Music Trade Review

Music Trade Review -- © mbsi.org, arcade-museum.com -- digitized with support from namm.org
FEBRUARY 24, 1923
THE
MUSIC TRADE
REVIEW
Financing a Retail Piano Business
The First of a Series of Articles on the Financing Problems Which Confront the Retail Piano Merchants—
The Three Alternative Methods of Handling Their Retail Paper in Order to Meet Current Obli-
gations—"Frozen Capital" and the Best Method of Turning
It Over Profitably
The retail piano merchant, because of the in-
stalment nature of the large percentage of his
sales, confronts problems which he has not suc-
ceeded in solving as well as have merchants
in other lines of retail selling whose business
is as largely of an instalment nature. Especially
is this true of the smaller piano dealer, whose
capital investment is limited and who, as a con-
sequence, often finds himself in a position where
the income on outstanding leases is insufficient
to meet his current obligations. It is this situa-
tion that has caused the poor financing for
which the retail piano trade has been notable and
which has limited its capital turnover with a
consequent steady reduction in its net profit.
The worst of this condition is that most of
it is unnecessary. The dealer who finances in
a manner that gives him no liquid assets, of his
own volition limits his freedom of action so
that, in many cases, he is no more than an
agent, assuming all financial responsibility and
receiving in return a sum that is practically a
salary. He cannot expand his business; he
cannot handle his buying and his selling prop-
erly; he cannot even call himself his own
master, for his tied-up capital controls him and
its influence permeates his every act.
Financing Through the Banks
What is tlie dealer of this type to do in
financing his business? The ordinary merchant
resorts to his bank and finances through the
medium of bank loans. By this means he not
only has the use of his own invested capital but,
in many cases, two to three times that sum.
He can expand his business and turn his capital
over more rapidly as a result. The consequence
is a greater net profit.
Unfortuntely, however, in most cases this
means is not at the disposal of the retail piano
dealer. His assets, to a large extent, are piano
leases, than which basically there is no better
form of collateral, but banks are not usually
organized to make loans on such security. And
it must be admitted the piano dealer who offers
them has still to contend with the blow that
long terms and poor collection methods gave
this form of paper in the past. As a result,
if he can obtain a loan upon it, it is small com-
pared with the face valve of what he offers.
Value of Piano Paper
It may be asked why the dealer does not
operate by means of ordinary commercial loans.
To do this he must maintain a heavy current
balance which could be more profitably invested
in his business and the difference which he
could obtain on that amount as capital invest-
ment and the interest the bank pays usually
make such a loan an unfavorable investment.
Here, again, as his worth is largely expressed
in retail leases, the line of credit the bank offers
is usually curtailed and bears no relation to
that offered to other merchants whose sales
are largely made on a cash basis.
It should be remembered that in all this there
are no aspersions cast on the security value of
piano paper. But facts must be faced—banks
do not care for loans based on such collateral
as a general rule. They are rarely organized
to handle them properly and in some cases are
not permitted to do so. If they accommodate
the dealer they arc likely to call upon him to
reduce his credit line at any time and with
short notice—a situation that many a dealer,
perfectly solvent, has met and overcome only
with great difficulty. This is not the case with
the piano trade alone; it is the same with all
lines of merchandise where the instalment
method of selling prevails. The bankers' atti-
ture towards piano paper is well summed up
in the statement made by one of them recently,
when he declared that he was in business to
make loans and not to make two to three-year
investments.
Financing by the Manufacturers
Through these reasons the average dealer can-
not finance through his bank. What he ordi-
narily does is to buy his instrument on long
terms, depending on the manufacturers to
finance him over the period represented in the
retail leases. The manufacturer accepts his
notes, either unsecured or secured by retail
leases, which he, in turn, adding his own name,
is compelled to discount in order to meet his
manufacturing overhead, including his payroll
that must be paixl in cash. When the manufac-
turer acts as a banker as well as a source of
stock supply the dealer loses his freedom of
action and in the long run pays dearly for the
accommodation he receives. For the interest
on the interlocking transactions steadily ac-
cumulates—interest is paid on the same sum
three or four times over—until it has been esti-
mated that the wholesale cost of a piano some-
times embodies as much as 20 per cent interest
charges. This is an unnecessary expense,
though few in the trade have ever seemed to
consider it as such, and in these days of high
prices it is one which the industry can no
longer afford to carry, if it is to expand in line
with its potential markets.
This condition is constantly accentuated by
the tendency there always is to fail to meet
this paper at maturity and thus renew it. A
renewal carries in its train a rediscount and its
attendant costs, both of the dealers' paper, and
in many cases of the manufacturers' own paper
as well. This strings on endlessly, constantly
accumulating interest and constantly increasing
costs. It is the most expensive of all ways of
financing, and the one which does the greatest
injury to all concerned, dealer and manufacturer
as well.
Cashing in Retail Leases
The dealer, to finance his business properly,
must use his retail leases. That goes without
saying. He cannot afford to carry them in
his safe, for they represent a good proportion
of his capital investment and practically all his
future profits. A business financed on this basis
requires too much capital and offers a very
small return on the investment. Even if the
dealer is able to do this he is losing money by
the transaction. It is here the element of
"frozen capital" enters and that is something
no business can afford, be it as great as the
United States Steel Corp. or a little piano ware-
room on a side street.
But if the banks are not available or else too
expensive with their hidden costs, if the method
of using the manufacturer as a banker, with its
still greater 'costs and all its attendant evils, is
unreasonably costly, and if the means of carry-
ing the leases in the safe diminishes the capital
turnover of the business to such an extent that
profits are lost despite the theoretical interest
such paper usually carries and thus makes if
perhaps the most expensive of all methods,
what is the dealer to do?
There remains a third method—the discount
company. Now, as a matter of fact, there is a
prejudice against discount companies among a
great many retail piano dealers. Yet they have
played a large part in building up some of the
most successful retail ventures in the trade and
in other lines of selling, where instalment
methods make conditions very similar to those
existing in the piano trade, they are utilized
universally by the dealers.
1 he discount company is an organization
formed primarily to handle instalment paper.
In the automobile field, the furniture field, the
vacuum cleaner field, in practically all fields
where such financing is a necessity, it is used
by the dealers and gives them an opportunity to
utilize fully the capital in their instalment paper
in their business, thus increasing their turnover
and bringing them a decent profit on their in-
vestment.
Fundamentally its methods are simple. It
loans the dealer money on the security of leases.
The loan is paid back during the time of the
lease as the collections come in from the cus-
tomer. The discount and interest costs are com-
paratively low compared with the accommoda-
tion offered. It gives the dealer cash to buy
his goods and it gives it to him at less than.a
prohibitive cost. It makes him his own master
in his own warerooms, and, properly used, it
gives him a decent return on his labor responsi-
bility and investment.
Some years ago a certain piano man, well
known in the trade, started business in one of
the strongest competitive cities in the country.
His capital was small and during the whole term
of his active connection with his enterprise he
used the discount companies for financing.
To-day that business is known as one of the
most outstanding successes in the retail trade
and proper use of the discount company's ac-
commodations was the basis of that success.
His experience is a standing refutation of the
ideas of those dealers who glibly proclaim they
do not believe in that method of financing.
The Nerve Center of the Warerooms
How did he do it? The answer is simple.
During all his career he met his maturities by
realizing that the collection department is the
nerve center of any retail piano warerooms.
Collecting from his customers closely, and that
can be done without prejudicing them against
the house, he used those returns to meet his
payments on the paper he had discounted, and
the cash from the discounts to buy pianos and
players for cash, thus securing rock-bottom
prices and the best of accommodations from
the manufacturers. For a cash buyer in the
piano industry is entitled to special attention
and gets it.
In a series of articles to be published in the
future The Review will take up this method of
financing in detail, analyzing actual experiences
within the trade and giving the actual figures
of transactions under it. For, if the piano trade
and industry is to be stabilized and is to expand
its basis, financing must be stabilized and the
heavy costs represented in it at the present
time must be lowered to a reasonable per-
centage of the ultimate costs of the instruments.
NEW HOME FOR ELLAS MARX CO.
Well-known Sacramento Music House Arranges
to Occupy Larger Quarters
SACRAMENTO, CAI.., February 16.—The Ellas Marx.
Music Co., at present located at 825 J street,
this city, lias announced that it will move to,
new and larger warerooms in the Native Sons'
Building, 1027-31 J street, on or about April 1.
The new building is of steel and concrete con-
struction and will provide the Marx Music Co.
with floor space of 15,000 square feet, devoted
exclusively to pianos, player-pianos and talking
machines. At the present time .the company is
conducting a removal sale for the purpose of
cleaning out stocks before occupying its new
home.