140. Records

The first requisite of a set of credit records is a statement of the borrower's assets and liabilities. The proper time to request such a statement is when the prospective borrower makes his first application for a loan. Figure 113 on page 240 shows a form in use by a large bank. It must not be assumed that because a man demurs at giving a statement that he is not worthy of receiving credit, for, as mentioned above, there are many men with good business sense and plenty of assets who do not keep books and cannot give an accurate statement of assets and liabilities. Many men at first object to reposing such confidence even with their bankers, but it should not be impossible to convince such a man that it would be to his advantage to make a full statement to his banker. The confidence thus given is never violated, and it is much better for a banker to be able to say something positively about a man when others apply for information, as they surely will, than to have nothing whatever to say.

For the purpose of procuring credit, from time to time, with the above bank for our negotiable paper, or otherwise, we furnish the following as being a fair and accurate statement of our financial condition on the........................day of........................................................19........

In consideration of the granting of such credit, it is hereby agreed that in case of the failure or insolvency of the undersigned, all obligations of the undersigned held by said bank shall become immediately due and payable.

Contingent Liability.

Accommodation Endorsements................................

Endorsed Bills Receivable Outstanding.........................

Names in full of all General Partners.

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Names in full of Special Partners with amounts contributed by each and until when.

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State last date of taking trial balance and if same proved............................

Memorandum....................................................................

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Please sign here................................................

By................................................

Date Signed....................19...

Figure 113. Statement Of Borrower.

The signature should be acknowledged before a notary after taking a borrower's deposition that the statement is a true one. The bank's own notary may take these acknowledgments without charge. The effect of this formal declaration will be found worth while.

Analysis of borrower's statement. The next thing in order is to analyze the statement, for an unanalyzed statement is no statement at all. Professor Bolles sets up the following as a list of things to be looked into:

1. Is the capital sufficient, and has it been contributed in cash; if not, what does it represent?

2. Who constitute the firm and do the partners understand the business?

3. Has the stock been taken in at a fair figure, and has due allowance been made for depreciation? This is very necessary in large manufacturing concerns.

4. What about accounts and bills receivable? Is there sufficient depreciation for bad debts? Have all bad debts been written off or provided for?

5. Liabilities should be carefully examined; are they heavy; are they continuously large, to whom and what for?

6. Is the buying legitimate in amount?

7. Do they carry other lines beside their principal business? If so, where does the capital come from?

In addition to the above, the credit man should inquire carefully into the question of insurance on stock in trade, buildings, etc., if carried in assets.

The borrower will probably value his assets generously, and the bank should be quite as liberal in depreciation. Ten per cent should be deducted from accounts and notes receivable as a reserve for bad debts, and a like per cent for depreciation on machinery. At least 10 per cent should be allowed on shopworn stock and 50 per cent on anything of indeterminable value.

Much valuable information may be gained from the previous loans. If paper is renewed year in and year out, it is pretty safe to assume that the borrowed money has been sunk in fixed capital rather than having been devoted to legitimate purposes as floating capital while goods are in process and sale. All discounts should be paid in full or reduced materially once a year.

If the borrower is willing to submit to any rate without protest, it is an indication of his urgent need for the principal.

A study of the man's account will produce valuable results. From whom does he receive the checks he deposits? To whom does he issue checks?