Secured Credit The personal element can be reduced by attaching to the 2 credit a concrete article of wealth or property right which, having assured and easily determined value, can be readily sold and con verted into money. This insures ability to pay and the law will avail to collect payment. Such is the method of collateral secu rity. The promise in the collateral note is backed by the pledged wealth or property. Ability to pay can also be practically as sured by basing the credit upon a strictly commercial transaction the completion of which will put the debtor in funds within the period of the debt. Such credits are said to be "self-liquidating," since they assure the debtor of ability to pay, provided the busi ness is sound. These two methods may be combined in one, the collateral being commercial documents by which the commercial transaction is effected, for example, bills of lading attached to a commercial bill of exchange.
Credit Indorsement and Substitution The personal element can be reinforced by getting, in the words of the customary expression, "someone to go your secu rity," that is, getting more "names" on the paper to evidence the credit; the purpose of these indorsements is to divide the risks. Synchronous complete failures of all the indorsers are, by the law of chance, very unlikely. Hence the security of the credit be comes as strong as the ability, joint and several, of the indorsers to pay, but no stronger.
The personal element can also be reinforced by getting some party who is better known, stronger in wealth and connection, and with good financial record, to substitute as debtor. The prac tice of issuing and using letters of credit is based upon this idea. A New York bank makes arrangements with an English bank whereby the latter agrees to accept bills drawn on it by a Brazil ian exporter; otherwise the New York importer would have to be drawn on and the Brazilian could get from the Rio de Janeiro bank but a very low price for the bill as compared with one drawn on the English bank. This substitution of debtor constitutes the fundamental difference between the bank acceptance and the trade acceptance.
Commercial and Financial Credits Credit is deferred payment; there is a period of trust, and it may be long or short. The longer the period the more the con tingencies against which the creditor must provide. "Com mercial credits" have come to differentiate themselves from "fi nancial credits" on the basis of the term; the former are for io, 20, 3o, 6o, 90, and 120 days, and are evidenced by promissory notes, checks, drafts, bills of exchange, acceptances, and so forth; the latter are for periods of 1, 2, 3, 5, IO, 20, and 4o years, and are evidenced by various forms of notes, bonds, and certificates.
Commercial or mercantile credits are used to conduct the daily operations of business life. It is always assumed that the money or goods are to be used in such ways that the debtor will be in a position to realize upon his transaction within the period of the credit and so will be able to pay upon maturity.
Financial credits, on the other hand, being for long terms of years, are issued with the idea that the money or wealth which the creditor contributes to the debtor is for quite permanent use. If the creditor wishes to regain his funds before maturity he does so by selling the credit instrument to another who may wish to be come creditor to the debtor; and it is commonly understood that the debtor will never make repayment in his own money or goods, but that the present credit will be met at maturity by refunding, that is, borrowing further funds either from the same creditor or others. There are, however, various practices by which com mercial credits function in real fact as long-term credits.
Definition of Commercial Credit Exact agreement does not exist among financial men and writers as to the definition of commercial credits. In the United States the term "commercial paper" is widely used in a very technical sense, and refers only to such paper as is marketed through note-brokers. Such paper is short term, but is in large part continually renewed at maturity and sold to present holders or others, and therefore represents long-term advances. Another restrictive definition makes commercial credit relate only to credit extensions which facilitate the marketing of products. This definition is too restrictive; industrial loans for the purpose of buying raw materials and paying wages to workers may be as self-liquidating, may be for as short terms, and as safe for tempor ary investment as mercantile loans. This definition would ex clude also loans to speculators and brokers, a considerable part of which are characterized by the two essentials of commercial credit, namely, short term, and self-liquidation. Important dif ferences of opinion as to banking policy often arise from the in ability to agree on a strict definition of commercial credit.