Advantages of Borrowing Through The advantages to the borrower from issuing its paper through note-brokers include the following: i. A concern may be able to borrow at lower rates than if it depended upon local funds. The ability to obtain lower discount rates is not the prime consideration, however. While at times brokers' rates are lower than the rates obtained from the local banks, it frequently happens that their rates are above those charged by banks to their customers; in the long run the average rate would probably not differ greatly either way.
2. Its borrowing facilities are, however, widened; the sources from which it can borrow are increased; and it can keep its ability to secure accommodation from its local banks for emergency when open-market borrowing becomes difficult. It enjoys a desirable independence of the local banks.
3. Many large borrowers need more capital than their local banks can loan, and instead of going around to borrow in other places, they employ the broker who is expert in this line of fi nancing. He covers the country and knows the field, the needs, and the preferences of the banks and the other buyers of paper, and has an effective selling organization in operation. The ex pense of borrowing through brokers is therefore less than if the concern borrowed directly.
4. A certain advantage also attaches to the open-market method from an advertising standpoint; it helps to make the firm's name known throughout the country. Brokers who have at tained a good name investigate carefully the paper offered and their offerings are synonymous with quality; to pass this test and have the fact made known generally over the country reacts favorably upon the firm's credit.
5. The total amount of funds carried as balances with banks is reduced, and therefore the total borrowings are less. Such balances need be carried only with local banks; it is probable that those local banks will require larger balances than if the borrower dealt only or more largely through them. If the borrower ex pects to receive much accommodation in emergencies it is neces sary for him to carry fair balances with the local banks, and such balances reduce the economy of borrowing elsewhere.
Effect of Open..Market Borrowing on Banks The banks are affected in various ways by open-market borrowing through note-brokers. Some banks dislike to have their customers borrow in this way; it destroys their local monop oly on loans. It is contended by them that competition and rate
cutting by brokers make it easy to borrow money and thus pro mote dangerous expansion; and they also object to having their customers do all their borrowing on the open market when money is easy and borrow from their banks only when money is tight. On the other hand, the banks may take the position that, if its customers can stand the scrutiny of a good note-broker and any where from twenty-five to fifty keen credit department men besides its own examination, the risk is much less, and therefore rather favor than oppose such operations. Brokers sell where discount rates are lowest and therefore tend to equalize the dis count rates of the country, thereby rendering credit more mobile and effective.
The banks buy open-market paper to put out otherwise idle funds. The local demand for funds is seasonal and the surplus in banks in one section of the country may occur at the time of high demand on another; by buying commercial paper with maturities adjusted to the probable local demands for funds the banks not only have their funds continually employed and in paper which they are under no obligation to renew, but also have good secondary reserves. Their field for lending is widened and loans are made frequently at better rates than local conditions warrant.
The average local banker depends upon his city correspondent to select his paper and he buys on its recommendation; but it is very possible for him to select and familiarize himself with a few well-known commercial paper names; a third but poor alternative is to depend upon the recommendation of reputable note-brokers. The broker has scrutinized the paper that he offers more expertly than the banker can; and the broker furnishes the buyer upon request, not only a digest of the borrower's statement, but also a list of houses from which trade references may be obtained and banks which have handled the paper before. The result is that open-market purchases have proved safer than loans made direct. When a bank deals with its customers it tends to take greater risks than in open-market purchase; in making direct loans there is usually the inducement of an account and the banker is in a less independent position; the loan will likely be larger, be made to smaller and weaker concerns, and be more bound to renewals.