shall have occasion to show that the commercial banks furnish funds for fixed capital purposes in various ways-some of them direct, others indirect. We shall also have occasion, in a succeeding chapter, to consider the relative liquidity of the or or On demand, paper with one On demand, secured by On time, secured by stocks Acceptances of this bank purchased or discounted. Total.. various types of investment and commercial loans. For the present, however, we are merely concerned with describing the different types of commercial bank loans and showing the uses to which the funds thus borrowed are devoted. 1. Single-name borrowing. Borrowing on the single-name promissory notes of individuals or corporations has come to be I From Report of the Comptroller of the Currency, I (1919), 50 one of the most common means of obtaining loans in the United States. The reason for this has already been suggested in the chapter on commercial credit instruments. Such borrowing may or may not be for working capital purposes, though in practice it is in the great majority of cases of a general commercial nature. It is often assumed that a loan made on a single-name promissory note, unsecured by collateral, must in the nature of things be less satisfactory from the standpoint of safety than two-name or collateral paper. We shall find, however, that this is by no means the case. In fact, singlename paper is on the whole just as safe as any other. As between single-name paper and indorsed notes, it may be observed that loans for business purposes are seldom obtained by business man A on the accommodation indorsement of business man B. The most common form of two-name paper in the United States has until recently been that which arises out of the discounting of customers' notes. Mr. A. sells goods to Mr. B, and requires B to give a promissory note as evidence of the transaction. Now A may discount this note with the bank, indorsing it in the process. Many people feel that in numbers there is strength and that since the bank here has two persons to whom it may look for payment, the note is doubly secure. The truth of the matter is, however, that as a rule the bank looks for payment only to the party who presented the note to the bank, namely, to the indorser-the reason for this being that the ordinary drawer of the note is generally unknown to the bank, whereas the indorser is usually a regular customer. The safety of the bank loan, therefore, primarily depends upon the standing of the individual upon whom the bank relies for payment. And whether a note be two-name or single-name, the bank makes the loan on the basis of its knowledge of the integrity and ability of the borrower—that is, of the indorser in the case of a discounted customer's note. Lending on single-name paper requires a careful analysis of the borrower's financial integrity and ability. Since the safety 1 See p. 169. 2 For a discussion of the trade acceptance see pp. 384-85. of loans depends upon the accuracy of the bank's knowledge of the borrower, it is incumbent upon the bank to make a careful investigation of his integrity, ability, and financial resources. As a preliminary to a consideration of the making of bank loans, it will be of service to recall the outline of the factors involved in credit extension given on page 126 above. In its analysis of the character and integrity of the borrower -of his intention and willingness to pay-the credit department of a bank has recourse to various sources of information. It sends out letters to references given by the credit applicant and to others whose opinions might be of value; and it secures reports from the commercial agencies, and from other banks with whom this borrower has had relations. A personal interview is usually requested in order that a first-hand impression may be gained; and considerable collateral information is often "picked up" from trade reports, newspaper comments, etc., as well as from the general "gossip" of the business community. The commercial agencies, of which the chief are Dun's and Bradstreet's, assemble data on the history and present status of the various businesses of the country and give to each a general credit "rating"-good, bad, or indifferent. These mercantile reports aim to cover the entire field of business and include every corporate and individual enterprise; but with new concerns springing up daily, it is of course impossible in practice to furnish recent information on all establishments. A serious handicap to reliable information lies in the fact that the agency reporters are not always treated with the greatest freedom and confidence; in some instances, indeed, there is an evident desire on the part of businesses to strengthen their rating by deliberate deception. Moreover, the reporters are relatively poorly paid and hence many of them are not particularly well qualified for the work in hand. Nevertheless, the service rendered is invaluable in the case of many small enterprises, and it is an important source of collateral information in nearly all instances. It may be added that upon request the agencies furnish special up-to-date reports to their customers. In the large financial centers analysis of the borrower's financial statement is now regarded as indispensable to an intelligent extension of credit. By far the most important source of credit information, nowadays, is the financial statement, with supplementary information that is furnished directly by the borrower. The use of the financial statement as a basis for loans dates back only to the nineties, and its great development has been mainly a matter of the last fifteen years. Even now the use of the statement is chiefly confined to the larger cities; though it is steadily gaining in vogue in the smaller cities and towns. Before the advent of the financial statement the banker relied only upon his general knowledge of the borrower's honesty and business ability. And so long as industry was conducted on a relatively small scale and business relations were of a highly personal sort, by direct observation and by the current gossip of the community with which he was in intimate touch the banker could obtain a fairly accurate line on credit risks. But with the great growth in the size of business undertakings in the last generation, together with the inherent impersonality of urban life, the bankers of the financial centers have found it imperatively necessary to supplement personal impression and gossip by investigation based upon the financial records of the borrowing corporation or business. The development of systematic accounting methods necessitated by the great size and complexity of business was of course an indispensable hand-maiden to the change in the methods of credit extension; for without accounting records it would be quite impossible to make an investigation of the condition of a large-scale enterprise that would have any meaning. Different banks use somewhat different forms of financial statements. A typical form for corporations' is shown on page 381. It will be observed that it contains an income or profit and loss account, as well as a statement of resources and liabilities. Besides the balance sheet and profit and loss account, collateral information is requested as follows: (1) contingent liabilities; (2) fire insurance on merchandise, on buildings, 'There is a separate form for individuals and partnerships. and on the machinery and tools; (3) life insurance on officers' lives; (4) average amount of goods on hand; (5) at what time Form 3 IM 12-22-15 BAH BORROWER'S STATEMENT-Corporation. Name (Corporate style under charter).. Business Address To the UNION TRUST COMPANY. The following is a true statement of the financial condition of this corporation on the. day of made to the UNION TRUST COMPANY, for the purpose of obtaining credit. We agree to notify said Bank promptly of any material change in our condition. FILL ALL BLANKS WRITING "NO" OR "NONE" WHERE NECESSARY. of the year liabilities are heaviest and at what time lightest; (6) total sales for last fiscal year; (7) average terms of sales and average terms of purchases; (8) regular time of taking |