The security of the paper is enhanced by the fact that the company's loans are scattered among many cattlemen, the simultaneous failure of whom is quite unlikely. Hence the buyer of paper from such a loan company is more secure than if he bought a mortgage note of a single cattleman; in addition he is relieved of the bother and expense of inspecting his security and of seeing that it does not deteriorate. The spread between the interest rate and the rediscount rate is from 1 1/2 to 3 per cent, and generally between 2 and 2 1/2 per cent. The cost of making the loan is from 1 to 1 1/2 per cent, and, other things being equal, the cost decreases with the size of the loan. The difference between the spread and the cost represents the profits of the loan company.
The security behind cattle loans therefore rests upon a number of factors, including careful investigations of the borrower and his collateral, recording of the brands and descriptions of the cattle, provisions to see that the proceeds of sales of cattle bearing these brands are turned over to the holder of the note and mortgage, the integrity and business sagacity of the loan company, and its assets.
Cattle paper is especially liquid. While renewals are necessary on stocker and breeder loans, requests for renewals are unusual in the case of feeder cattle, which must be marketed when ready as any lengthy delays will cause loss. Therefore loans on feeders automatically liquidate themselves. In the commercial paper market cattle paper has a very good reputation.
Cattle-loan companies thus furnish the cattlemen with large loans; as the cattle industry on the range is conducted on a large scale, larger loans are necessary there than can be provided by local banks. The loans, too, are at rates lower than local capitalists would generally accept. The companies tend to promote the cattle industry, steady the price of beef, increase the food supply, and perform other economic functions.1