SHORT-TERM LOANS 1. Short versus long-term loans.—In the legal sense a note and a bond are the same, each being a written promise for the future payment of money. In finance, however, different meanings are given to these terms, based upon distinctions of: (1) time, (2) formality of contract, (3) denomination, whether singly or in series, and (4) security.
We have seen that corporate notes may be (1) given to trade creditors to cover purchases, (2) dis counted at the banks for seasonal advances; or (3) sold to the public for temporary requirements. When given to trade creditors or banks, they are usu ally self-liquidating and do not run over four or six months. When sold to the public, however, notes usually run from one to three years, and sometimes longer. Bonds, on the other hand, usually run from ten to one hundred years, seldom less than five years. This chapter relates to notes maturing in from one to ten years and sold to the public, including banks which buy in the open market.
Notes are sold to fill temporary requirements, whereas bonds are issued to supply a part of the per manent capital of the company. Bond issues are therefore usually larger than note issues, better se cured, and the instruments are more formally drawn. Notes may be given singly, as in the case of bank loans or the settlement of trade accounts, but when sold to the public are usually in series. When so issued, each note is for one hundred dollars, or some multiple of this sum. When issued singly, the note may be for any odd amount, according to the account settled or the specific amount borrowed. Notes in series differ from bonds, which are always issued in series, only in being issued for shorter terms and with less formality.
It is only natural that long-term obligations should be better secured and more formally evidenced than temporary and smaller debts. Notes issued individ ually or in small series may be very informally written and may range in denomination up to $100,000 or larger. On the other hand, when the issues are of large size and expected to be widely sold to the public, it is better practice to have the notes beautifully en graved, and issued much in the same style as bonds.
In this case, they are usually in even denominations of one hundred dollars, five hundred dollars, or one thousand dollars, and may be listed upon the stock ex change.
Corporate notes, whether large or small, formal or informal, single or in series, always mature upon a definite date and otherwise conform to the require ments of negotiable credit instruments. Each note should be signed by the proper officer of the corpora tion, upon whom authority has been expressly con ferred and should bear the name of the corporation above the signature of the officer, in order that it may not be mistaken for his personal obligation.
2. Market for corporate note issues.—Since cor porate notes are sold to meet temporary requirements, they are put out upon a banking basis, that is, they bear a rate of interest similar to trade obligations, or direct bank loans, and possess security similar to that required by banks upon ordinary accommodation pa per. It is usual for the corporation in turn to retain the right of redemption upon any interest date, after short notice, and frequently, when reinforced by col lateral, the right to substitute or redeem any part of the collateral deposited under the trust agreement.
The ordinary investor in bonds who desires maxi mum security, permanency of investment, and mini mum supervision over his investment does not favor corporation notes. Their short term, redemption on brief notice, the care required to examine and watch them, and the possibility of idle funds between invest ments render them unattractive to him. On the other hand, commercial banks do not purchase them widely because they are too long in term, too restricted in market and not liquid enough. This explains why such notes usually require a higher interest rate than bonds. A slight difference in interest rate and mar ketability is often the only noticeable distinction be tween long-time collateral trust notes and short-time collateral trust bonds. In some cases, the difference between them is merely nominal.