508 CORPORATION FINANCE
disers. Among the former are manufacturers of agricultural implements,
chemicals, clothing, cotton products, dairy products, drugs, furniture, and
leather, metal, paint, and tobacco products. Among the latter are chain
stores, department stores, mail-order houses, and wholesalers of dry goods,
furniture, groceries, and hardware. Other issuers include warehouses, flour
mills, oil refineries, finance companies, stockbrokers, and public utilities. 1
Brokers collateralize their notes with stocks and bonds, and warehouses
secure their notes with claims against commodities.2
Advantages of Commercial Paper.—The advantages of commercial-paper
borrowings may be summarized as follows:
1. Commercial-paper houses buy note issues only after thorough
investigation of the financial strength of the issuing corporation. This
includes the capacity to pay the notes when due. This protects the
purchaser of the notes and is, indirectly, an advantage to the borrowing
corporation.
2. Local banks may be unable to lend the amount required by the
corporation.
3. Wide distribution of the notes may result hi lower interest rates than
local banks would demand,
4. Commercial paper advertises the issuing corporation in the invest-
ment markets and may facilitate future distributions of stocks and bonds.
5. The proceeds from the sale of commercial paper may be used in part
to liquidate bank loans and thus improve the credit of the corporation at
its local bank.
6. All the proceeds from the sale of the commercial paper are available
to the corporation. The 20 per cent deposit rule of commercial banks does
not apply here.
7. Commercial banks may find the purchase of commercial paper
more advantageous than loans directly to the corporation for the following
reasons:
a. They can buy paper with maturities to suit their convenience,
6. They can diversify their risks both as to types of business and
geographically.
c. They can rediscount commercial paper through the Federal Reserve
system if they need liquidity.
d. They are under no obligation to renew the paper at maturity.
Disadvantages and Limitations.—Among the more important disadvan-
tages of open-market borrowing are the following:
1. Free use of open-market borrowing may cause corporations to neglect
bank-credit lines. The latter are available only to corporations that use
them. Banks are probably more dependable in crises than are commercial-
1 Greef, op. c&, pp. 243-341