It is a matter of common knowledge that in periods of great prosperity, credits are apt to become over extended, both in amounts and as to length of time. This is due to the fact that in times of prosperity, business is conducted at a considerable volume of profit. Furthermore, business men lose sight of the fact that nearly all periods of prosperity are sooner or later followed by periods of business depression. The result is that business houses find themselves with their business and profits greatly reduced and their credit obligations reaching the maximum.

In times like these money becomes scarce, as a result of which accounts are made difficult to settle, bringing about failures in business, to the great loss of all the people of the country.

As a remedy to the above conditions, the trade acceptance method is advocated, to the end that it will eliminate credit over-extension with its accompanying evils.

It is, therefore, to the banker that the problem of improving credit conditions and curtailing over-extension falls. The banker is especially interested in acceptances, and there are a number of interesting reasons why the average banker should encourage their use.

The Element Of Risk

Without question, from a consideration of the previous discussions of the trade acceptance, and from the standpoint of both the buyer and seller, the banker gains a great advantage from this class of commercial or two name paper, for it gives him a better opportunity of measuring risks than under the open book account system. Under the open account method, the best that could be done was to estimate the risk. Under the trade acceptance method the risk can be actually measured.

Higher Commercial Standing Of Acceptances

When a depositor seeks to borrow money on single name paper as security, the banker is never sure as to the purpose of its origin. The borrower may desire the funds for the purpose of using them in the general conduct of his business, but the banker knows nothing about the actual transaction against which he is extending credit.

The banker knows that the trade acceptance represents a current transaction. It shows on its face the reason why the credit is extended. The trade acceptance arises from a merchandise transaction and is backed up by the merchandise which it covers as security for its payment. The trade acceptance is consequently of a higher commercial standing than single name paper or paper with no uniformity of purpose in its origin, as commercial paper used by the Government banks for the issuance of bank notes it acts as a form of special currency.

Acceptance Requires Less Credit Re-Extension

Borrowers very frequently seek to have their bankers extend the time within which to meet their single name notes. Frequently, they are obliged to make new loans in order that they may be enabled to take maturing notes. In this connection, a general refunding process is nessary. The banker, moreover, in discounting single name paper, takes it for granted that he may sooner or later be called upon to extend the date of maturity.

In the discount of trade acceptances, however, the banker knows that the particular transaction is segregated from the borrower's general business, and that the obligation arises from a tangible nature. He knows furthermore that it will be actually liquidated at a definite date. He knows also that the trade acceptance may only arise from transactions involving the sale of merchandise, and there is something of a tangible nature from which the obligation can be met.