Show PUZZLE OF WHY DEBT HELPS E BUT HARPS OTHERS how a debt can be put to work to increase earnings thrift and loans go hand in hand to aid the industrious the true use of debt in personal and business affairs remains something of a puzzle to many people to some the very word debt signifies misfortune while others merely fail to understand the ways in which they can put a debt to work for them to increase their earnings the committee on public ic E education du cation of the american bankers association has undertaken in the following discussion of how and why banks loa loan n money to clear up these misunderstandings soule homo people think that to incur a debt at the abo bank is unwise or a reflection on their business standing this is not the case where the debt ts contracted tor for legitimate business purposes incurring debt to live beyond ones income Is something no thrifty person would do and careless use ase of credit leads to estr extravagance ralance and disaster but wise borrowing Is an encouragement to thrift and industry I 1 the first function ot of the banker is to encourage industry and thrift so that a large fund of bank deposits may be accumulated this fund is often likened to a reservoir in water Is accumulated tor for community needs the banker then loans from this fund to those conducting the business of the community the banker bases credit on what are known as the three Cs of credit character capacity and capital character is an imperative business qualification allied with character ts Is capacity before making a loan a banker takes into consideration the capacity of the applicant that is dishis his ability to earn through his bis honesty and nd his industry capital Is a mans worth fn an money merchandise stocks and bonds or lands which may he be given as collateral in security of a loan to make it safe let us consider the business transactions of mr smith the storekeeper he finds with hifa hib business increasing that he needs a larger idock 0 of f goods also some of his customers do not pay cash and their accounts must be carried until pay day he must have more money tor for his business so he goes to his banker for advice the banker asks mr air smith to submit a statement of his bis business showing what he owns and what he owes he knows smiths character and responsibility from his observation of his dealings and from the confidence that people have in him if he finds mr smiths statement and the progress he is making satisfactory he will be glad to con alder aider the best method of loaning him the needed funds how money Is loaned money blaney is loaned by banks on straight notes on indorsed endorsed Indor sed notes on collateral notes on bills receivable and on trade acceptances mr smith may be told by the banker that because he has sufficient money in his business and manages it well the bank will extend him credit without his putting up any security beyond his own word of honor evidenced by his note let us say that mr smith needs a maximum amount of 2500 during his busiest season and that the bank has consented to grant him such a line ot of credit mr smith could come to tho the bank and make out a note tor for any portion all of this I 1 amount for any time up to six months to pay some bills he needs say he estimates that within sixty days he will receive from his charge customers enough money to repay this amount he therefore makes a sixty day note which the banker discounts at the prevailing rate of Jin interest terest let us say 6 per cent and places the proceeds to mr smiths credit how much does he credit to mr smiths account six per cent on for sixty days la Is 55 5 this amount the banker deducts at the time the note to la made it being the interest which he be charges mr smith for the aae se of the m money aney ho he then credits mr smith with tho the pro proceeds ceede of the note or when the note Is due in sixty days mr smith has received payment from his customers and ho he pays the bank the bank marks the note paid and returns it to mr smith it if mr smiths business condition were not sufficiently strong to warrant granting him unsecured credit the banker might say to mr smith 1 I want to help you but you will have to ae get t the indorsement endorsement indor of your friend mr jones jones is known to the banker as a very reliable and responsible business man should he be willing to help mr smith he will write his name on the back of mr smiths note and if smith cannot pay the note when due mr jones ill have to pay in another r cas cae th the e b banker an ker sti ethl I 1 1 anxious a to help smith night say 1 I am willing to loan you up to 2600 2500 but you must secure the loan with the goods which you purchase p for that amount and with some a additional goods mr smith would have to warehouse the merchandise used as collateral in such a way dat that it might be easily identified through warehouse w tre receipts as being the banks property until the note is paid if smith finally found himself unable to pay th the banker could sell the merchandise and use the proceeds to pay the note it if the goods brought more than the amount of the note the bank would pay the excess to mr smith if the amount were not enough the bank would look to mr smith to make good the difference mortgage loans loans against farm lands called mortgage loans are frequently made in country districts it if mr smith lacking an in dorser or sufficient collateral or business standing owned a farm tree free of debt he might t give a mortgage on it as security the procedure would be somewhat different from loaning against merchandise eban dise the law realizing the useful place farm and home owners occupy protects them IL a special manner it says to the lender in case of default on a mortgage loan you must give this owner ol of land one year after serving botic that you ex hect to sell his I 1 land to pay the mortgage and redeem the debt this is called the period ot of redemption mr smith has still another method open to obtain funds from his bis banker he has sold say a bill of merchandise to mr drown brown a dealer in a smaller community who must sell the goods to his own customers before he be can pay smith smith says to brown it if you cant pay cash give me a ninety day note I 1 will discount it and get immediate cash on it from my bank I 1 will have to pay 6 per cent interest to do so and I 1 shall ava wast t you to pay that interest mr brown agrees and makes his ninety day note for or with interest at 6 per cent mr smith takes this note to the bank which advances him credit tor for when the bank collects the note from brown ninety days later it receives SO tho the added being the 6 per cent interest charge for or tho the use meanwhile of the money tor for the ninety day period of the note these theae are the various ways waya in which the bank serves its community by placing through loans the accumulated thrift ot of the community at the disposal ot of business and industry |