When this condition is found to exist, the merchant's or manu facturer's credit usually is curtailed by banks and by the trade. In fact, many mercantile houses refuse to sell to concerns which conduct their business in this manner. It has been found that, where this practice is followed, in the event of failure the un secured creditors receive little or nothing from the bankrupt's estate. No guaranty of payment of these accounts is made by the discount house.
Borrowing from Commission House The case is different where a manufacturer does business through a commission house; he receives advances to the extent of, say, two-thirds of the value of the merchandise pledged with it, and if it sells the goods it guarantees the accounts, charging a commission ranging from 2 to 4 per cent, according to the amount of detail involved in the business. This particular manner of business ordinarily works no hardship upon the manufacturer. While no large difference in the charge may exist between houses working in this way and those which pledge their accounts by assignment, the charge for selling and guaranteeing accounts is, as a rule, less than where the manufacturer maintains an or ganization and assumes the credit risks himself.
One prominent New York house advertises its business as follows: The company buys commercial accounts from manufacturers, wholesalers and jobbers, having their guaranty for too per cent of all accounts so purchased. These accounts are payable in 30 or 6o days and average less than 40. If they are not paid promptly at due date the company reimburses itself from a guaranty fund of 20 per cent or more left in its hands by the manufacturer or wholesaler for this purpose. The company usually pays 8o per cent less the discount in cash at the time of shipment and retains a reserve of 20 per cent or more, to be paid only as said accounts are collected. The company thus has a double guaranty in addition to the responsibility of the debtors to whom its customers ship the goods.
This company raises its funds by sale of capital stock and debenture bonds.
Sometimes a manufacturer does not require advances from a commission house but utilizes it only to sell his goods and guaran tee his accounts, obtaining from banks or note-brokers in the open market the credit he requires. If his credit is good, it is not often, at least until recently, that he must pay more than 5 per cent for money, and the saving thus obtained, by the difference be tween the rate charged him by the commission house and the rate at which he can borrow elsewhere, may at times be considerable.
Simultaneous Borrowing from Different Sources Sometimes houses will borrow simultaneously, through com mission houses, from banks, and in the open market. From the banker's standpoint this practice is unsatisfactory, as the com mission house is secured to the extent of practically 15o per cent, the amount which the house is advancing to the manufacturer being about two-thirds of the value of the merchandise, while the banker's loans are unsecured.
In some instances it does not become generally known that a manufacturer who is borrowing from banks is at the same time receiving advances on his merchandise, and when such concerns fail, the creditors are usually unable to collect much on their claims. Somewhat after the manner of commission houses, certain interna tional banking houses undertake the financing of importers by advancing money against merchandise, but when this is done it becomes known through the customary channels, the importers, as a rule, having no particular reason to keep the matter secret.
The fact that there is such a large element of secrecy in the selling and pledging of accounts, and that the method lends itself so readily to fraud upon creditors and discount houses and com mission houses that finance the assignors, has led to a demand that all sales and pledges of accounts should be made matters of public record.
The Trade Acceptance and the American Acceptance Council Effort to introduce trade and bank acceptances as the pre dominant form of credit extension as between buyers and sellers of goods and to supplant the open book account system has taken organized form in the American Acceptance Council. This council acts as propaganda and organization agent and is conducting a campaign of education through the press, circulars, and platform. The Federal Reserve Board and banks have also encouraged the use of acceptances. The trade acceptance in one form or an other is now used by upwards of ten thousand firms and busi ness establishments and the number of its users is increasing daily. Its practicability has now been proved beyond doubt. It offers advantages to the buyer and seller of merchandise, to the banker and banking system, and to the general public.