In addition to the services which the railway, the mail, the telegraph and the telephone have rendered credit transactions, these have been further helped by the increase in banking accommodations which are now found in nearly every town and village in the country. These accommodations have worked a change in the methods and extent of note settlements. The long-time credit—frequently one of six months or a year—was of course paid for by the merchant in the form of higher prices and higher rates of inter est. When, therefore, he found that the bank was willing to extend to him the necessary accommoda tions, he quickly saw the wisdom of borrowing money from the bank and taking advantage of the whole saler's most favorable credit terms.
7. Buying on open the practically complete disappearance of the long-time credit instru ment, the chief record of credit transactions was that which the creditor's books contained. The bills of exchange formerly used had not only served as first hand evidence of debts but had also done duty—to some extent at least—as a medium of exchange. A merchant who had sold a bill of goods and taken a note as payment, could either turn the note over to a manufacturer as payment for more goods or take it to the bank and discount it for actual cash. The lat ter course was frequently a great convenience, and the necessity for such accommodation continued to ex ist, even tho the use of the bill of exchange was fast being discontinued.
8. Borrowing on book accounts.—The merchant, however, was not left wholly without a means of turn ing his outstanding accounts into cash, for he was usually able to borrow money upon them. But this required that the owner of the book accounts be well known to the banker; for unlike the promissory note, which gave evidence of a double transaction—involv ing both the maker and the indorser—the book ac count had only the owner's name to stand upon.
As soon as it had been demonstrated that the prac tice was both safe and profitable if conducted with due care, a regular system for dealing in credits of that kind gradually grew up. 'While at first this business was handled by the banks as part of their loan department routine, it eventually came to be the work of a special department organized for that pur pose. However, many of the banks found that busi ness of this kind, being highly specialized, was not always profitable, especially in view of the conserva tism that is always necessary in the conduct of a bank.
In their stead, there gradually grew up certain broker age institutions that made a specialty of handling business paper. The brokers soon became expert in judging credits, and the brokerage concerns, as they gained in capital strength and in prestige, came to be looked upon as valuable adjuncts to the banking sys tem. Thus, where a bank finds itself unable to as sume the risk of discounting book accounts at first hand, it is frequently able to lend money on the se curity which the broker furnishes.
9. Two ways of assigning accounts.—The exact methods by which this business is handled varies to some extent. Frequently the merchant who assigns his accounts may draw against the amount of such accounts up to a certain point—say, seventy-five per cent.
The terms upon which the merchant may assign his accounts are of course largely determined by the na ture of the accounts and by the standing of the as signor himself. Often the merchant is made virtually the agent of the assignee, collecting the individual ac counts as they fall due and using the money in his own business. It goes without saying, however, that in the latter case the merchant is under the necessity of replacing the collected accounts with new ones in order always to maintain a proper balance. The ad vantage of this method to the merchant is chiefly that it permits him to hide from his customers the assign ment of their accounts.
If the bank or commission house is willing to as sume all risks and buy the accounts outright, the terms are, of course, less favorable to the assignor. Usually the accounts are bought only at a heavy discount.
But while the assignment of his accounts is a per fectly legitimate procedure the merchant who finds it necessary to resort to this expedient in order to meet his current liabilities is not always regarded in the best light by his creditors, if the matter becomes known to them. For not only does this procedure indicate that the merchant is urgently in need of funds, but the assignment of his accounts receivable, unless il legally made, withdraws these from his assets and diminishes by that amount the resources available for distribution among creditors in case of his failure in business.