Everyone is familiar with the way in which whole sale houses finance new retail concerns by granting large credit, extending often over a period of six months or a year. In such cases, complete financial statements are usually required, and the retailer's pur chases are confined to one or two large jobbers, who watch his progress very carefully.
A brokerage company in Toronto, Canada, with a paid in capital of $50,000, has been able to accumulate assets exceeding $150,000 by purchasing on long term trade acceptances, and selling on the thirty and sixty-days' open account and acceptance basis.
Construction companies, machinery supply houses, equipment concerns, and others of similar nature, fre quently assist the financing of small companies by granting liberal time on notes and trade acceptances. Long term notes are frequent in the purchase of printer's machinery and plumbing supplies, and many successful concerns could not have begun business without this assistance. It is a legitimate source of funds for the small new corporation, but a very risky one. It is much better financing, when possible, to sell enough stock and bonds in the beginning to pro vide the full equipment and permanent working cap ital, without depending on banks or trade creditors.
As the business grows, it will develop trade credit and use it to meet growing capital requirements.
6. Selling stock to customers.—Customers may contribute in two ways to the financing of a new small company. One is by the purchase of stock, which is rare and not at all to be counted upon. The other is by placing orders for future delivery, which may be used in turn as a basis for obtaining bank or trade credit. This latter method is frequent. An unusual case will illustrate the first.
Two men in New York City, possessing an exten sive knowledge of selling and a new process for pro ducing after-dinner confections, determined to finance a new $50,000 company on their customers' capital. Very little equipment was needed, as the product con sisted of an assortment of attractive five cent pack ages, made in one shape and from one substance, but possessing different flavors and labels. The selling expense, however, would normally be very high, and particularly the cost of introducing the brand.
With a few hundred dollars, these men first con tracted for a small quantity of their product from a reputable manufacturer, who supplied the product, labels, cartons and all, at a stated contract price.
Then a small, but attractive, prospectus was issued in pamphlet form, describing in glowing terms the ad vantages of the product and the splendid business which the new company would doubtless develop. The authorized capitalization was $500,000, altho the promoters only expected to raise $50,000 in cash.
With the samples and prospectus in hand, the two men individually canvassed a portion of the retail trade in New York City. Their proposition to the retailer was that he should place with them a contract for the confection equal to his full annual require ments, at the usual prices prevailing for similar con fections, which were clearly no better than the new product. As a consideration for doing so and for ordering by mail as required, thus avoiding the ex pense to the seller of frequent sales calls, the retailer was to get a full-paid certificate of eight per cent pre ferred stock, to the par value of one dollar, with each ten-dollar carton of goods ordered, in addition to the usual quantity discount on larger orders. The pre ferred stock was to be delivered on payment of the invoice. All orders were taken for future delivery, with the exception of the first ten-dollar carton, which was delivered then and there upon an order calling for payment within ten days.
It will be noted that under this plan the retailer was paying no more than usual for his goods, but was re ceiving in addition a ten per cent bonus in preferred stock. This made him a stockholder in the new com pany and presumably a regular customer. On the other hand, the new company was giving away noth ing, since the preferred stock delivered to retailers represented merely the amount which would other wise have been paid to retail salesmen, or advertisers, to market the product. The usual profit would ac crue to the company from the manufacture and sale of the goods. The plan was based upon a clever device to reduce the expense of selling repeat orders, the saving being refunded to the purchaser in capital stock to insure his continued support. The issue of stock under these circumstances was equivalent to sell ing it for cash and then using the capital to advertise and sell the product of the company.