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them, when they thought they had the only troubles in the world, that "there hath no temptation overtaken you but such as is common to man." So it may be said in speaking of the dangers to be avoided in the trade acceptance practice-that there are no dangers connected with the use of trade acceptances that are not always prevalent when credit is extended or money is loaned.

The exception to this statement would appear to be that there are fewer dangers in the trade acceptance method than in any other method, except where title to the goods is retained or where collateral security is required. Like all new methods, the trade acceptance in American business will probably be attended by certain defects and errors of practice that will have to be dealt with somewhat like weeds in the growing crop, to insure a healthy growth of the crop itself, but there is no good reason for not adopting the trade acceptance system in place of the "open account system." It may be timely, therefore, to point out some of the pitfalls and improper tendencies. Several of the suggestions are prompted by banking and business prudence and are made for the purpose of insuring for the trade acceptance a use in agreement with the best banking opinion and in conformity with correct commercial usage. First. The mere fact that the paper is in trade acceptance form should not lead anyone to believe that proper investigation of the credit standing of the parties to the bill is not just as necessary as if the goods. were sold on open account. If the trade acceptance is to mean anything beyond single name paper, there should be responsibility attached to the acceptor of the bill as well as to the drawer. While, of course, the bank discounting a trade acceptance for its customer may not require a statement of the acceptor, except for those who accept for unusual amounts, yet the bank is entitled to sufficient information so that it can determine whether the acceptor is of good moral and financial standing and may be relied upon to meet at maturity the amounts for which he has accepted.

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Second. The trade acceptance form of obligation should never be taken or given for overdue accounts.

The trade acceptance, as an instrument in trade and banking, has a specific function to perform and is used for one purpose only; that is, it is a negotiable acknowledgment of an actual sale of goods by a seller to a buyer and constitutes a promise to pay, covering a live transaction drawn for the time involved in the terms of the sale contract. In order to cover a number of small sales in one acceptance, no objection can be made to making the acceptance for the average time, but it would be an abortion of the trade acceptance method to secure an acceptance against an overdue account and then to treat it as a trade acceptance.

Third. For the same reasons as mentioned above, a trade acceptance under normal conditions should not be renewed, since a renewed trade acceptance does not represent a current transaction. Instances have been observed where it was expected that a trade acceptance would be renewed from time to time on the plea that sales by the drawer to the acceptor were occurring each month aggregating or exceeding the amount of the trade acceptance. This, in my opinion, is not a good practice, and the acceptance should be drawn for a period corresponding to the sale and wherever possible for the actual amount due on the particular sale or the accumulation of sales. The exception to this latter statement takes place when it is necessary to issue acceptances in smaller pieces to facilitate their discount.

Fourth. The giving and taking of trade acceptances should not be used as an excuse for granting unreasonable time in sales terms. If the buyer is receiving trade acceptances from his customers, these will be available for obtaining funds to meet his own acceptances. Therefore, in the use of the trade acceptance plan, unreasonable extensions. of time should be avoided. While at the beginning of the trade acceptance movement it may have been necessary and desirable to offer inducements to obtain trade acceptances, the granting of additional time on a trade acceptance sale over an open account sale has never been regarded as prudent. In fact, undue inducements in the form of time and discounts in order to convert accounts into the liquid form of trade acceptances will, in my estimation, tend to cheapen the caliber of the acceptances thus made.

Fifth. Some concerns initiate the trade acceptance movement in their business by beginning on their slow-pay customers. There is no objection to this method of itself, but there is serious objection if the concern attempts to market or discount these acceptances and makes claim to a preferential rate because of the two-name self-liquidating character of the paper.

One of the strong arguments in favor of the trade acceptance method is that it serves to show the bank the character of buyers to whom the borrower is selling, and whether or not these buyers pay promptly. The banker receiving for discount from his customer acceptances of companies of inferior credit standing and slow-pay reputation will not become very enthusiastic about making a preferential rate, and may even feel like revising upward the loaning terms to that customer. Not all trade acceptances are desirable for discount, and if a company is using the trade acceptance method for the purpose of reforming some of its slow-pay trade into prompt payers it is doing a thing in itself commendable, but in that case the acceptances should not be marketed or

discounted as first class trade acceptances, as offerings of this character tend to cheapen the trade acceptance movement.

The fundamental use of a trade acceptance is not primarily that of a vehicle for collection, even though it is apparent that many concerns using trade acceptances have that single conception of the proposition. We will avoid emphasizing the incidental beneficial phases of the trade acceptance movement instead of its fundamentals if we bear in mind that the principal mission of the trade acceptance is to liquify credit, improve the turnover and minimize credit loses, rather than consider it as an up-to-date method for collecting a bill. In other words, the trade acceptance should appeal even more strongly to the president, treasurer and manager of a company than it does to the credit man.

Sixth.-Vigilance is required in what is termed the "twilight zone" of the progress of trade acceptances-this being the period when the transition is taking place from the "notes payable" to the basis of "trade acceptances discounted." During that period there may frequently be both "notes payable" and "trade acceptances discounted" appearing on the statements of borrowers. There is nothing in this situation to cause consternation or alarm, nor should it prevent the rapid growth of trade acceptances. Banking prudence here again asserts itself. The lender of the money will desire to know if the notes payable are being appropriately reduced as trade acceptances are being discounted. The means are available to every lender of money to determine this.

Indeed not only during the "twilight zone" may bills payable properly be given by a concern discounting its trade bills. In many manufacturing and distributing lines direct borrowing is necessary and proper to furnish the borrower temporarily additional working capital for the purchase of raw materials and seasonal stock in trade. The peak of the load occurs between the time when preparation for the season's business is about completed and the time when realization on sales begins in substantial volume. Then "bills payable" should reduce and the "trade acceptances discounted" may increase temporarily, but the disclosed relation of the two together, to merchandise and other quick assets, the relation of each to the other and the relation of "trade acceptances" both discounted and held to known volume of sales and to the turnover, provide to the banker a basis for intelligent and precise analysis of the borrower's statement of condition and the exercise of banking judgment. Just as in England and Canada the "overdraft," which is equivalent to the cash advance, and the sale of bills receivable go together, so with us, the single name paper and the sale of trade acceptances have each their proper and legitimate place side by side in the balance sheet of a borrower.

As the English banker in extending a line of "overdraft," and as the Canadian banker in establishing a line for direct advance, have particular regard for the amount of invested capital in the business, so will our bankers in making advances on single name and discounting trade paper require that the sum of the two classes of accommodation granted at any time shall not exceed a proper relation to the borrower's own It should never be forgotten that a business is expected to have a sufficient capital of its own to carry on its normal volume of trade without continuous or too frequent or too great dependence on its bank for borrowed money.

Some note brokers and dealers in commercial paper still claim that they cannot sell an unsecured note of a borrower when that borrower is selling or discounting trade acceptances. When one is reminded of the "window dressing" that frequently takes place in borrowers' statements issued at yearly or half-yearly periods, and when one remembers that the day after such a statement is issued the "notes payable" account of the concern may go up many thousands, one is amused at the assertion that it is less safe to lend money to a concern borrowing two ways during the transition period or for seasonal requirements. Candor, good faith, financial morality and security will take care of this situation. It is only fair to say that the majority of the bankers and note brokers with financial and business vision are meeting this difficulty and solving it

Seventh. There is the fraudulent acceptance-and, while this may not yet be in evidence, it is perhaps as inevitable as the spurious commercial paper that has cropped out and does crop out occasionally. As already stated, banks through their credit departments and other avenues of investigation should, of course, subject acceptances to as close scrutiny as other paper that is offered them for discount. For the purpose of misleading bankers and producing an instrument that prima facie represents a commercial transaction and is in the form of a trade acceptance, there will likely be a tendency on the part of unscrupulous persons to resort to forgery and to draw drafts representing fictitious transactions. The machinery is available for discovering and preventing abuses of this kind, and severity in dealing with offenders will reduce such instances to a negligible minimum.

Finally. I think a danger exists when an attempt is made to force the acceptance method upon customers without proper explanation and education. Arbitrary action as a rule creates antagonism. On the other hand, understanding leads to co-operation.

Companies incorporating the trade acceptance plan into their busi nesses owe their customers a chance fully to understand and appreciate the advantages and superiority of the new method. To successfully

introduce the plan, companies must themselves thoroughly comprehend it in principle and operation, and have it fully understood not only in the office but by the selling force also. A good salesman, if he knows the merits of the trade acceptance, will "sell" it as well as merchandise to pleased customers, who in turn will desire to "try it out" in their own trade.

The trade acceptance method has already shown its ability to win its way when launched under proper auspices and when opportunity and facilities for discussion and consideration are provided. Its value is positive and enhanced by increased use. Satisfied users are enthusiastic in proclaiming its merits and in acknowledging its benefits to them. Its dangers are not inherent but potential, and develop only through abuse. They are identified, charted and readily recognized, and should easily be avoided.

Criticisms of Trade Acceptances.

Reprinted by permission from a pamphlet issued by the American Acceptance Council, pp. 24, 43-50, June 9, 1919.

S. B. Lewis, S. B. Lewis & Co., Philadelphia: Mr. Chairman, I have nothing but commendation to give for the acceptance, if properly used; but to answer Doctor Holdsworth's question, I do know of one instance where a hosiery manufacturer used the acceptance for one year, and at the expiration of the year he abandoned the system because he felt or found in actual practice that his credit men had been a little more lax in the granting of credit than they would have been had he had the old open account. Now that might be due to the credit man not having fully in his mind the fact that the taking of an acceptance did not necessarily make the buyer any stronger. However, I am answering your question. He did abandon it, and has not since taken it up.

J. H. Scales, Belknap Hardware & Manufacturing Company, Louisville, Ky. This discussion has been rather elucidating. It has convinced me of one thing that I have always believed: that is, a trade acceptance— and I intend no discourtesy to any of you men-the trade acceptance under the present laws and under the present practices of the banks is nothing more nor less than a promissory note.

I don't want to deal in personalities, but I was particularly impressed by the address of Mr. Woodruff this afternoon. It reminded me of the old story when some one asked about a patient-that the operation was successful but the patient died. It is a fine thing from the banker's standpoint, as Mr. Woodruff presented it. He expressed the advantages. of the two-name paper to the bank, and then he went on and expressed

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