LOANS FOR BUYING AND SELLING 113 discount. A contractor in thirty days will be paid a payment of $10,000 on a building he is erecting. He needs $5,000 to spend in labor and materials to push the work along. His note discounted for thirty days will raise the money. An insurance agent can sell $100,000 of insurance if he will take notes for one-half of the premiums to be paid in ninety days. If the parties are responsible it will pay him to take the paper and discount it. It is the rule in commercial lines like lumber, raw silk, and agricultural machinery for the seller to take notes from consumers. While the seller awaits payment he borrows. A manufacturer has orders from responsible customers for $200,000 worth of goods. He can borrow to finance his purchases of raw materials. A merchant buys $20,000 worth of flour from a miller subject to payment by a thirty-day sight draft. The merchant is getting a loan either from the miller, or from the bank which discounts the draft. The customers of a broker want to buy stocks valued at $1,000,000. He can advance $100,000 and borrow $800,000 more, enabling the securities to be paid for gradually, or when sold. In some businesses goods are delivered to the buyer in advance of the selling season and the invoice dated ahead. In others orders are taken in advance and cash is paid on receipt of the goods. A cash sale may allow payment within ten, fifteen, or even thirty days. In lines where credit is extended, payment is contracted for at a fixed date. The seller knows about when these accounts receivable will be paid and he can make his single-name notes, usually without other security, for discount so that they may be liquidated from these incoming payments. This is a characteristic form of bankable paper in the United States. The above instances illustrate loans which are based on commercial transactions. They have in themselves the power of payment, that is, they are self-liquidating. When ever values upon which credit has been extended, become temporarily unsalable, or unsalable except at a loss which the borrower does not wish to take, the loans are no longer self-liquidating. The banker to tide his customers over the crisis may extend the loans by renewal in order not to aggravate the crisis by compelling losses to be taken. Such bank credit which has become "slow" is popularly called frozen credit." 66 88. Loans may be large or small. The following from the report of the Federal Reserve Board shows an interesting range in the size of loans: During the year 1921 there were received 21,461 applications for rediscounts and advances. There were 149,868 pieces of paper rediscounted or advanced upon, and they totaled $30,768,989,922.52. The largest piece of paper was for $78,100,000.00 and the smallest for $16.72. In 1917 the largest single piece of paper was for $147,000,000.00.3 89. Distinction between loans and discounts. - A banker makes a distinction between a loan and a discount. If a bank buys a note, draft, or acceptance on the market, he buys it at a discount and calls it a "discount." If he buys a note from a customer which amounts to $1000 and pays $990 for it, he calls it a discount. If he takes a note on which he is to receive interest at a later date, or at time of payment, he calls it a "loan." Demand paper is always a loan, never a discount. When a person who obtains funds from a lender either by loan or discount, has to repay those funds, he is a borrower, and from his point of view, he has made a "loan." When a person sells to a bank a draft, or note, which some one else has to pay, he has not created a debt, he has "discounted" an asset. Because he secures the funds by guaranteeing the paper, he may think of himself as a co-borrower. 90. Descriptions of notes. -Notes (see 16-17) are 3 Eighth Annual Report of the Federal Reserve Board, p. 508. DESCRIPTIONS OF NOTES 115 called by the owner, the one who is to get payment, "notes receivable," and by the maker, the one who makes payment, "notes payable." When a note is given in payment for merchandise, something similar, which is to be sold within a short time (at a profit), or when the proceeds of a note sold to a bank, or some other person, are used to buy merchandise, pay for merchandise, or carry forward a step in production, it is called "commercial paper." A bill of exchange arising out of a sale, or in preparation for a sale, is of the same class. Persons who sell, or who are holding commodities for sale, can use them Pittsburgh, Pa. pay to the order of 191 promise to Lollars Without defalcation, value received with interest hand and seal (SEAL) (SEAL) Judgment note. The maker authorizes any attorney to appear in his stead and confess judgment upon the filing of a suit against him for non-payment. He also agrees to the payment of collection fees and waives his right to certain exemptions. for security, if they are non-perishable and of a staple, readily marketable character. The goods are stored in a public warehouse and a receipt is attached to the note, or draft, which is known as "commodity paper." When a warehouse receipt, bonds, stocks, or other property, is deposited with a note for security, it is called a "collateral note." If property is mortgaged to get the loan, the note is a "mortgage note." When a loan is desired subject to repayment at the will either of the borrower or lender, the note reads "on call," "at sight," " on demand," or one day after date." Such are known as demand 66 notes." In the large cities call loans are continually being made to and through brokers. These are subject to call the next day, or later. The term "call loan" is coming to be applied strictly to such loans only. Interior banks often carry demand notes year after year, collecting the interest quarterly and taking a renewal note each year. On- Dollars And in the event default is made in the payment of this note at maturity and it is placed in the hands of an attorney or collection, or suit is brought on the same, then an additional amount of ten per cent on the principal and interest of this note shall be added to the same as collection fee. The makers and endorsers hereof hereby severally waive protest, No.- P.O. -P.O. P.O.. "Waiver note." The maker waives protest, demand and notice of protest. He also agrees to the payment of collection fees in case he does not honor the note at maturity. A concern which has notes payable to it may wish to raise funds by indorsing and selling them. This makes "double-name" paper. It is also known among bankers as "receivables," "two-name," and "indorsed" paper. Double-name paper is also created when notes are made DESCRIPTIONS OF NOTES 117 jointly, or when the borrower instead of making a note to the lender, makes it to a friend, who indorses it merely to add to the maker's credit and enable him to borrow. Such paper is "accommodation" paper. A concern of ample resources borrows on its own note. This is "singlename paper. An interest" note reads "with interest from date." If no interest is specified the legal rate is understood. A "judgment" note authorizes an attorney to appear in court and confess judgment against the maker for the face of the note, costs of the suit, and an attorney's commission. A A "waiver" note waives the right of the maker to any property exemptions accorded him by law, or to any rights he, or an indorser, may have to presentment, or notices of dishonor and protest. "Bonds" are described in a succeeding chapter (see 248-260). |