Naturally the bulk of the loans of a commercial bank consists of advances to manufacturers and wholesale merchants. Both classes are considered highly desirable customers. They are at times heavy borrowers from banks, and a consideration of their relative merits in that connection is of interest. Mr. George Hague, in his "Banking and Commerce" has expressed himself so clearly on the subject that he is well worth quoting:
There is this fundamental difference between the wholesale merchant and the manufacturer; the merchant, if his credit is good enough, can put the whole of his stock upon his shelves without the expenditure of a single dollar except for freight and duties. Good credit will enable him to obtain all he wants from manufacturers on this side of the Atlantic, or from wholesale houses in England. But a manufacturer can do nothing of the kind. From the time that he begins operations he has to provide for a cash expenditure which never ceases until goods are ready for sale. In nearly every branch of manufacture he must pay cash for his raw material and his fuel. And the moment he begins the manufacturing process, his pay-roll of wages confronts him week by week, and must be met. There can be no possibility of asking credit here; not for a single week could wages be left unpaid. In the case of special lines of manufacture where wages are a most important item of cost, the necessity of meeting the large sums required is the most harassing of all financial pressures. It presses, indeed, more heavily than the necessity of meeting acceptances and promissory notes, for the payees of these can be approached for renewal, at a pinch, while a request to a body of workmen to defer payment of wages is utterly impossible. And as payment is imperative, the manufacturer will naturally, in such circumstances, have recourse to his banker.
Hence, it is more difficult to finance for a manufacturing establishment than for the business of a wholesale merchant. The latter, having the power to buy goods at all times on credit, has no reasonable ground for asking regular advances from his banker. His dealings should be confined, as a rule, to the discount of bills given by his customers.
The only payments a wholesale merchant has to make, which are absolutely imperative, are the customs duties and freight on imported goods. It is just as impossible to ask credit here as it would be for the payment of wages. But no wholesale merchant could reasonably think of commencing business without capital, and the very lowest minimum necessary would be an amount sufficient to pay the duties on the stock requisite to commence business, and thereafter on his average stock.
Once he has his goods in warehouse, he can begin to sell, and with such facilities as bankers are now ready to offer for the cashing of customers' bills, a merchant may, from a financial point of view, be said to be able to sell for cash.
Thus, by the time the payments for his stock become due, the proceeds of his sales ought to be sufficient to meet them.
From all which the rule may be deduced that loans to a wholesale merchant (as distinguished from the discount of trade bills) should be considered as irregular in the nature of things, and only to be granted in exceptional circumstances.
But the whole system of loans to wholesale merchants is exceptional, and requires exceptional treatment at the hands of a banker.
The character of that treatment may be indicated as follows:
First, no regular line of credit should be arranged for in respect of loans; that is, no amount which a customer can always have at his command. Second, advances should be temporary, each being applied for on its own merits, with the explanation of circumstances. Third, they should only be allowed at certain seasons, and never last more than two or three months at the most. Fourth, renewals should not be granted. Indications of continuance should be carefully watched and promptly dealt with. If advances become chronic, security should be insisted upon. Fifth, it is always desirable, too, that when such advances are granted to a firm, the indorsement or guaranty of each individual in it should be obtained; for individual partners may have separate estates which the indorsement would bind. If the business is carried on by a joint-stock company, the guaranty of some of the principal stockholders would be desirable.