi ties will make to the public at a given price. Even if they are not mistaken in their esti mate of the popularity of the issue, general, financial, and business conditions may shift rapidly, before the securities can possibly be disposed of, and cause the bankers who have purchased or underwritten them a heavy loss. The corporation can well afford to pay for the insurance. Generally it is almost a vital matter that the corporation secure the money and usually a relatively small difference in the cost of securing it is not at all vital. If the corporation is carry ing through a refunding operation, creating a new issue of bonds to sell and to enable it to pay off bonds which are falling due, it must have the money or suffer a default. If the corporation requires new capital for ex tensions, it may be of the utmost importance to it, under the conditions existing, that the new capital expenditure be made. Though the difference between a 51- per cent and a per cent basis — which would be a differ ence between 93.25 and 90.12 in the price of a 25-year 5 per cent bond — is important, it is not vital.
Though it may not be expedient generally for a corporation to turn itself into a banking house in the endeavor to raise capital with out the expense of the services of a mid dleman, it may under some circumstances procure for itself new funds required. The corporation may be a "family" affair: that is to say, a very few people may own practi cally all of the stock and may not want any "outsider" to have a substantial interest in the business. Many such corporate busi nesses conduct their affairs much in the manner of a partnership. People who are essentially partners organize in the corpo rate form for the sake of the limited lia bility, for the precision of the corporate form in providing for the contribution of capital and division of profits, or for any other of the advantages which the corporate form possesses. The stockholders are so few and so closely associated that they are like a fam ily. Often more literally family corporations conduct business enterprises. Such corpo rations frequently result from the death of the man who established the business and during his lifetime carried it on as his per sonal enterprise. On his death, in order to keep the business in the family and provide for its management and the distribution of profits, it is incorporated. Under such cir cumstances the existing stockholders may be able and may prefer to supply any new capital needs of the corporation.
Many corporations cannot appeal to the banker for help. No financial organization may have been developed to procure capi tal under the special conditions. At the time of writing banking organizations are ade quate to supply the financial needs of any railroad, electric railway, gas, electric light, or hydraulic electrical enterprise which economic conditions justify. These are, of course, the kinds of business which, as shown by the principles developed in the discus sion, in the previous book on Capitalization, of "Trading on the Equity," are, when once established, least subject to business risk. Our financial organization is also adequate to procure capital for the larger industrial enterprises. Even for these, however, it is not as well developed as for the public service corporations. Many smaller industrial en terprises, thoroughly justified by economic conditions, cannot obtain capital through well-organized established channels. It may be objected that the amounts involved in these smaller enterprises do not justify the effort bankers must make to raise the capi tal. Many of the costs would be nearly as large as for the big capital demands of the great corporations. Costs of investigation and of advertising in various ways, to make the enterprise sufficiently well known to command capital, would be disproportion ate to the amount of capital required. The banker would have to charge enough for his services in such a case as actually to im pose too heavy a burden on the business. Bankers, however, have overcome such dif ficulties for the smaller public service en terprises, and in the course of time will probably devise means for providing cap ital, in spite of the greater business risk, for the smaller industrials. Meanwhile those in charge of the affairs of these smaller indus trial enterprises must get their capital as best they can. Such as they cannot provide themselves they must appeal to acquaint ances for. On a personal appeal men famil iar with the industry of which the partic ular enterprise is a part may see an at tractive opportunity for a commitment of capital. So from various sources the man agers of the enterprise find the necessary capital.
Family corporations and the small indus trials do not, however, compose the large body of corporate enterprises which present the problem of raising capital we are dis cussing. Generally a corporation which can procure capital through the regular chan nels of the banking houses had better take advantage of the opportunity and not at tempt financing itself.