This section is from the "Practical Banking" book, by Albert S. Bolles.
A number of persons desire to construct gas works. The city where the works are to be built promises a liberal support to the enterprise. The project has been fully discussed by the business men and property owners of the place, and a number of them decide to combine their efforts in carrying it through. To build the works and lay the pipes requires a large expenditure of money. It is learned that for a good part of the necessary capital outside assistance must be asked. There is nearly always plenty of money for all such enterprises, provided it can be shown that the security is ample. In the large financial centers, it is known, there may be secured the desired means at a fair rate of interest when the investment can be shown to be a safe one. What steps are best to be taken? The promoters of the scheme propose to organize a joint-stock company.
Estimates have been made, which show that fifty thousand dollars will make a reasonable start towards carrying the project along. A canvass shows that capital stock to this amount would be subscribed for. The company is formed, a charter granted, and permission given by the city authorities to lay and maintain the pipe lines. Further estimates are now made, and it is shown that to build the works and lay sufficient piping for present needs there will be required, besides the already paid-in capital of the company, about two hundred thousand dollars. This must be secured by a loan.
The company decide to issue first mortgage bonds for the amount of money needed. If they can find persons in their own city or among the stockholders who are in position and are willing to loan the money they need not call for outside assistance. But in this they do not succeed. They then must go to some financial metropolis where money is seeking investment. Here they are confronted with the inquiry: How do we know that our investment will be a safe one? What assurance have we that your company is properly organized, and that the proper authority has been given for it to make this loan? And each person who might be willing to purchase some of the bonds demands the right to have an agent examine into all the facts, and report upon the conditions, before the money could be paid over. In this case the company must pay the expenses and fees of the agents and lawyers. They see such a course is going to make it exceedingly expensive. But the money must be procured, and what shall be done?
A happy thought occurs to them. They will go to a loan and trust company. They visit one of these institutions, and learn that they will have no trouble about securing the required loan, if a clear title to the property to be mortgaged can be shown, and the other usual requirements of investors in such securities are found satisfactory. "We will transact your business for you," says an officer of the trust company. "In the first place we must put the matter in the hands of our attorneys, who will report upon the legal status of your company. We must know how much of your capital has been paid in. The amount of work you have done in the new enterprise. What your assets and liabilities are. The recording of the mortgage bond of your company may be left with us, or our attorneys will look to see that it has been properly attended to. We will issue the bonds from our institution, make all transfers, and pay the interest for you when it becomes due. In fact, we will transact the whole business, turning over the money from the sale of your bonds as it is paid in. How much money do you want to procure?"
"We wish to procure two hundred thousand dollars, or what will come from a two-hundred-thousand-dollar bond. We have invested about forty thousand dollars. The money procured is to be applied in completing our works and in extending the pipe lines."
"If you have invested only about forty thousand dollars and are free of debt, we would suggest that the loan be made in installments. We could not undertake to issue the whole amount of the bonds, excepting as the work progresses, and until we are assured that the money received for bonds issued had been properly applied in the construction of the works. We would issue, say, twenty-five thousand dollars as the first installment, then we could issue fifty thousand as the second installment, and so on, increasing the issue according to the increase in the value of the security offered."
"And on what terms would you undertake this business?"
"We would charge you by the year, according to the amount of business transacted, or liable to be transacted. You would pay for the fees necessarily incurred at the start, and thereafter probably two hundred to three hundred dollars a-year, according to circumstances and arrangements."
An agreement is entered into. The officers of the gas company are put to no further inconvenience or delay. When they inform the money-lender that Loan and Trust Company have charge of their mortgage business, and are issuing the bonds, no inquiries are made as to the legal status of the company or the mortgage. The capital is secured, and the company pushes ahead with its work.
Loan and trust companies have often proven of great service in the construction of railroads. Of course railroads would be built and bonds disposed of without the mediation of such agencies, but the trust companies have greatly facilitated the work and reduced the expenses.