What​ ​problems​ ​did​ ​entrepreneurs​ ​face​ ​in​ ​raising​ ​capital​ ​during​ ​the industrial​ ​revolution,​ ​and​ ​how​ ​did​ ​they​ ​overcome​ ​them? During the 18th century, Britain began the industrial revolution which is now considered to be one of the greatest periods of economic development. The availability of adequate capital is a major challenge faced by any country undergoing the process of industrialization (Pollard 1964). In this essay, I shall mainly focus on the problems faced by entrepreneurs in raising capital​ ​and​ ​how​ ​they​ ​overcame​ ​these​ ​problems. Capital required by industries are mainly two types, Money which is required to purchase land, machinery and factories is known as fixed capital whereas money required for the day to day activities of the business like payments of wages and salaries, raw materials, insurance​ ​etc.​ ​is​ ​known​ ​as​ ​working​ ​capital​ ​or​ ​circulating​ ​capital. Before we start looking at the problems faced by entrepreneurs in raising capital, it is worth asking ‘How much fixed and working capital was required by these entrepreneurs?’. Fixed capital requirement was very little in many branches of industry, for instance, in the textile industry, the fixed costs were low because entrepreneurs build the factories in a phased out manner. In some sectors of the industry like copper and coal mining, large amounts of fixed capital were required for the installation of machinery for drainage and haulage was required (Morgan 2011). It has been argued by Crouzet (1972) that fixed capital requirements need not be large yet there were frequently large enough to harass and perplex those who needed funds for building or equipping a plant of their own. “The ratio of fixed capital to working​ ​capital​ ​rose​ ​from​ ​parity​ ​in​ ​1750​ ​to​ ​3.3:1​ ​by​ ​1850”​ ​(Morgan​ ​2011,​ ​p.​ ​61). By​ ​Syed​ ​Anas​ ​Ahmed Cardiff​ ​Business​ ​School 1 The problem of finding capital was not great compared to the problem of raising capital, “By the beginning of the eighteenth century there were enough rich people in the country to finance an economic effort far in excess of the modest actives of the leaders of the industrial revolution”(Postan 1935,p. 2).The main problem in raising capital was linking the savers to those who required the savings as a lot of the savings were hoarded by the savers. Hence Innovators tend to use their own resources or those of their family and friends, when Marshall set up a flax spinning mill in Leeds in the 1790s he raised the necessary capital by disposing off his own drapery business, borrowing from his friends and by a bank overdraft (Deane 1965).There were some other less significant methods to link the savers to those who required capital, some landlords helped by building mills, The merchants supplied capital to those producers whose goods they were handling (Crouzet 1972). Later innovators tend to use profits from one branch to finance innovations in another branch of the same industry (Deane​ ​1965). Linking savers to those who required the funds was not the only problem as joint stocks companies which were incorporated to raise funds from investors looking for safe and easy investments (Joint stock companies had shares which were freely transferable and shareholders liability towards the company's debt was limited to their shares) were restricted by the bubble act 1720,which virtually prohibited any new joint stock companies and partnership was limited to a maximum 6 partners, Only a few companies like the Bank Of England and East India Company set up before 1720 could remain joint stock companies (More 1997).Moreover, there was a competing demand for capital between industrial development and military expenditure, overseas investments, government borrowing to pay By​ ​Syed​ ​Anas​ ​Ahmed Cardiff​ ​Business​ ​School 2 off interest on accumulated national debt largely unproductive (Morgan 2011; Stagg: Lecture 12) The eighteenth century saw the rapid increase in the initialization of capital accumulation and investment the most important of them was banks. Three main groups emerged in the banking system: The Bank Of England, the London private banks and the country banks (Brown 1991).One of the problems which the merchants and industrialists of the late eighteenth century faced was the shortage of cash in small denominations to pay wages, many merchants and industrialists paid their labour in promissory notes which were redeemable with the local traders. It was this pressing need of ready cash as well as to find surplus capital that inspired hundreds of little country banks to issue notes of small denominations like £1 and £2 (Deane 1967). They were mostly small in England and wales due to the Bubble Act of 1720, however in Scotland, there was no restriction on joint stock banking so there were large but fewer in number (More 1997; Mathias 1983).This slowed down the development of specialist banks. Most of the country bankers were businessmen and merchants who were involved in some other kind of business and they took up banking in view of the shortage of means of payment. The location of factories during industrialization was close to the raw materials which often was in remote areas with no availability of banking services, Hence the entrepreneurs created his own banking services. The benefit from this type of banking system was that when entrepreneurs went to raise capital, they could find local bankers who had enough personal knowledge about the entrepreneur and practical knowledge of the industry, to be able to take risks which a less personally involved banker​ ​would​ ​find​ ​incalculable​ ​and​ ​therefore​ ​out​ ​of​ ​range​ ​(Deane​ ​1967). By​ ​Syed​ ​Anas​ ​Ahmed Cardiff​ ​Business​ ​School 3 Short term credit was an important feature in the early industrial Britain and penetrated the entire economy. It linked suppliers of raw material with middlemen, manufacturers, and merchants, often in a chain of debtors and creditors. “Its pervasive nature helped entrepreneurs in lowering their fixed capital and to help with the shortage of cash in the economy” (Morgan 2011, pp.62). “The bill of exchange was the chief mechanism through which credit was extended. There were both inland and foreign bills of exchange, the latter always had a specified rate of interest between different currencies. After 1705 an inland bill of £20 or more had the same legal status as a foreign bill”(Morgan 2011, pp.63). The bill is issued by the drawer to the drawee and once the payee endorses the bill he is bound to pay the mentioned amount within the time frame on the bill, the drawer can now wait for the maturity of the bill or he could persuade a bank to make an immediate cash payment for an amount less than the mentioned this amount represented the interest plus the allowance for the risk of default undertaken by the bank, This was known as discounting of bills. The drawer was free to circulate the bills via the conduit of businessmen without using banks this practice had the advantage of increasing the money supply. By 1800 specialist bill-brokers were common; their income was linked to their skill in discounting skills (Deane 1967; Morgan 2011). Promissory notes with the same purpose were issued only within the circles of businessmen​ ​and​ ​were​ ​not​ ​readily​ ​assignable​ ​(Morgan​ ​2011). It has been argued (More 1997, pp.40 ) that the development of London banks and bill-brokers as intermediaries between agriculture and industrial areas was, therefore, important because it provided working capital for industrialists. The increased efficiency of the financial system in channelling funds to the most needful area can be seen by the decline By​ ​Syed​ ​Anas​ ​Ahmed Cardiff​ ​Business​ ​School 4 in the long-term interest rates, from about 6 percent at the beginning of the century to about 5 percent​ ​at​ ​the​ ​end​ ​of​ ​the​ ​century. While Britain underwent industrial revolution it required a huge amount of capital, there was no general shortage of capital but the linking of savers to entrepreneurs was not adequate. Entrepreneurs faced many problems in raising both fixed capital due to scarce availability of external sources of capital forcing them to internal sources like self-financing and borrowings from family and friends and later use profits from one sector of the industry to another sector of the same industry and in raising working capital due to heavy requirements of it and the shortage of small cash currency in the early eighteenth century which inspired many entrepreneurs to start their own country banks and issue notes of small denominations. The Bubble Act of 1720 adversely affected the development of specialized banks and formation of new joint stock companies. Bills of exchange was an important credit instrument used to meet the requirement of working capital, as they could be discounted with banks or freely traded with other businessmen. Entrepreneurs faced many problems in raising capital during the industrial revolution however they developed various methods to overcome them. References Brown,​ ​R.​ ​(1991)​ ​Society​ ​and​ ​economy​ ​in​ ​modern​ ​Britain​ ​1700-1850.​ ​London​ ​:​ ​Routledge Crouzet,​ ​F.​ ​(1972)​ ​Capital​ ​Formation​ ​in​ ​the​ ​Industrial​ ​Revolution.​ ​London:​ ​Methuen By​ ​Syed​ ​Anas​ ​Ahmed Cardiff​ ​Business​ ​School 5 Deane,​ ​P.​ ​(1965)​ ​The​ ​First​ ​Industrial​ ​Revolution.​ ​Cambridge​ ​:​ ​Cambridge​ ​University​ ​Press Economic​ ​History​ ​Lecture​ ​Notes:​ ​Lecture​ ​12,​ ​Population​ ​Changes Mathias,​ ​P.​ ​(1983)​ ​The​ ​First​ ​Industrial​ ​Nation.​ ​2nd​ ​ed.​ ​London​ ​:​ ​Routledge More, C. (1997) The Industrial Age : Economy and Society in Britain, 1750-1995. 2nd ed. London​ ​;​ ​New​ ​York​ ​:​ ​Longman Morgan, K. (2011) The Birth of Industrial Britain 1750-1850. 2nd ed. Harlow ; New York : Longman Pollard, S. (1964) Fixed Capital in the Industrial Revolution in Britain. The Journal of Economic​ ​History​ ​24(3):​ ​299-314 Postan, M.M. (1935) Recent Trends in the Accumulation of Capital. Economic History Review​ ​6(1):​ ​1-12 By​ ​Syed​ ​Anas​ ​Ahmed Cardiff​ ​Business​ ​School 6