A $200,000 tool company was formed and its stock sold locally on the strength of new inventions and the skill of two experienced tool makers.
A real estate company was formed to sell lots and construct houses in a new subdivision opened to pro vide homes for employes of the new shops of the Pennsylvania General Electric Company. This capi talized a local opportunity.
A new $100,000 lithograph company was financed by local capital, largely by former employees of a man who had previously built up in the same city a lithograph business which had sold for nearly three quarters of a million dollars. Having lost his money in another venture, this man's experience and high standing in the business were successfully, utilized to build up this new company.
A small manufacturing company was successfully financed by the son of a prominent local citizen. Father's influence having sold the stock and secured outrageously ample bank accommodations, the son, who did not believe in work, proceeded to run the business into the ground. What father did next is another lesson in finance, recounted later.
4. Sources of funds; bank for small incorporated enterprises may be drawn from any one or more of seven principal sources: Bank loans Trade credit Loans on collateral Sale of stock to local capitalists Sale of stock to small local investors Sale of stock to employes Sale of stock to customers.
Some of these sources are not very frequently em ployed. The backbone of the financial plan, as in the case of larger companies, is the sale of capital stock, since trade credit or other forms of borrowing cannot usually be utilized without first having some paid-in capital.
Unless the new business is founded upon some prominent financial connection or is backed by the indorsement of local capitalists, the banks cannot usu ally be depended upon for much working capital. Knowing how hazardous the small new enterprise is, financial institutions hesitate to loan to it until a sound basis of earning power has been established. In its relation to the banks, the new corporation is at a greater disadvantage than either the sole proprietor or the partnership. The delegated and changing management of the corporation, and the limited lia bility of stockholders, weaken the credit risk. A
dozen small home owners, associated in a small enter prise as partners, might have no difficulty in borrow ing on their joint note whereas, the same individuals, composing a small corporation, would receive but scanty recognition.
Furthermore, banks are always fearful lest funds which they loan to new enterprises, be used for per manent investment and not in self-liquidating trans actions. The capital requirements are usually under estimated in the financial plan, in fact are rarely fully known before the second year. Meanwhile, the treas urer is under the painful necessity of endeavoring to "explain" delays to suspicious trade creditors and to convince the banks that they should advance funds to finance "the rush of new business" and meet "purely temporary" requirements. If the banker succumbs to this frantic appeal, often honestly but mistakenly made, he will probably find later that his funds have been merged inseparably with the permanent capital of the business and cannot be repaid conveniently. New companies are chronically short of capital. Hence the reluctance of bankers loan to them.
5. Sources of funds; trade credit.—Trade cred itors, altho cautious with new concerns, may usually be counted upon to extend assistance. Occasionally, when a connection appears to be a promising one, trade creditors will even take a small amount of stock or a few bonds in part payment for the first invoices. More often, they are found willing to extend addi tional time upon the first invoices until the new con cern can get into operation. Frequently notes are taken, due serially in small amounts and extending settlement over many months. The writer remem bers one instance in which a small lithograph com pany purchased its first large press by signing an en tire book of promissory notes, due at the rate of $25 a week and extending over several years. The earn ings of this press more than paid the notes and, within twelve years, the concern was one of the largest and most successful lithograph houses in the United States.