In dealing with trading firms, it is well to remember that the act of one partner binds the firm. When possible, it is better, in making a loan, to obtain the consent or authority of all the partners, but it is not a legal necessity. Not only is this so, but a banker need not take special steps to prove that an individual is a legal partner in a business firm. Provided the firm act in such a manner as to induce the public to believe that an individual is a partner, they are bound by the acts of such a man, and cannot repudiate them on the ground of lack of authority, although no deed of partnership may exist.

In dealing with the third class of borrowers, viz., companies registered under the Companies Acts, there are one or two important points to remember.

First of all, a company may have no power to borrow money at all, or may only have a limited power to borrow to a restricted amount, or under certain conditions.

A company's powers of borrowing are determined by its memorandum and articles of association, and it is advisable to see a copy of these before lending money to the company. Otherwise it may be discovered that the directors have acted ultra vires by so borrowing, the effect being that the shareholders of the company are not bound by the acts of its directors, and the only remedy of the bank is against the directors personally.

Secondly, caution is necessary in lending money to a newly registered company. Bankers have often to help to finance new companies floated under their auspices; but the Companies Act of 1900 says that no contracts entered into by a company shall be binding until such company is entitled to commence business; and in order to do this the company must first obtain from the Registrar of Public Companies a certificate stating that certain formalities have been carried out and that a certain proportion of the capital has been allotted. In lending money to newly formed companies it is advisable for the banker to ask to see a copy not only of the articles of association but also of the registrar's certificate that the company is entitled to commence business.

The third point to remember is the obvious one that if the liability of the company is registered as "limited" the shareholders of the company are not responsible for its debts beyond the nominal amount of their shares. The debts of a common law partnership can be recovered against the private estate of any or all of the parties; but the creditor of a limited company is denied this privilege. A banker will therefore usually hesitate before lending money to a limited company unless security be deposited; but in cases where a temporary loan is required, and it is not convenient to deposit Stock Exchange securities or title deeds, it is very usual for the banker to accept a joint and several promissory note signed by two or more of the directors personally. This is discounted, and the proceeds placed to the credit of the company. At maturity the company will probably be in the position to pay the amount; but if not, the banker has a remedy against the private estate of each or all of the directors who signed the note.

Now that we have gained some idea of the chief classes of borrowers, it will be advisable to examine the different methods of borrowing from a banker, and these can again be conveniently divided into three heads:

(1) By the discount of bills and promissory notes.

(2) By overdraft upon current account.

(3) By loan account.

(1) When a bill or a batch of bills is offered to a banker by a customer for discount, the first thing the banker has to decide is whether the customer's account is a sufficiently good one to justify the transaction. A banker will naturally hesitate to discount bills for a customer whose cheques he is sometimes forced to dishonour, for it is very probable that the bills offered by such a man will not be reliable. He will also probably refuse to discount for a customer whom he does not know to be thoroughly respectable, for a banker is, as a rule, ignorant of the signature of the acceptor to a bill offered for discount, and relies upon the honesty of his customer.

Having decided that the customer's account warrants the transaction, the banker will see that the bill is correct in form, drawn upon properly stamped paper and duly accepted. He will see that the customer endorses the bill, whether it be payable to his order or not, for in case of dishonour the banker's remedy against his customer lies through the latter's signature either as drawer or endorser. As a rule a banker will not discount bills having more than six months to run, nor do English bankers often discount bills payable abroad, this branch of the business being usually left to the bill brokers.

Nearly all bills offered for discount are accepted payable at a bank. The discounting banker will then make a confidential inquiry of the acceptor's banker, asking for the latter's opinion in strict confidence of the standing and respectability of the acceptor. This opinion he will record for future use in his acceptor's register, in which book it will be found convenient to make a note of any dishonoured bills, in order that if necessary he can avoid similar bills in the future. If the opinion is satisfactory the customer will be credited with the full amount of the bill, which will be debited to the "bills discounted" account. Interest on the unexpired term of the bill, at a rate to be agreed upon, and usually bearing a fixed relation to the current Bank of England discount rate, will then be debited to the customer and credited to the banker's discount account.

This operation, which is the ordinary routine of discounting a bill, is now complete. It only remains to make a note of the due date of the bill in the bill diary in order that the bill may be duly presented, for if through inadvertence presentation be neglected the consequences may be serious to the banker, since the drawer's and endorser's liability will be terminated by the omission, and the banker's only recourse will be against the acceptor. If on due presentation the bill is dishonoured, notice must be given to the customer not later than the day following such dishonour.

In discounting promissory notes, the proceeding is similar, except that the maker of the note stands in the position of the acceptor of the bill. A banker will sometimes advance money to a customer of good standing by discounting the customer's own promissory note; if he wishes an additional safeguard, he will ask the customer to get a friend to join with him in a "joint and several" promissory note, in which case each of the parties is liable for the full amount of the note.

(2) and (3). The difference between lending money by an overdraft upon current account and by loan account is as follows: - In the former case, the customer pays interest on the daily balance standing to his debit, this being charged either quarterly or half-yearly. In the latter case, the customer opens a loan account and transfers from this account to his current account either the whole stipulated sum or such a portion of it as he is likely to require in the immediate future. He will be expected to keep a credit balance on his current account of such an amount as a banker thinks sufficient, according to the character of the account. He will pay interest on the sum standing to the debit of his loan account.

At first sight it may seem as though every customer would prefer to borrow by the former method, that is, by overdraft, because in this case he only pays interest on the sum he actually uses, whereas in the latter case, part of the sum for which he pays interest is standing to his credit on current account. But to counterbalance this, a banker is usually willing to grant a loan at a slightly lower rate of interest than he will charge on an overdraft, while in the latter case he also usually charges a small commission to recoup himself for the trouble and expense of keeping the customer's account, an expense which is covered in the case of a loan account by the credit balance kept on the current account.

The next chapter will treat of the various forms of security which are deposited with a banker to cover loans made by him. Before passing on to this, I should like to reiterate what I have previously mentioned as to the character of a banker's loans. It is not a banker's function to lend money permanently.

Fortunately we have not had to face the failure of one of our larger banks for many years, but minor failures have been frequent, and it is no exaggeration to say that by far the larger proportion of these have resulted from assets being locked up in large loans to a few individuals - loans which have gradually acquired a permanent character, and ended by becoming bad debts. The province of a banker is to tide over temporary lack of ready money, not to provide capital on which the customer carries on his business.

No doubt a banker in this as in other directions has often to run counter to his general policy, but he should never lose sight of the fact that his obligations are to pay on demand, and keeping this ever in mind, he should always hesitate to lock up his money in permanent loans.