FIXED AND MISCELLANEOUS ASSETS 153

from all should be no greater than would be expected from one. If purchases are $600,000 a year and the usual trade terms are thirty days, perfect liquidity of purchases and sales means that not over $50,000 should be out for purchases. If notes receivable, accounts receivable, or drafts, are sold to bankers, or a broker, the notes payable should be correspondingly reduced. The lender may want to know the maximum and minimum debts on open account, the greatest and least borrowings from all sources, and especially if, at certain seasons, all temporary loans are cleaned up. Sometimes a promise is exacted that the maximum of loans will not be exceeded without the lender's permission. Notes payable, or accounts, should not be past due except for exceptional reasons.

It is important for the lender to know what assets are already pledged to secure the payment of notes payable.

Mortgage loans due within six months, and accrued items like interest, taxes, and wages, are among other current liabilities which are listed separately.

118. Fixed and miscellaneous assets. - Land is carried as an item separate from the improvements upon it. It does not help individual credit for this to be in another's name. Buildings used for farming, mercantile, or manufacturing purposes should be listed at cost, with the date given, and a deduction made of the reserve for depreciation which should be increased annually. Machinery, implements, office, and other equipment, should be treated similarly; otherwise the credit man of the lender may cross off the items. The experience of each business determines the amount of equipment. Any less will cause a conclusion that the business suffers a handicap; any more will indicate poor management. Either view hurts credit. Only in exceptional cases should plant and equipment represent other than capital permanently secured. Buildings and equipment should be insured. Prepaid interest

66

and insurance are other items. Mortgage loans due from others will appear in some statements. Good will may be very valuable. A trademark may be worth nothing, or millions. Just the name Marshall Field" or "John Wanamaker" would be of great value, if everything else perished; but good will used to pad a balance sheet by making up the difference between assets and the stock issued may not be worth anything. It should be gradually written off. The same thing is true of patent and mining rights. Into patents the question of infringements and litigation always enters. It strengthens credit to have life insurance payable to the business in case a strong manager should be lost. For a partnership it should be stated, who the partners are, the total means each has outside the business, to what extent each is liable, and when his interest expires.

The ratio of net worth to fixed assets reveals the extent to which the owners have supplied the permanent funds for their business. The ratio over a period of years is valuable as indicating whether the proportion is being maintained. If the ratio is falling it shows that more and more of the invested funds are being tied up in assets which are not liquid. The ratio between sales and net worth may show such a rapid turnover that it indicates under-capitalization and a feverish condition of business; it may show such a low turnover that it is clear that the funds which have been invested are non-productive.

119. Fixed liabilities. These are bonds, mortgages on the plant, farm, or other real estate, and mortgages on equipment. If any of these are due in a short time and are unprovided for, they have to be considered as current liabilities. The balance between assets and liabilities of an individual, or partnership, is paid-in capital and profits. In the case of a corporation it is stock, surplus, and, if a bank, undivided profits. The lender wants to know if

CONTINGENT LIABILITIES

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the stock of a corporation was issued for money, property, or services. A dealer in specialties, luxuries, or goods of fashion, or a manufacturer in those lines, especially if advertising and expensive solicitation are necessary, needs relatively more capital than a maker, or seller of staples, because his borrowing margin is smaller.

The ratio of debt to net worth indicates the proportion of capital that is being supplied by outsiders. Its trend from date to date shows whether more is being obtained from outsiders or more is being furnished by the owners.

120. Contingent liabilities. -Acceptances, notes, and accounts which have been sold, or guaranteed, are contingent liabilities until they are finally paid. Consequently, although no longer owned outright, they are set up as contingent assets. If a note is indorsed for accommodation, or a surety bond is signed, there is no corresponding contingent asset, unless the person, or corporation, is good personal security, or has pledged property as security. What suits are in court against the borrower? If he is a manufacturer, does he carry employer's liability, or workmen's compensation insurance?

121. Necessity for intimate knowledge. At a credit men's association a statement of condition of a firm was submitted with a request for credit. One individual present refused credit: all the others granted from $300 to $25,000. The statement was that of a firm just before it went into bankruptcy. It shows how weak are statistics without a personal knowledge of values. A stranger cannot successfully judge a statement of condition, unless it is certified by a competent outsider, in whose judgment of values there is great confidence. In order to borrow in the cheapest markets, borrowers employ certified public accountants to certify that their statements are correct and that the values are believed to be good. Without such a certificate the lender must use supplementary information to check the correctness of the values.

CHAPTER XI

MAKING AND PAYING LOANS

122. Applying for loans. When the business for which a loan is needed has been thoroughly studied, so that the strong and weak points are mastered and one knows how to present its merits, it must next be determined where to apply for the loan. Bonds are sold as described later (see 253-258). A real estate loan can be negotiated at any state bank, trust company, savings bank, or private bank, that has the funds to lend for a long period. Mortgage companies, land banks, and building and loan associations, are in the market for such loans. A national bank not in New York, or Chicago, and all land banks can lend on farm land. .Section 24 of the Federal reserve act provides that "any national banking association not situated in a central reserve city may make loans secured by improved and unencumbered farm land, situated within its Federal reserve district, or within a radius of one hundred miles of the place in which such bank is located, irrespective of district lines; and may also make loans secured by improved and unencumbered real estate located within one hundred miles of the place in which such bank is located, irrespective of district lines; but no loan made upon the security of such farm land shall be made for a longer term than five years, and no loan made upon the security of such real estate as distinguished from farm land shall be made for a longer time than one year nor shall the amount of any such loan, whether upon such farm land or upon such real estate, exceed 50% of the actual value of the property offered as security. Any such

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bank may make such loans in an aggregate sum equal to 25% of its capital and surplus, or to one-third of its time deposits."

A cooperative marketing association of agricultural producers or sellers may obtain loans from an intermediate credit bank (see 222). Borrowers for agricultural purposes may be accommodated by a national agricultural credit corporation (see 223) provided warehouse receipts, or other like documents, are offered for collateral and the time of maturity of the paper does not exceed nine months. Those persons who offer as security chattel mortgages upon live stock may borrow from cattle loan companies (see 136) or national agricultural credit corporations.

For short term loans on collateral or personal security, the ordinary borrower goes to the commercial bank where he has his account. Many banks will not lend except to a depositor, unless they are seeking high class paper through brokers (see 126) for a secondary reserve.

In a small bank the president, or the cashier, or the treasurer is the proper person to whom to apply. In a large bank inquiry will determine the officer, probably a vice-president, who has supervision over each class of loans. It pays to get acquainted early in one's business life with these officers. The customer should be introduced by as responsible a man as he knows. If real estate, or collateral, is offered, the security speaks for itself. In applying for a real estate loan the bank's application form providing for a complete description of the property is filled out. The bank then appraises the property and examines the title (see 106). The banker is acquainted with the value of collateral securities, or he can quickly ascertain it. If a line of credit, or a short-term loan with personal security, is desired, the borrower should see that he and his business are fairly and properly presented. Frankness and openness should characterize one's rela