Music Trade Review

Music Trade Review -- © mbsi.org, arcade-museum.com -- digitized with support from namm.org
MARCH 3,
1923
THE
MUSIC
TRADE
REVIEW
Financing a Retail Piano Business
The Second of a Series of Articles on the Financing Problems That Confront the Retail Piano Merchants—
The Relation of the Discount Company to the Turnover of the Retail Dealer's Capital—
Rigid vs. Self-liquidating Loans—Making Dealers Better Collectors
All piano men who have ever given the ques-
tion of retail piano financing any serious con-
sideration arc agreed that the custom of the
manufacturer financing the dealer through ac-
cepting the latter's notes and then granting
the requests for renewals which usually follow
is probably the most outstanding evil with
which the industry has to contend. Yet, despite
this agreement, it has been followed for years,
with the result that its consideration has even
taken a humorous turn, giving rise to such
stories as the one told about a piano man, now
no longer with the living, who, when the eighty-
eight note player made its advent, exclaimed:
"My God, they used to give us four, five or
ten notes to pay their bills—now they're going
to give us eighty-eight!"
An Expensive Luxury
This sort of a joke is an expensive luxury.
What it has cost the industry in actual cash is
hard to discover—the interest alone, it is esti-
mated with a basis of authority, ranges as high
as 20 per cent in the cost of the finished in-
strument. This burden has been an unnecessary
one, yet, with the piano man's customary atti-
tude, it has been permitted to continue. Tradi-
tion, here, as in so many other fields in the
industry, has acted as a drag on progress.
When, after the armistice, a large part of the
frozen credits of the industry were liquidated
and outstanding paper turned into cash, the
general cry went up that the opportunity was
before it to reform and the declaration was
made that the old methods would never be
permitted to come into being again.. But, de-
spite these declarations of intention, the swing
has been steadily back since that time, accel-
erated with the period of depression that inter-
vened, until to-day, while conditions may not
be as bad as they have been in the past, they
are much worse than is generally considered.
That is the condition which confronts the
industry and that is why every movement for
its betterment must start with the consideration
of retail financing. For the basis of its develop-
ment is in the hands of the men who sell the
products of its factories, and theirs is the re-
sponsibility for what may come to it in the
future.
Tf they continue to increase costs
through unnecessarily heavy interest charges,
if they continue to tie up their capital in non-
liquid assets through endeavoring to carry their
retail paper themselves, if finally they constantly
lower their capital turnover through a combina-
tion of these two methods, it cannot be ex-
pected that the industry's volume of business
will be commensurate with the potentialities of
the market which the country offers it. This
is not the case to-day, nor will it be until the
capital investment of the industry is liquid and
utilized to its extreme degree.
Supplementing the Bank's Facilities
Tn the first article of this series, which was
published in the last issue of The Review, the
three usual methods of retail financing were
taken up in some detail. Therein were pointed
out the difficulties that confront the dealer in
dealing with the average commercial bank. The
attitude which the bank assumes towards the
piano dealer is inherent in the nature of its
organization and not due to any deliberate as-
sumption on its part. A bank, especially a com-
mercial bank, is organized primarily to take
care of short-term loans and piano paper does
not come under that category. It is under con-
stant and continuous obligations to its deposi-
tors, hence it must keep its own assets liquid
so that they can be turned into cash whenever
needed. To loan money on collateral of twenty-
iour months' duration, for instance, or to dis-
count it, assumes from the banker's viewpoint
all the marks of an investment and none of
those of a loan. Hence, such long-term loans
being beyond the facilities of the banker, it is
necessary that some supplementary means be
found for the handling of retailer's paper and
freeing his capital.
The discount company, on the contrary, is
an organization which has been formed to meet
just such conditions. It is primarily a bank
that deals in long-term paper. It has none of
the obligations which the ordinary commercial
bank assumes, for it has not depositors, only
stockholders. These, like any other stockhold-
ers in a corporation, can sell their stock, of
course, but they cannot go to the company and
demand their money on no notice, as a bank
depositor can. As a result the discount com-
pany, knowing exactly where it stands at all
times, can handle such loans at a lower over-
head and give the dealer better facilities. Many
are controlled by the banking laws, just as are
the banks, and their stability and financial in-
tegrity are under governmental supervision.
Facilities Offered the Dealers
And that is the main point in the entire ques-
tion—the facilities which it offers the dealer to
obtain cash at a reasonable expense. Suppose
a piano dealer should go to an ordinary com-
mercial bank and borrow, say, $50,000 on a four
months' note. When the term of his note is
up he must to meet it in full. Banks do not
iegard renewals with complacency. The man
who asks for them is looked at with suspicion,
as he should be. Perhaps this dealer may only
need this amount for one or two months. The
loan is rigid and he must hold it for the full
term, paying interest, an unnecessary expense,
even though he does not take in enough to cover
it. If he makes the same loan from a discount
company it is entirely different. What he does
is really to make a series of notes, which are
met in rotation, as the collections on the col-
lateral come in. In other words, his credit
resources are at all times under his own control.
There is a close analogy between the discount
company system and the present Federal Re-
serve System, which seems effectually to have
checked the vicious currency panics, of which
1907 was a striking example, and which were
always marked in the financial history of this
country, prior to its enactment. Before the
Federal Reserve laws were passed American
currency of issue was based on fixed bond issues,
with no elasticity to meet the demands of the
country's business. In other words, the country
had cither too much or too little currency to
meet its financial and industrial needs. With
the Federal Reserve System currency of issue
is based on commercial paper, providing for a
constant and almost automatic readjustment to
the increasing and decreasing credit demands
as business fluctuates. The dealer receives prac-
tically the same service from the discount com-
pany.
The Self-liquidating Loan
Another great advantage of the discount com-
pany system is that such loans are really self-
liquidating. The dealer who utilizes this means
of obtaining cash has a greater volume of paper
to discount with the company when business is
good and thus the necessary cash to finance his
growing sales. Lack of capital is the greatest
check on business growth in the retail field, and
one of the most fertile sources of failure. If,
on the other hand, the volume of sales shrinks,
his obligations automatically decrease as his
collection department meets his maturities with
the discount company. Here again the analogy
between the discount companies and the Federal
Reserve System is close and striking.
The discount company serves another real
purpose. It makes the dealers who utilize its
services good collectors. Dealers' poor collec-
tions are largely the source of dealers' poor
financing. The discount company's own collec-
tion department expects the dealers' maturities
to be met, and the dealer, in turn, utilizes the
same methods on his outstanding paper, with the
result that many a dealer who has been a poor
collector is made a good one purely through
this means.
The claim is made by some dealers that cash
costs too much when it is obtained from a dis-
count company. This claim has already been
dealt with to some extent in these articles. The
truth of the matter is, and it has been proven
time and again in actual practice in the trade,
that the position of cash buyer, which the dis-
count company permits a dealer to assume if
he uses its facilities properly, brings him a suf-
ficient extra profit to take care of his interest
with something over besides. And this is in
addition to permitting him to use his entire
capital investment and turn it over promptly
and a greater number of times within a given
period. Turnover, more than margin, is the real
gauge of net profit.
Too Much to Expect
A man in business who makes a bank loan
of four months and then expects to meet it from
the proceeds of paper collateral, the duration
of which is twenty-four months and more, is not
doing good business. He is expecting too much.
Such an obligation is too risky. On the other
hand, a dealer whose loans are timed in accord-
ance with the time of his collateral finds them
automatically met, with a minimum of risk and
consequently at a minimum of expense. That is
the main difference between a bank loan and a
discount company loan and that alone is suffi-
cient to prove that the latter is the better.
The next article in this series will be devoted
to the actual plans now in use and to the con-
sideration of the cost involved in obtaining cash
by means of the discount company.
BILL TO CURTAIl^SSUMED NAMES
Legislation Pending Before New York State
Legislature Would Prohibit Use of Assumed
Name for Transaction of Business
A bill which would prohibit the transaction
of business in New York Slate under any des-
ignation, assumed name, or style, corporate or
otherwise, other than the real name of the per-
son conducting such business, has been intro-
duced in the New York State Legislature by
Senator John Knight. The use of the designa-
tion "Company" or "& Co." would be barred
unless a certificate giving the name under which
business was to be conducted, and the true and
full names and addresses of all persons asso-
ciated therewith, was filed with the Clerk of
the County in which the business was located.
Repeal of Section 82 of the Partnership Law
and Section 924 of the Penal Law, relating to
fictitious partnership names, would be affected
also.
KRIEGER=AVER INCORPORATED
SAN FRANCISCO, CAL., February 24.—The Kriegerr-
Ayer Music Co. has been authorized to do busi-
ness in Long Branch, Cal., with a capital of
$50,000.