made in a previous period in some disreputable line of activity, or whether it is money earned by hard, conscientious work.

The facts concerning capital as one of the bases upon which credit is to be granted are found in the accounts,—generally in the form of the profit and loss statement and the financial statement. These records are analyzed by the credit manager and deductions drawn which lead to the conclusions upon which the credit judgment is based. Because this is such a tangible method, some credit men place greater reliance upon it in the granting of credit than upon either character or capacity. Others think that as a rule, capital presupposes character and capacity. Further consideration will be given later on to the financial record.

Collateral, the Second Line of Defense.-Collateral has been included as one of the bases for credit because, in so large a proportion of our credit transactions, collateral is used as security for the payment of the loan at the time due. Banks particularly make a large proportion of their loans on the basis of collateral. This arises from the fact that banks have a peculiar relationship to the community in which they are organized in that they must keep liquid reserves large enough for all current needs.

As

To loan on collateral is to grant the use of money for a period of time, asking the borrower to give as security listed or unlisted bonds and stocks, bills of lading, warehouse receipts or trust receipts representing merchandise, or real estate. a basis for credit, collateral, of course, is naturally satisfactory. If the margin is sufficient to take into consideration market fluctuations, and the collateral itself is sound, the credit manager finds little to disturb him when loans are made on this basis. As a special feature of bank credit a further discussion of this topic will appear later.

External Factors Bearing un the Bases of Credit.-The factors previously discussed may be classified as internal in that they refer to those characteristics of good and bad credit risks which are an integral part of the individual or firm asking for credit. There are other influences affecting credit which may also be termed as basic, though they are external.

Dr. John Whyte has grouped them under the heading of business movements,1 and classified them as of two types: (1) regularly recurring seasonal movements, (2) oscillating movements of business as a whole, commonly known as the business cycle. He points out that a knowledge of these two movements is essential to a correct estimate of willingness and ability to pay in the future, in that business is not static, and capital and capacity cannot be evaluated identically in slack and active seasons, to say nothing about periods of depression and prosperity.

Seasonal variations are not difficult to understand, but their significance is often forgotten. Agriculture, in all of its forms, is seasonal. Indirectly, it touches every economic activity in America. However, the severity of the seasonal variations is offset by the fact that the different localities have their periods of seedtime and harvest at varying times throughout the year, and the credit system does not have to carry the strain. at any one season.

It must be remembered, however, that in particular cases, this seasonal variation is often marked and each credit risk must take the full brunt of the situation, for certain districts. and communities are often dependent on single industries for their support. Arrangements to make pay periods coincide with each other, so that money is coming in at about the time payments ought to be made, both in relation to the nature of the industry and the seasonal characteristics of the particular line, have assisted materially in strengthening the credit risk.

1 Whyte, John, Credit Monthly, March, 1923, p. 15.

The second external movement, that of the business cycle, has a very vital relation to credit. Since the coming of capitalistic production, business has experienced periodic changes in business conditions, shifts from prosperity, through liquidation, adjustment, improvement, to prosperity again. It is not possible to forecast with absolute exactness either the length or intensity of these movements. Business science, however,

in the form of statistics, is able to study fundamental data, and so give a definite enough idea of the periods to enable business men to take warning or encouragement, and to know when to expand and when to contract credit and volume of business.

Because the credit man must always think in terms of the future, it is vital to him to know whether six months hence will be a period of prosperity or a period of depression. If payments fall due during prosperity, they are likely to be made, while payments which fall due during depression are likely to be frozen at the time when payment should be made.

So it is evident that the oscillations which constitute the business cycle are of utmost importance to the credit man; and that the external bases of credit have a vital part in the granting of credit, equal almost to that of the internal bases.

REFERENCES

Alexander Hamilton Institute. Credit and the Credit Man, pp. 58–96. New York, 1913.

Beckman, Theodore N. Credits and Collections in Theory and Practice, pp. 94-102. New York, McGraw-Hill Book Co., 1924. Ettinger, Richard P. and Golieb, David E. Credits and Collections, pp. 90-95. New York, Prentice-Hall, Inc., 1917.

McAdow, Finley H. Mercantile Credits, Chaps. II, III. New York, Ronald Press Co., 1922.

Meyer, Charles A. Mercantile Credits and Collections, Chap. I. New York, Macmillan Co., 1919.

CHAPTER IV

CREDIT TERMS

Nature of the Business.-In Chapter II we indicated the existing conditions which bring about the substitution of credit transactions for cash transactions in the economic processes of production by means of which the raw materials of nature finally satisfy the wants of the ultimate consumer. There is no more sensitive aspect of credit than that relating to terms. In our definition of credit we found that time was an essential element. The question of credit terms is a question of time. The business efficiency of a community is often measured by the strictness or lack of strictness with which such terms are followed in every-day transactions. Often communities and even large sections of a nation compete in credit terms rather than on a basis of service rendered.

Meaning of Terms.-The terms of the credit relationship involve in general the length of time between purchase and payment, and also specify the methods of payment. As a rule, the time element has two alternatives. A certain length of time for instance, 60 days-is given until the whole bill is payable. It is usually specified that if the account is settled within a shorter time-for instance, in ten days-a certain percent will be deducted from the total amount of the bill.

The following terms are some of those in common usage, terms with which every business man should be familiar:

(1)% 10 days to 4% 10 days. These terms indicate that a discount varying from 2% to 4% will be allowed on the invoice if the account is paid within ten days from date of such invoice.

(2) 1⁄2% 10 days to 4% 10 days N 30 to N 120 days. This also means that a discount of 2% to 4% will be given if the account is settled within ten days from date of invoice, but also that the final date of payment, if no discount is desired, will be from 30 to 120 days. It is usual, of course, to allow a larger discount if the invoice is paid at once. For instance, one might quote as follows: 6% 10 days, 5% 30 days. 4% 60 days, 2% 90 days. This indicates clearly that the discount offered decreases as time lapses.

(3) 1% 10 days to 2% 30 days' extra to 60 days' extra may be explained as follows: In certain lines of business it is found advisable to allow 30 or 60 days' extra credit on a shipment of goods. For instance, 1% 10 days 30 extra means that the buyer may deduct 1% from his invoice if it is paid 10 days after the 30 day period, or, at the end of 40 days. By virtue of trade custom, if a merchant pays for the merchandise ten days after day of purchase, he is entitled to an additional discount of 1%. On June 1, A buys $1000 of merchandise from B on the terms 2% 10 days-60 extra. The buyer may discount the invoice 2% if he pays it at the end of 70 days, August 10, but if he pays at the end of 10 days, June 10, he may deduct an additional 1%. Also, it is trade custom to allow the deduction of interest at the rate of 6% per annum from the net amount, (invoice minus discount) if the account is settled at any time. between June 11 and August 10. If the account is not settled by the end of the seventy day period, August 10, the purchaser is not legally entitled to any discount but in many instances he would be allowed to deduct the discount if interest at the rate of 6% per annum were added for the additional time. It would appear then that the 2% is more of a mask for the selling price than a discount and that the real discount is the 1% allowed if the bill is paid within 10 days.

In this case "extra" refers only to time, and is not to be confused with the other meaning, namely: "extra" discount.