CHAPTER III

METHODS OF FINANCING

The Gradual Development Method

The usual method of financing an enterprise and the one discussed at length in the present volumes is that of interesting men who have money. There are, of course, other methods which may be followed on occasion. The simplest of these is when the owner or promoter invests his own money in his enterprise. Much of the difficulty of financing is avoided by the adoption of this plan, but unfortunately it is not always practicable.

Next to this method, comes the safe and cautious plan of gradual development-the actual up-building of the enterprise, first from whatever small funds are available, then from the returns of the enterprise itself, eked out perhaps by funds secured from some other source, until the infant enterprise becomes a selfsustaining and profitable undertaking.

The method of gradual development and particularly of selfdevelopment from the profits of the enterprise itself is, of course, absolutely inapplicable to the up-building of those very numerous undertakings where large purchases, investments, or installations are an essential preliminary to operation. Also there are cases in which the method is entirely inadvisable because of the slowness of the procedure as in the development of a patent with but a limited period to run, or in the up-building of a business where competition can be overcome or prevented only by quick and brilliant success, and the many other enterprises in which "time is the essence" of the undertaking.

Where, however, the "natural growth" plan of development is applicable, it is ideal. It avoids the risks, the mistakes, the expense of costly experiments, and the premature development more

or less characteristic of all fully financed enterprises in which the managers are inexperienced or where the nature of the business is new and not fully understood. It is the step-by-step method. A man developing an enterprise in this way begins on a small scale, and his expenditures are necessarily limited. This is pleasantly pictured by a recent writer:

There is a manufacturing company now a prosperous leader in its field that once had "its day of small things" when it had to struggle for its place in the world. It was owned by two partners both actively at work. The senior was in those early days content with plain brick walls and cheap second-hand furniture in his office. His associate used to joke with him claiming to have a more expensive outfit because the junior partner's desk cost seven dollars and the other but six dollars. There were no rugs or carpets. Most of the clerical work was done by the two partners."

I

Under such circumstances, experiments are, as a matter of necessity, cautious, carefully watched, small in cost, and quick in results-be they good or bad. If good, the particular line of effort is pushed; if bad, it is abandoned without serious loss of either time or money. In either case the facts of the particular experiment are determined in the course, perhaps, of a few days or weeks at the cost of a few dollars; while in a more pretentious venture the same results would be demonstrated no more satisfactorily at a cost of hundreds or thousands of dollars, and months or even years of time.

During the period of early growth the business itself becomes for its owner a school of business administration in which he goes through a course of thorough training a course which gives him a grasp of the business and an understanding and control of its every detail that could in no other way be acquired so thoroughly and satisfactorily. As a result he frequently attains a degree of success in his own business and in the business world hardly pos

I Redfield, "The New Industrial Day."

sible under any other system of development. The enterprise grows into prosperity, and when this point is reached is so firmly rooted and grounded on all sides that it is proof against every competition and the severest industrial storms.

Objections to the Plan of Self-Development

Developing an enterprise from within may be said to be the primitive and natural method. Examples of its successful application date from long before the time of Dick Whittington and his cat, are numerous and well known, and supply the basis for many a well-meant homily of more or less doubtful commercial soundness on the wisdom of making haste slowly.

On the other hand, there are, as intimated, serious objections to the plan. Any business undertaking involves risk and these risks are intensified when capital is severely limited. The danger from this source is stated by a well-known financial writer as follows:2

One of the great weaknesses of American business life is the starting of business on insufficient capital. Two carpenters and builders who have saved a few hundred dollars decide to become their own bosses, and by some scheming get a piece of land. They persuade friends to agree to lend them a certain amount on the building when completed, and lay their plans carefully and figure closely. Something goes wrong; the weather is bad; the work is delayed; strikes and liens not reckoned with interfere; the result-failure. They lack capital; and lacking it, lose out. They cannot carry their loan.

The author draws a true picture. The possibilities of the cloth should always be carefully considered before the coat is cut -or attempted to be cut. The spirit behind the attempt of the unlucky builders is, however, entirely commendable, is distinctly American, and the daring and ambition that led the builders to make their unsuccessful attempt will lead them to try and try again until with better laid plans and more favorable conditions they win through to success.

* Albert Atwood, "Industrial Handbook."

A Successful Self-Development Venture

A striking and pleasing illustration of the self-development plan is to be found in the Mary Elizabeth candy shops. Some fifteen years ago, Mary Elizabeth Evans, then a girl of sixteen, with her widowed mother and three younger children, was living on a farm near Syracuse, N. Y. The death of their grandfather had thrown them on their own resources. The problem of money for the purchase of clothes, for education, and the many other requirements of a growing family, was very difficult. The task of solving the problem devolved on Mary Elizabeth.

To meet this situation, Mary Elizabeth possessed two valuable personal qualifications, neither as yet recognized by her as a business asset. She was a born candy-maker and a born executive. In addition, she was desperately anxious to increase the family income. But what to do she did not know. Her attitude was one of "watchful waiting."

Making a Start

Her opportunity-though as yet unrecognized-came in the form of a party given by an old family friend in Syracuse. This friend, knowing that the Evans children often made candy at home, suggested to Mary Elizabeth that she bring some to the party. So happy as most children are to make candy-Mary Elizabeth readily agreed. Then, the thrilling possibility occurred to her that this might be the longed for "way out." The candy was made with anxious care, packed in a neat box, and labeled in her own handwriting with the now familiar legend, "Mary Elizabeth's Candy." The candy made a distinct hit. It looked good, it tasted good. Not only was it delicious but it was different from anything the guests had tasted before. Inquiries soon drew from the willing hostess its story, together with an opinion that orders would be gladly received. The guests were enthusiastic, and practically every one of them put in an order for a weekly box of Mary Elizabeth's candy.

This was the starting point of the Mary Elizabeth business. The candy was made at home and delivered C.O.D. by the children. The little trade thus established began to grow, but slowly because of the difficulty of making new connections. Possible patrons could not be expected to employ detectives to ferret out the source of supply. Or, even if they knew where the candy came from, it was difficult for them to place orders, and Mary Elizabeth soon saw that some more effective method of distribution was essential if the business was to be really worth while.

The "Help Yourself" Booth

At this critical time Mary Elizabeth learned that a booth suitable for the sale of candy could be rented in the arcade of the University Building in Syracuse, a central and desirable location. The rental was within reach and the opening attractive, but how was attendance to be provided for? Mary Elizabeth herself had the candy-making to look after; the other children were too young; a paid attendant was beyond their means. An implicit trust in human nature finally solved the problem. The customers must serve themselves.

The booth was rented, neatly fitted up, and stocked with an attractive display of candy, every box plainly labeled with its price. An open cash-box was provided and suitable signs notified the passers-by to help themselves, and put the money in the cash-box. Change to the amount of $2 was placed in the box, and the new venture was launched.

The success of the "Help Yourself" booth was immediate. The excellence of the candy, the attractiveness of the display, the entire novelty of its method, brought a liberal and increasing patronage. The daily contents of the cash-box sometimes ran as high as $15. Customers, neighboring tenants, and even the newsboys who sold papers in the arcade, vied with one another in the protection of Mary Elizabeth's property and the promotion of her business.