Finance
Help for the Small Industrialist
PLAN TO MEET LONG-TERM CAPITAL NEEDS
THIS is the title of an article which appeared in the Financial News on April 30th last, but I have not hesi- tated to adopt it as the heading for this article, as it expresses an attempt which is now being made to meet the legitimate requirements for financial accommodation on the part of a certain class of industrialists. I have said legitimate requirements, and the word perhaps needs explanation. What may be a perfectly legitimate re- quirement on the part of a borrower may not necessarily be a legitimate operation for the lending banker if he is actively engaged in deposit banking where, by reason of his customers having the right to withdraw their deposits at a moment's notice, he must perforce keep himself in a more liquid position than would be possible if he were to grant loans for a •very long period, and possibly on security which would not be immediately marketable. Those industrialists or traders—and they are compara- tively few in number—who maintain from time to time that adequate banking facilities are lacking for the small trader are usually of two kinds : one class of critic asserts that loans can be obtained but that the charge is too high ; while the other class asserts that, owing to the nature of the requirements, it is unable to obtain from the ordinary banker the accommodation required on any terms at all.
I should say that the question of the rate of interest on the loan is seldom a real obstacle to business, but on the other hand, deposit bankers would be the first to admit that by the very nature of their business there are certain demands for accommodation which, while perfectly proper in so far as the object of the loan is concerned, involve so long a lock-up of resources as to make them undesirable from the standpoint of the deposit banker. To an institution, however, where the . resources for lending are obtained for the most part from the capital of the lending concern, the proposition is quite a different one, and so long as the borrower is able to convince the lender of the reasonable prospect of repay- ment at a later date, the question of time can more easily be arranged.
AN INTERESTING EXPERIMENT.
_ At all events, a highly interesting experiment is now being put into operation, and the writer of the article in the Financial News to which I have referred was Mr. J. Gibson Jarvie, who, as Chairman and Managing Director of the United Dominions Trust Limited, is playing an important part in the experiment. That institution has for some years conducted important and useful operations in financing many forms of business activities. From comparatively small beginnings it has grown into an institution of considerable size, so that the latest balance-sheet of the parent company and its sub- sidiaries cover figures approaching £5,000,000. Some months ago it was decided—the project was one in which I believe the Bank of England took a friendly interest —to form a new subsidiary entitled " Credit for Industry."
THE MACMILLAN REPORT.
For a long time past, as Mr. Gibson Jarvie himself observes in his article, there had been a good deal of un- enlightened criticism of the British banking system. There was, however, no doubt some justification for the demand for special banking or loan facilities for small trading concerns, as it was well recognized it was no part of the province of ordinary banks to provide loans of the character required. The question was one which engaged the attention of the Macmillan Committee, and in their Report members of that Committee said : " It has been represented to us that great difficulty is experienced by the smaller and medium-size businesses in raising the capital which they may from time to time require, even when the security offered is perfectly sound. To provide adequate machinery for raising long-dated capital in amounts not sufficiently large for a public issue, i.e., amounts ranging from small sums up to, say, £200,000 or more, always presents difficulties.
" The expense of a public issue is too great in proportion to the capital raised, and therefore it is difficult to interest the ordinary investor by the usual method; the investment trust companies do
not look with any great favour on small issues which would have no free market and would require closely watching ; nor can any issuing house tie up its funds in long-dated capital issues of which it cannot dispose. In general, therefore, these small capital issues are made through brokers or through some private channel among investors in the locality where the business is situated. This may often be the most satisfactory method. As we do not think that they could be handled as a general rule by a large concern of the character we have outlined above; the only other alternative would be to form a company to devote itself par- ticularly to these smaller industrial and commercial issues. In addition to its ordinary capital, such a company might issue Preference share capital or Debentures secured on the underlying Debentures or shares of the companies which it financed. The risks would in this manner be spread, and the Debentures of the financing company should, moreover, have a free market. We see no reason why with proper management, and provided British industry in general is profitable, such a concern -shbuld not succeed. We believe that it would be worth while for detailed enquiries to be made into the methods by which other countries attempt to solve this particular problem.
" CREDIT FOR INDUSTRY."
It was therefore directly arising out of these comments in the Macmillan Report that the Institution now known as " Credit for Industry Limited " was established some few months ago. The Chairman and Managing .Director is Mr. J. Gibson Jarvie, and the concern works in close co-operation with United Dominions Trust. The Insti- tution has only been actively working for some few weeks and it starts with the modest capital of £250,000, but already the balance-sheet made up to June 80th last shows loans against_ security of £77,000, and I understand that the Management has been flooded with applications from small traders and industrialists for accommodation, all of which are being carefully examined. It should now therefore be possible to test more thoroughly the extent of the needs of small borrowers for loan facilities other than those provided by the joint stock banks. The new Institution has the goodwill of the ordinary banks, which doubtless means that the banks themselves will often introduce business to it. Mr. Jarvie, however, has publicly acknowledged- the necessity which rests upon the new Institution to inves- tigate the history of a borrowing company, to weigh care- fully its position, and also to measure future prospects. I understand that the new Company sets no-limitIO the amount of money to be provided for British industry beyond or apart from the soundness of the business pro- posed. It has been said that it will grant loans for purposes suited to the requirements of the individual borrower, but I should imagine that in the main " Credit for. Industry Ltd." will make a practice of lending com- paratively small amounts to a great number of indi- vidual borrowers rather than make very large loans in any one direction. To quote the concluding paragraph of Mr. Jarvie's article in the Financial News, which for all practical purposes is really an official statement of the character of this new lending institution and the methods by which it proposes to conduct business : " The com- pany will consider applications from those engaged in any kind of productive enterprise or service to the commu- nity. The charter of Credit for Industry is wide and its keynote at all times will be service to British industry. C.F.I.' may do much to retain individualism in trade ; it may well do much for British craftsmenit may even do much to assist towns and villages which have been left derelict by the removal of large works on which their existence depended."
A PRACTICAL TEST.
Nor need this new institution be considered as in any way antagonistic to the operations and interests of-the big joint stock banks. Theinterests of those institutions, as has so frequently been stated, are bound up in the well-being of industry as a- whole, and if as a result of the small loans - by " Credits for Industry Ltd." what are now small concerns grow into large, flourishing businesses, not only will the trade of the country be helped, but automatically demands for accommodation from the ordinary banks from these larger concerns will increase.
Briefly, therefore, the position today as regards the relations between banks and industry is that on the one hand we --have our ordinary banks amply stored -with resources and - eager to make all advances to industry (Continued on page vi.)_
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