105. The Loan Department

The loan department of a bank compares with the sales department of a producing or manufacturing company, or with the operating department of a railroad. It is the department under the guidance of an officer, where the profits of the bank are made. In a large bank in New York City, the duties of this department are very exacting and of vastly more importance to the bank than any other. If the department has several clerks and loans in the millions, an officer should have a desk in the cage and be in charge.

106. Time And Demand Loans

The first general division of loans is into time and demand. The time loans are classified as time loans and discounts. Either demand loans, time loans or discounts may be with or without collateral. Collateral may be divided into mortgages or other liens on realty and other collateral. The latter includes all forms of loans on stocks, bonds, bills of lading, warehouse receipts, assigned claims, and not infrequently upon silverware and jewelry, though the latter class of loan borders on pawnbrokering and cannot be classed as a legitimate bank collateral. Discounts are always referred to in New York trust companies as bills purchased, because the law does not give them the right to discount bills receivable, but does allow them to purchase, invest in, and sell stocks, bills of exchange, bonds and mortgages and other securities.

The loans and securities should be kept in perfect order so that any note and its collateral may be produced with the least amount of delay. The furniture and general equipment should be selected with due regard to the vault space and room in the cage. It would seem almost like the millenium if all New York banks would adopt some method of filing loans flat instead of folding stocks and bonds in order to get them into the usual loan envelope.

107. Discounts

The Standard Dictionary defines discounting as "The purchasing or accepting of notes, etc., at less than face value, retaining the difference, when paid, as interest." The same authority defines discount as "The interest allowed and deducted from the face amount for advancing money on negotiable securities not yet due."

The best kind of discounts arise from transactions similar to the following: A is a manufacturer of goods and sells to sundry dealers, including B. B buys his goods long before the season and must sell them when the season arrives. He is unable to pay A when he buys the goods, so gives his note to A for sixty or ninety days. He draws the note in A's favor and makes it payable at his bank. See Figure 72 on page 156. B, of course, can buy his raw materials for the next season's output $920.00 Nashville, Tenn., July 6th, 1909 at a better price if he can pay cash than if he has to give his promise to pay. He therefore takes the note to his bank, after endorsing it, and the bank gives him credit on their books for the amount of the note less interest to maturity, or less the discount, as it is termed. If B is a man of means and integrity, so that he is both able and willing to pay the notes of his customers in case they default, he will be allowed to discount his customers' notes quite freely.

Sixty days after date. I promise to pay to

"A"................................................................................................... - or order

Nine hundred twenty and......................................................................No/100 Dollars at the Brooklyn National Bank, Nashville, Tenn.

Value received.

No.............................Due....................................................................."B"............. ..

Figure 72. Note.

$1,000.00 Delaware, N. Y., July 25th, 1909

On the 25th day of........October............1909

We........................promise to pay to the order of....................Hudson & Co.........

One thousand and....................................................................................No/100 Dollars at the Coal National Bank. Value received.

Douglas & Duff

Figure 73. Note.

We have become used to dealing on credit, and to-day do not demand a note for every sale of goods. The buyer is charged on the books of the seller and remits when he is able, or according to agreement made at the time of sale. Thus we have not so many bills receivable and a great many more accounts receivable. The seller must, however, have money with which to buy raw material. He therefore goes to his banker and offers his own note for discount. This paper is not so highly regarded by the bank as the note of the purchaser endorsed by the seller, and the bank is much more careful in investigating the credit of the borrower. If the bank has a great deal of confidence in the man they will loan him on his own note. If they wish to feel a little more secure in making the loan, they will require the applicant for the loan to get some one to endorse his note. Some banks loan on the note of the seller and take an assignment of the accounts receivable as security. We will discuss this class of loan later.