FINANCING THE SMALL COMPANY 1. Special methods for small companies.—Small companies, with a capital from $10,000 to $200,000, are usually locally owned. Their securities are not listed on the exchanges, nor are they underwritten or sold by investment bankers or large brokers.
While many are directly concerned with financing or managing small or moderate sized corporations, few are fortunate enough to control the destinies of larger companies. And yet, in our financial litera ture, little or nothing has heretofore been written, about small companies. The reader who wants to finance a $100,000 corporation, and who most needs instruction, finds little assistance in existing texts, and while the large company can afford to employ expert financial counsel, the small incorporator is usually unable to do so.
Underwriters and brokers will not take the trouble to investigate, underwrite or sell vigorously the se curities of a small concern, as the income from so doing does not justify the risk and expense involved. Theoretically, the small company may obtain trade credit and bank loans in the same manner as the larger ones, but in practice it finds itself at a disad vantage. The average investor favors the large com pany because it appears more substantial, mere size lending an aspect of competence and reliability.
For all these reasons, small corporations are financed mainly upon the personal basis. Acquaint anceship, personal influence, friendly interest, local pride, and other similar factors enter largely into the financing. The purpose of this chapter is to outline the usual methods by which such small companies ob tain their capital and finance themselves thru the early stages of their exsitence.
2. When a going concern is is little difficulty in incorporating and financing an established small business which has existed success fully under the sole proprietorship or partnership form. Any well informed accountant or attorney can devise a financial plan for this purpose.
It involves taking out a charter with sufficient auth orized stock to purchase the assets of the business which is being incorporated, and enough additional stock or bonds to provide the enlarged capacity and the new working capital required. The owners of
the previous business usually take the controlling interest and sell the other securities. Local investors or bankers, familiar with the past success of the busi ness, require but little inducement to purchase the re maining stocks and bonds, especially when the money is to be used in expanding the business.
When the corporation has been fully organized, it purchases the assets of the old concern, issuing securi ties to the former owners in part or full payment, and obtaining new capital by the sale of the securities remaining. Provision must be made in the plan for adequate additional working capital, since the incor poration of a business does not usually involve the purchase of the cash on hand, and frequently does not include the purchase of the accounts receivable, unless these are guaranteed by the previous owners. Fur thermore, it is customary to expand the business at the time it is incorporated, and neither trade credit nor current loans can safely be relied on for such a purpose.
3. When a new business is to be established.—The financing of a new company is ordinarily very dif ferent and more difficult. In nearly every case, a small new company, not based upon an already es tablished business, is founded upon one or more of the following elements: 1. A new patent right or process 2. A new local trade opportunity 3. The special ability or goodwill of one or more experienced and previously successful men, whose connection with the concern inspires confidence in its success • 4. Some prominent business or financial connec tion of the principal parties.
Few small concerns are successfully promoted un less one or more of these elements is present. A few instances of actual companies located in a small city in Pennsylvania, will make these points clearer.