Assistance To Banks In Credit Matters

Trade acceptances necessitate collections upon maturity, which work is invariably done by banks. Where they are generally used, bankers are in a position to keep in very close touch with local credit conditions, and have an opportunity to observe which of the local people pay their acceptances promptly and satisfactorily, and which of the local people meet their obligations in an unsatisfactory way. At the present time the local banker has only a general idea as to how various peoples in the community settle their open accounts. Under the acceptance system, he will know definitely the credit standing of the various people of the community in a more certain way.

Prevention Of Assignment Of Book Accounts

It frequently happens that open book accounts are secretly assigned, the knowledge of which might remain unknown to the banker. Such assignments of accounts are sometimes made by very reputable people in order to overcome real disadvantages existing in our present system of extending credit. The assignment of accounts is a menace to sound credit conditions, as one's assets may be transferred without the knowledge of those whose interest it is to know it.

The holder of acceptances will be able to realize upon them at short notice, instead of being forced to either wait until the accounts mature or to loan thereon, at greater cost.

The trade acceptance would overcome in a legitimate manner all such disadvantages for it would eliminate the practice of secret assignment of accounts.

Assistance In Judging Customers

In the discount of trade acceptances by a depositor, the banker is able to learn which of his customers are desirable and which are unsafe or dangerous. Trade acceptances enable the banker to judge his depositors' customers as either comprising a good or bad class. The advice of the banker would doubtlessly lead the depositor to concentrate his efforts on the good customer and discontinue business with such as the banker might suggest were unsafe. This will tend to eliminate losses on the part of the depositor.

In judging the basis for credit of a particular party or firm, bankers generally expect that the total bills and accounts payable will not exceed fifty percent of its quick assets, consisting of cash, accounts receivable and inventory. It is believed by some bankers that the introduction of the trade acceptance would interfere with this so-called fifty percent rule, as a bank would then be called upon to continue the process of discounting for any one customer for the full value of the acceptance, in other words, treating the acceptance as the equivalent of quick assets.

In European countries, where the acceptance method is most developed, bankers make a distinction in extending credit on acceptances and on open accounts. They allow the depositors two lines of credit, one against trade acceptances, and the other based on inventories. The banker examines the trade acceptances offered, and if he finds them of a high-class nature, extends a liberal line of credit. The banker then carefully considers the exact nature of the inventory and its status with respect to existing liabilities and grants a line of credit based on the inventory, depending upon whether the products are staple or not readily saleable.

Foreign bankers claim that this is a more scientific way of extending credit than our method of merely granting fifty percent, and furthermore, it is pointed out by these foreign bankers, that they loan money on two specific items in their depositor's statement. First, they discount the trade acceptances, which represent the best form of accounts receivable, and second, they loan money on the depositor's inventory considered in relation to the depositor's liabilities. Under this system, the money advanced by the banker is very seldom used for the purchase of machinery, extension of buildings and for acquiring other fixed assets, as is sometimes the case under our system where the banker does not make such close inquiry as to just what the money is to be used for. Credit extended on trade acceptances is based upon money due to the depositor, while straight bank loans are based upon inventories.