Another form of commercial credit which has been developed as a substitute for the promissory note and the commercial draft is the book account. With the disappearance of the long-time credit instrument the chief evidence of the indebtedness of the buyer to the seller of the goods was the record on the seller's books. Having the same need of raising money, but not having his customers' notes to discount at the bank, the jobber or wholesaler resorted to the practice of borrowing directly on these book accounts.1 At first the handling of this particular kind of credit was confined to the banks and some banking concerns have separate departments for dealing in book accounts. In recent years there have grown up brokerage or commission houses which specialize in negotiating loans on book accounts. Some of these houses, which are closely connected with banks and trust companies, have a very large and lucrative business.
1 Prendergast, Credit and Its Uses, p. 114. 2 lbid.
There are several ways of realizing on book accounts.2 The book account may be sold outright to a bank or commission house which assumes all risks and charges a high rate of interest and, perhaps, a bonus in addition. Another plan is for the seller of merchandise to assign his book accounts and borrow upon them up to a certain percentage of their value. The assignee permits the assignor to collect the accounts when due, but requires the substitution of other accounts to maintain the agreed-upon ratio. Under this method the borrower's customers do not know that he has assigned their accounts. Sometimes the commission house or banker advances funds to a certain percentage of the value of the accounts assigned by the borrower and collects the accounts. In this case the borrower's credit may suffer somewhat because his customers learn that he has assigned their accounts to procure funds. Though the increasing number of firms whose business it is to make loans on book accounts is evidence of the large use of this method of procuring funds, a borrower who resorts to it, involving as it does heavy interest charges, is not generally considered as having high credit standing.
1 See Prendergast, p. 115. 2 See Hagerty, pp. 68-G9.