When this form of financing is adopted a commission or some form of bonus must often be paid to secure the money needed, interest must always be paid on the loan, and the borrowed money itself must, of course, sooner or later be repaid. If, however, the enterprise is really successful, the interest payments, the indebtedness, and any commissions paid are easily carried and cleared off in due time, and the whole amount given in interest and commissions for the use of the money is small compared with the profits of the business. It is also small compared with the interest in the enterprise that must be given to an associate if the needed money is secured in this way.

Dangers of Borrowed Capital

If, on the other hand, an enterprise ends in failure, the borrowing plan is disastrous-far more so than if the money were secured through a partner, or through the sale of stock, if the undertaking be incorporated, as an investment in the business. For this reason many people, well able to borrow money, prefer to obtain part or all of the needed funds for a new undertaking as an investment in the enterprise rather than as a loan. In this case they divide the risk. While not looking for failure, they recognize its possibility in any new undertaking, no matter how good. Therefore they prefer to diminish their own interest in the enterprise and in the future profits, rather than to take chances of a disastrous loss in case of failure.

Also, while the interest on the money borrowed for the development of a sound enterprise is negligible, there are definite risks and at times very real dangers connected with such financing. Loans and interest payments have a tendency to become due at inconvenient times, or if left to run after they become due, may be called unexpectedly. Then, if not met, they may be used to the serious embarrassment of the enterprise.

As a matter of fact loans are not infrequently made to owners of promising enterprises, with the definite hope or expectation

that they will not be able to repay the amount when due. In such a case the parties making the loan promptly foreclose andas the owner is already in a difficult place financially and unable to protect his interests-buy in the enterprise at a tithe of its real value. The title to many a valuable undertaking has passed never to return-in this way. In some financial circles to secure properties by foreclosure at bargain prices is regarded as entirely legitimate and even clever business.

This fact that borrowed money may and frequently does give a basis for foreclosure with the loss of the whole enterprise, should be borne in mind when loans are made for the development of new enterprises, and a line of retreat always be kept open. Extensions may be provided for in advance, or sufficient time be obtained to permit the enterprise to pay out, or perhaps provision may be made to meet the loan from other sources if the necessity should arise.

Financing by Means of Credit

A common variation of the borrowing plan is the use of credit to start the new enterprise, which in this case is usually some line of established business. As in the borrowing plan, this requires good personal standing, and usually some little cash capital to serve as the basis of credit. A young man, for instance, has clerked in a hardware store until he has mastered the details of the business, has gained a reputation for fair business ability and, more particularly, reliability, and usually has saved a certain amount of money. He then determines to start for himself. Sometimes his entire stock-in-trade is purchased on credit, but more commonly the young merchant will make a first payment, securing credit from the wholesalers for the balance. The remainder of his money is used for the purchase of equipment, for rent, advertising, and other preliminary expenses. He then depends on the proceeds of the business to meet his maturing obligations for goods, and to carry the business. More goods must

usually be bought on credit, but if the new business is prosperous, the amount of credit will be gradually cut down, or the amounts purchased will be increased without increasing the credit margin proportionately. The method requires real ability—for selfdenial as well as for the conduct of the business—and a capacity for hard work, but it is entirely practicable and a common method of starting new businesses.

In speculative enterprises the credit method of financing is rarely available, unless the owners of the enterprise are able to put in a considerable amount of money themselves. In such case they should be able to secure credit for a material balance. For instance, if the undertaking is the development of a mine, and the owner has already sunk and timbered his shafts, he should, if the mine offers any real, demonstrable basis of confidence, be able to secure credit for part, at least, of the equipment needed. Here the work already done and the money already invested and to be invested furnishes the basis for credit. Even in this case the personal standing of the party asking credit must usually be thoroughly good if any material amount of money is involved.

Moneyed Partners

Another method of financing frequently practiced is that of taking in moneyed partners. This is merely selling an interest in the enterprise, and does not differ in principle from the usual plan of securing money as an investment in the enterpriseusually in the form of stock subscriptions. It has, however, some special advantages and disadvantages of its own due mainly to the peculiarities of the partnership relation. When any such arrangement is under consideration, it must always be borne in mind that a partner has all the rights in the business that the original owner himself has. If he sees fit, he can interfere in the management of the undertaking, run it into debt, or make trouble in many other ways.

All this is of no great importance if the partner is known to be

the right kind of man-one who will shoulder his part of any business burdens to be borne, and who can be depended upon to co-operate when needed and to do nothing when not needed. If, however, there is any doubt as to the character or the disposition of the prospective associate, the close alliance of a partnership should be avoidedpreferably by the use of the corporate form of organization.

Another point to be considered when a financing partner is to be taken into an enterprise, is the fact that should the enterprise fail to reach the point of self-support before its funds are exhausted-a contingency that frequently occurs and the moneyed partner cannot or will not supply further funds, the conditions are most unfavorable for securing them elsewhere. In a corporation, stock may be reserved for just such emergencies, or perhaps a special issue of preferred stock or bonds may be floated. In a partnership, on the contrary, there is usually no reserve of any kind that can be offered outsiders for additional money. If more money is needed, and the partners cannot supply the need, each partner should, of course, sacrifice a pro rata share of his interest in the business for the purpose of securing outside assistance. In practice, however, it not uncommonly happens that the "financing" partner declines either to increase his investment or to sacrifice his interest for the purpose of obtaining money from others.

Sometimes the moneyed partner refuses because he thinks that the management of the business has been faulty and that, therefore, the "working" partner, who is responsibile for this, should bear the burden of securing additional funds. At other times he declines from purely selfish reasons, thinking that the working partner's interests are sufficiently large to force him. somehow to pull the enterprise out of its difficulties. On rare occasions help is refused because the financing partner hopes that the embarrassment of the business will work to his own interests, possibly enabling him to acquire the whole enterprise for a fraction of its real value.

In any such case the working partner must do the best he can. He may be able to borrow, or he may have to make very material sacrifices of his own interests to obtain the needed funds. If the enterprise is successful, he will be able to recoup himself. It is, however, far better to anticipate the possible need of more funds and provide for them in advance by suitable provision in the partnership agreement. It is better still to incorporate the undertaking and thereby avoid the sometimes disconcerting possibilities and responsibilities of the partnership.

Usual Plan of Financing

The usual and, speaking generally, the best plan of financing an enterprise is to incorporate it and to sell its stock or other securities. The corporation offers advantages, both for the owner of the enterprise and for the investor, found in no other system of business organization-so much so that there should be strong reasons in its favor to justify the formation of a partnership to conduct any enterprise of fair size. The use of the corporate system in connection with the financing of enterprises is discussed in detail in later chapters.3

3 Volume II, "The Organization."