130. Loans On Warehouse Receipts

Banks are frequently called upon to advance money on the security of goods in storage, represented by warehouse receipts. These receipts are negotiable and represent actual goods having marketable value and ought to be as good security as commercial paper, minus the moral value of the extra name. Great care must be exercised in handling this class of loan, to see that the papers are in proper form, that the goods are properly insured, etc. The bank should confirm the statement of the borrower as to the value of the goods stored, and should demand ample margin. The borrower should reduce the loan every time he makes a delivery of goods. The warehouse will see all deliveries are endorsed on the certificate.

A grain receipt of a warehouse registered by the State of Illinois is preferred to receipts issued by non-registered warehouses in Chicago, because the Chicago Board of Trade will not accept trades in stored grain for delivery unless receipts are from warehouses under the supervision of the state grain inspector.

Loans should never be made on receipts covering whiskey, etc., unless from bonded warehouses.

131. Loans On Assigned Accounts

This is a new form of collateral which has appeared when houses are unable to secure notes of customers for goods sold. They regard their accounts receivable as valuable assets and they are invaluable to them, but they ought to be discounted considerably as a collateral security. Borrowers who endeavor to secure loans on this kind of security have in all probability used up every other kind of borrowing asset and therefore need watching. The practice is to take an assignment of some of the larger accounts, with the understanding that the bank is to receive all payments on account, instead of the borrower and apply all receipts to the reduction of the loan, returning the balance to the borrower. There is considerable work connected with the handling of the loan itself and collection of the payments, not to mention the rigid investigation that should be made of the financial standing of every account assigned to the bank. The laws of the different states prohibit a bank from charging a rate high enough to make this kind of a loan profitable.

132. Purchased Paper And Note Brokers

Purchased paper is a term given to notes of commercial houses, which are bought from a third party.

A note broker is one who makes a business of disposing of large amounts of notes of commercial houses to banks and trust companies and others who have money to invest in such paper. Many bankers do a large note brokering business. Some large business houses who need to borrow money frequently, instead of shopping among the banks for loans, issue notes for all the money they need and deliver them to a responsible note broker.

If the broker has not already done so, he makes a careful investigation of the credit and financial standing of the intended borrower. On being convinced that the house is in sound condition and that the notes will probably be paid at maturity, which is rarely more than ninety days from date, they do the shopping among the banks. If the notes are drawn at 5 per cent they will try to shade the net return to the banks down a trifle so that they may make the difference. The broker does not endorse or become responsible for the payment of the note at maturity. He simply guarantees that it is what it purports to be, the genuine note of the house he represents. However, much dependence is placed upon the broker, and there are grave risks attending the purchasing of the notes of any but the best-known houses. On the other hand, the banker has the privilege of investigating the borrower as fully as he would one of his own customers.

Purchased paper is used largely in trust companies as a short time investment for deposits. It would be advisable to keep a certain percentage of deposits invested in first class paper of this kind, because there is no obligation to renew the loan at maturity. It is so much money that can be counted on. A bill of sale should always be demanded with every purchase.