The advances which a bank extends to its customers are described either as loans or discounts. The distinction lies in the fact that in the case of the former interest is collected usually at maturity, while in the latter the discount is deducted in advance. As a general rule, loans are collateraled by some form of security, while discounts are usually unsecured.

As there is little uniformity among banks in the organization of their lending departments, it is best to omit such description, and instead to consider the operation of handling a typical demand loan and a time loan. A demand loan is usually accompanied by collateral which may consist of stocks and bonds. The borrower sends these securities to the loan department, where they are carefully examined, and their value is determined by reference to the current market quotations. The bank usually insists upon a margin or difference of about 20 per cent of excess value in the amount of security over the amount of the loan. The purpose of this margin is to safeguard the bank against loss if the market value of the collateral declines.

A margin alone is not sufficient to protect the bank, for the collateral must also be satisfactory in character.

A bank seeks to distribute its risk by demanding mixed collateral consisting of railroad, industrial, and other securities, rather than straight, which is composed only of one class. Conservative stocks are preferred to speculative, which are of an uncertain value. An active security is favored over an inactive one, for the bank can more readily find a buyer if the loan is unpaid. In order to give the bank full title to the securities they must have good delivery - that is, be negotiable in form - and so they are either indorsed in blank by the borrower or he signs a power of attorney. If the collateral is acceptable as to value, margin, quality, and delivery, the bank receives a demand note signed by the borrower and in return grants him the loan.

The procedure of handling a time loan includes the keeping of several additional records. All facts relating to the promissory note are first entered in a discount ledger, which gives the complete history of the debt between borrower and bank. As the note is a time obligation, it is entered in a maturity tickler, which is a diary of all loans filled chronologically according to their due dates. The name of the maker and all the indorsers are recorded in a book known as a liability ledger. The bank thus knows the direct and the contingent liabilities of each borrower and is able to prevent overextension of credit to any individual or firm. On the maturity date the note is presented to the maker, and if payment is made the obligation is canceled.