COMMERCIAL PAPER AND THE DISCOUNT MARKET The Cash Discount System and Single-Name Paper The terms upon which American manufacturers, distributers, jobbers, and retailers sell their goods vary somewhat with the different lines of business. These variations rest upon custom, local conditions, or the peculiar necessities of the trade, such as seasonality or perishability of the product, the character of the market, distance between producer and market, etc. The terms granted differ also as among the different houses selling and as among customers buying; the tendency is, however, for the associated members of a trade to charge the same prices and allow the same terms to all. In general, the American system for the last fifty years has been characterized by the open account and cash discount; in some lines, however, the note receivable and the trade acceptance are prominent. The tendency is to extend credit for such period only as will permit the buyer to realize on the goods bought; the more regular the sales throughout the year and the higher the turnover, the shorter is the term of credit allowed.
The cash discount system is as follows: The jobber (or other seller) sells to the retailer (or other buyer) "on terms," such as "2 per cent To days, net 3o days," which means that the net in voice price is due in 3o days but that by paying within ro days, the substantial discount of 2 per cent from the price will be allowed. Payment within ro days is called " cash " payment, and the 2 per cent deduction "cash discount." The shipments of goods are recorded by the jobber as accounts receivable; they are open book accounts, as the sale is not closed by a signed note or draft, and succeeding sales are added to the account. The goods are sent under implied warranties, and the accounts are thus subject to dispute at time of settlement. To induce the retailer to pay cash, the discount is made considerably in excess of the interest for the remaining time. For instance, in the above quotation of per cent to days, net 3o days," the 2 per cent discount allowed for payment 20 days earlier is equivalent to 37.2 per cent interest per
Obviously if the discount allowed were 3, 5, 7, or to per cent, as it sometimes is, the advantage of taking the discount and paying cash would be still greater. But if the quotation were "2 per cent to days, net 90 days" the advantage would be less, for it would necessitate the retailer using his own funds or borrowing for a longer period to gain the discount, that is, for at least So days.
If the retailer can get accommodation at his bank at ordinary rates it is highly profitable to him to borrow the funds and pay the jobber cash. If the retailer does not pay cash the jobber must carry him for the 3o days at least, and to do this the jobber must borrow. Whether the loan is obtained by jobber or retailer, the usual method is to borrow from the local bank on a single-name promissory note, the borrower proving his solvency to the bank by a financial statement.
Since in practice the date of settlement is somewhat flexible so as to accommodate retailers, and since the possible accommo dation which the jobber's local bank can extend is often quite limited, big jobbers (and some big retailers and manufacturers) obtain further funds through the sale on the open market of their simple promissory notes for a round amount, adjusting their maturities to those of their book accounts receivable. Such notes are marketed through note-brokers.
Another way in which single-name paper comes into use is in the settlement of overdue book accounts receivable or in exten sions granted to weak debtors. Since such notes are not readily discountable and are likely, if known, to injure the credit of the jobber, he holds them in his portfolios and issues his own notes instead. The open book account, cash discount, and single-name paper characterize American sales' terms. Among others, two results are evident: (r) the period of credit extended by the seller has been shortened until American business is nearly on a cash (io-day) basis; and (2) single-name paper composes a very large proportion of the commercial paper of the country.