There are certain conditions covering the relation of Canadian banks with their borrowers which are invariably observed. One is, that no man can be a borrower from more than one bank, and it is only in the case of a very large account that this rule is broken, and then only by mutual agreement between the banks interested. The advantage of this "one bank" policy is obvious. The customer benefits from the fact that in being loyal to one bank he can rely upon the support of that bank at all times. The bank is also thoroly in touch with his position and prospects, and is often able to give valuable advice. Another condition a Canadian bank insists on is, that a full statement of a customer's affairs should be submitted to it each year, and that as far as possible loans should be cleaned up at least once a year.
On the fulfilment of these conditions the bank on its part grants a customer what is called a line of credit, based on his estimated requirements, which is generally for a period of one year, during which time the customer is able to use as much or as little of the authorized credit as his business requires; providing, however, that he does not exceed the limit. A customer of a Canadian bank of good standing has therefore very little to worry about during the currency of his line of credit. He is not called upon to pay interest on more money than he is actually using, and he is, moreover, assured of the support of the bank in the operation of his legitimate business, no matter what the financial conditions may be.
The position of a bank customer in the United States is very different and not always so comfortable. National banks are restricted by law in the amount of loans they may make to any one firm or corporation, and large concerns are forced to seek loans all over the country. This practice is not to the advantage of the borrower; he is dependent on note brokers to dispose of his paper to various purchasers thruout the United States, to whom he is personally unknown. The paper must be met at maturity without fail. True, provision could be made by selling more paper, but if money is at all scarce even this resource is not available and, in consequence, solvent firms are often forced to the wall. The position is an unfortunate one for the borrower, not only because his finances are always in a state of uncertainty, but because the practice has a tendency to encourage over-borrowing in times of easy money, with consequent over-expansion. This evil is unlikely to happen to a man who has only one bank to deal with, as no trained banker would allow a customer to obtain more money from the bank than his business conditions warranted. A brake is just as necessary in business life for averting disaster, as it is in the mechanical world.
This method of financing naturally restricts the manufacturer and wholesale merchant to the making of one class of paper, their own single name notes, and consequently comparatively few settlements with their customers are affected by means of notes or drafts, the amounts due being carried in open account until the customer remits according to the terms of the sale.
In Canada, however, open accounts are the exception, and practically every sale of goods is subject to settlement by draft or note. These notes and drafts are known as trade bills and are discounted freely by a bank and collected thru its various branches, the proceeds being applied in reduction of the customer's loans.
The Canadian borrower has therefore two methods of borrowing, loans and trade paper. Loans are made with or without security for the purpose of creating or purchasing goods. The goods when made or acquired are exchanged for cash, notes or the right to draw on the purchaser; the two latter are known as trade bills and, when discounted by a reputable firm, form the highest class of security a bank can have.
The discounting of trade paper is of benefit both to the bank and to the borrower. The latter changes a direct loan into an indirect or contingent liability, and is assured of the effective and prompt collection of the debt. The bank receives tangible evidence that its loan has been devoted to the production of goods, and that the goods have been disposed of to responsible merchants; furthermore, its position is strengthened by a second name and a definite date of payment.