Music Trade Review

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APRIL 7, 1923
THE MUSIC TRADE REVIEW
Financing a Retail Piano Business
The Fifth of a Series of Articles on the Problems oi Financing That Confront the Retail Piano Dealer—The
Three Elements Necessary to Maintain the Collateral Value of Outstanding Paper—The
Relation of a Firm's General Policies and Its Questions of Financing
There is one point in the retail dealer's financ-
ing problems which thus far has been but
slightly touched upon in this series of articles
but which is fundamental in their consideration.
That is the collateral value of his paper. A
dealer's ability to obtain cash at a reasonable
expense depends directly upon the tangible
security back of a retail piano sales contract.
Good piano paper is a security that commands
a good market at almost all times; on the other
hand, the element of risk is too great in piano
paper that is not properly backed for those who
loan cash on it not to exact a heavy rate to
compensate them. The greater the risk the
greater the cost of obtaining cash holds good
in piano paper just as it does in every other
form of security.
Elements in Collateral Value
The elements which make up the collateral
value of piano paper are, first, the standing of
the customer whose name is signed to it; second,
the duration of the terms it is written for, and
third, the piano which it represents. Broadly
speaking, these constitute a credit problem, a
sales problem and a buying problem. Each of
them is an essential factor, so it can be easily
seen how the solution of the financing question
depends largely on the general policies in force
in the retail piano house.
The tendency to sell indiscriminately is found
with many retail piano merchants. The type of
mind which considers a sale a sale, no matter
the standing of the customer, is unfortunately
all too frequent. It is a policy which leads
directly to a heavy percentage of past due and a
more than necessary percentage of reposses-
sions. Roth of these are heavily contributory to
lowering the general worth of a dealer's out-
standing paper. And what is not usually real-
ized is the fact that this value is usually con-
sidered in general, and a dealer's good paper is
tainted by his poor paper. In other words, a
dealer who sells indiscriminately finds that he
experiences difficulty in cashing even the best
of his piano leases for all his paper is suspect.
A further problem which presents itself under
these conditions is that when he must go into
the market for cash on his paper he can only
use selected leases, the best in his possession,
with the result that the collections from the
poorer stuff are what he must depend upon for
meeting his overheads, a condition which wrecks
the stability of his business.
Discrimination in selling leads to an evenness
of worth in outstanding paper and provides a
margin of safety, which not only lowers the
cost of obtaining cash but at the same time
assures a dealer of steadiness in collections to
meet his current expenses.
Time and Collateral Value
The second element in the worth of piano
paper is the average length of time. Long-time
paper, we all know, cannot be cashed with the
same facility and minimum of expense as short-
time paper. But the increased expense is not
the main difficulty. What is even more impor-
tant is the fact that long-time paper is much
more uncertain. It presents collection difficul-
ties which not only increase the expense of
handling it, but raises the average of past due,
the criterion of piano paper's value. There have
been cases of dealers whose percentages of past
due were as high as 10, 12 and even 15 per cent,
not due in these cases to poor collection
methods, but largely to the fact that the average
of terms was altogether too high. And this
paper was being handled at a collection over-
head that more than took up the interest of
the outstanding balances.
In paying out a long-term lease the natural
growing weariness of the customer must be
considered. The element of novelty and interest
loses its power to a certain degree. The piano
becomes nothing more or less than a reminder
that every month a certain payment must be
met. Psycho'Jogjcally the owner comes to think
that he has paid-much more than the instrument
is worth, and strenuous methods usually have
to be resorted to before the payments are made
in their entirety. This attitude of constant op-
position operates continually to lower the value
of the paper, both through raising the past due
and through increasing the percentage of re-
possessions.
Terms are primarily a sales problem. The
sales force which is instructed to work con-
stantly for minimum terms usually finds that it
does not have to resort to the maximum terms
to close a sale save in rare instances, and it is
usually ready to make money by losing a sale
when the prospect insists upon an extension be-
yond that last figure. It is not too much to say
that the retail house to-day that sells beyond
a maximum of thirty-six months has a constant
financing problem before it, for because of that
policy it has placed beyond its reach the ordi-
nary methods of obtaining cash which arc avail-
able to the average piano dealer who sells upon
•the proper terms.
Name Value and Collateral Value
The third clement is the name value of the
piano which stands behind the paper. To make
the importance of this clearer, it should be re-
membered that the piano is the only tangible
asset in the entire transaction, and that is in
the hands of the person who has signed his
name to a promise to pay along certain lines.
1 he dealer takes this promise to pay and ob-
tains cash upon it. Its ultimate holder has a
piece of paper, just as the dealer had.
Every piano man knows that the paper repre-
senting the sale of a name-value piano is of
better value than the paper representing the
sale of a stencil. In the first place the name-
value instrument has a certain stabilized value
set by the name it carries and the origin which
that name indicates. The stencil, however, pos-
sesses none of this. It has a selling value only
to the amount that the dealer can obtain for it.
It is largely a power that depends upon the
bargaining power of the dealer. This naturally
is represented in the paper, and banker and dis-
count company both hesitate to handle such
leases, for they have no guide to their ultimate
worth. This element plays a much larger part
in the dealer's financing problems than is gen-
erally considered and is one of the strongest
of the arguments against the stencil as opposed
to name-value instrument.
Nothing should be too much for the average
dealer to maintain the cleanness of his paper and
therefore its value, for this is the first step in
proper financing. A majority of the important
failures which have taken place in the retail
piano trade have been due to a neglect of this
important consideration. Clean piano paper is
one of the best securities available; poor paper
involves such a large element of risk that in
many cases it is too dangerous for the dealer
to carry himself. What chance then has he of
obtaining cash for it?
The dealer who maintains his collateral value,
which, after all, is his invested capital, rarely
has trouble in financing and in financing at a
reasonable expense. He can always obtain the
cash necessary to meet his maturities or to
assume the position of a cash buyer, and he is
sure that his current collections to meet his
current expenses will be sufficient. On the other
hand, the dealer who considers a sale a sale and
who pays small heed to the inherent value of
the paper that sale creates is constantly con-
fronted with problems that not only diminish
his net profit, sometimes to a vanishing point,
but always keep him on the brink of failure.
The Cardinal Points
In short, the solution of the dealer's financing
problems rests on these cardinal points: Main-
tenance of collateral value of outstanding paper;
increasing his capital turn-over through obtain-
ing cash on this security for direct use in his
business; keeping the expense of this cash low
through meeting his maturities, and retaining
sufficient paper to meet his current liabilities
through the collections thereon.
If these points are constantly carried in mind
the dealer has no financing problem. He then
can devote all his energies to selling. But the
trouble is too often he permits the gross vol-
ume of business to dazzle him to such an extent
that he is unable to see his net profit at all,
and when he comes out of it he usually cannot
find the net profit because it does not exist and
therefore he does not receive it.
Proper financing is the basis of every success-
ful retail piano business, but it is impossible to.
achieve it save when the general policies of
that house are in accord with the fundamental
principles of good merchandising as they exist
in the retail trade.
BAKER REPORTS GOOD YEAR
WATERTOWN, N. Y., April 2.—The Baker Music
House, Inc., of Albany, paid its twenty-first con-
secutive quarterly dividend of two per cent on
preferred stock and $1 a share on common stock
on March 15 to stockholders of record March 1.
The business of the company shows an increase
of $44,000 for the first two months of 1923 over
a similar period last year.
CHARACTER
"Admirable Quality, Acknowledged Reputation"
—(Standard Dictionary)
PIANOS
Manufactured by
Smith, Barnes
and:
Strohber Co.
have for 33 years
justified their right
to be called
Pianos of Character
FACTORIES
North Milwaukee, Wis.
Chicago, III.
OFFICE
1872 Clybourn Avenue
Chicago, HI.