Methods of short-term borrowing are many and include the following:
- Unsecured bank loans;
- Sale of promissory notes in the open market;
- Discounting trade and banker's acceptances;
- Loans secured by stock market collateral;
- Commodity loans;
- Assignment of receivables;
- Installment financing;
- Factoring;
- Miscellaneous.
1 - Unsecured bank loans, the most common method of borrowing money, are those in which the signature of the individual or the signature of a corporation executive is taken and money is placed to the credit of the individual or the corporation at the bank. It is customary that the borrower never withdraws all the money but leaves about 25 per cent continuously on deposit. These are short-term loans and may be made for as little as 30 days or as much as 90 days. At the conclusion of this time, they are renewable if conditions still look favorable for making such a loan. When a bank and a business have established relations over many years, such a loan may be almost continuous, year in and year out.
2 - Promissory notes can be used only by a very large and powerful corporation that is so known that its notes carry an instant message of security to the prospective buyer and are interesting to investors.
3 - Trade and banker acceptances are commercial paper received by the business and which it may discount with the bank to obtain money. This may originate as follows: first, a trade acceptance may be taken when a delivery of merchandise is made. The person accepting the merchandise admits that he has received it in good order and is liable for it; he gives back to the seller a trade acceptance which indicates that after a certain number of days the amount will be paid at the buyer bank. This trade acceptance will be accepted by the seller; in turn he will deposit it in his bank. The bank may discount it for him, that is, the bank will charge him interest for the use of the money add it to the note, and place immediately to his credit the amount of the trade acceptance less the interest charge. Should it be impossible to collect the trade acceptance, the seller will have to reimburse the bank. In the usual course of business the trade acceptance is honored by the buyer at the end of the period of time, and the seller is no longer a borrower because the money has been collected.
4 - Stock market collateral is used by individuals or organizations who own large quantities of marketable stocks. A great deal of tragedy occurred in the crash of 1929 due to the fact that too many banks held stock market collateral which became quite worthless. Nevertheless, this is still a possible method of borrowing money, but it is not available on the same liberal terms as was possible during the "roaring twenties."
5 - Commodity loans are very common. Loans may be made upon tobacco or cotton in a warehouse. The liquor and wine industries make loans based upon warehouse receipts. Such loans are possible when the commodity is well-known, understood, has a market value which does not fluctuate too readily, and has some promise that it can be sold in the normal course of events without spoiling. In the case of tobacco, whiskey, or wine which age in warehouses, field warehousing is often used; in this method of financing the "warehouse" company (in reality a finance company) puts up a sign on the customer's premises establishing a claim and then advances money which must be repaid as goods are moved out.
6 - The assignment of receivables is often used by a business in the last throes of trouble. They may go to a finance company and assign their accounts receivable. This is not desirable because it serves notice to most of their creditors and customers that the business is not in a particularly good situation and thus decreases business confidence.
7 - Installment financing is just as possible for a business, particularly a small one, as for an individual. The individual or the business borrows a certain amount of money and agrees to pay it back monthly over a period of time, depending upon current credit restrictions as imposed by the government and the practices of the loaning institution. Effective interest rates on this kind of borrowing are relatively high.
8- Factoring, another method of borrowing, is very common in some of the textile trades. A factor is an individual who practically takes over the financial management of a business. He tells the firm to whom they may extend credit and how much credit they may extend. If they follow his rules, the moment the goods are delivered, the factor will give the selling firm 80 per cent of the value of the goods that have been shipped and will make the balance of the payment when he is successful in collecting from the debtor. Although this is equivalent to assignment of receivables, the practice is so common in the cotton converting business that it is not regarded as an indication of weakness in the individual firm. The factor in some of these industries is in a splendid situation. Since he handles the finances of a good many firms in the same line of business, he knows to whom they are selling and can gauge whether the buyer has over-bought; in this way he can restrict others among the concerns that he factors from selling to the over-stocked business, in order to avoid loss. Thus the factor not only advances money to the firm but is also their credit service in that he takes care of checking the credit of the people to whom these firms sell. The charge for this service usually amounts to about 2 per cent of the money advanced.
9 - Miscellaneous methods of financing might include purely private deals between individuals. Unfortunately, it also includes some transactions that cannot be termed illegal but certainly are unethical in purpose. It is often difficult for certain lines of business to borrow money.