Ben H Blanton.

Credit, its principles and practice; online

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credit. If a credit man can be assured of his customer's
honesty, all other considerations are merely relative.

When it comes to a choice between the honest man of
small means and the man of large resources but of doubtful
integrity, the honest man should be entitled to credit, while
to the man of doubtful honesty credit should be denied.

Investigation of Habits

The busy credit man is too apt to accept without ques-
tion the brief remarks in the commercial reports as to the
general character of the prospective purchaser; and if these
state that the subject is of "good habits and fair ability" he
checks the item and passes it up. An investigation might
reveal the fact that while the subject's habits may be good
most of the time, he is addicted to occasional sprees during
which his business suffers. Drinking is not the only dan-
gerous habit, but is mentioned simply by way of illustration.

When interviewed by the reporter for a commercial
agency, a merchant's associates and commercial neighbors,
desiring to do him justice in regard to his financial affairs,
usually report very accurately in this respect; but when it
comes to speaking of his failings and bad habits they do not
consider this an important part of the report, and try to take
a charitable view of the case. The reporter himself is
schooled to be very careful in dealing with information

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which might be damaging in character and which must be
supported by evidence from a man's home town. Even a
loose character can often obtain witnesses to vouch for him,
and when adverse information is obtained by a commercial
agency it is usually handled with great care, and the report
in which it is embodied is sent to the inquirer under seal or
else held in the office and shown only to the inquirer in per-
son for his exclusive use. Thus, considering the difficulties
under which character investigations are made, and how
hard it is for agencies to procure absolutely correct informa-
tion, it is always well to make this matter of habits the sub-
ject of a specific confidential question when writing local

In this connection, also, the business history of a pros-
pective customer should be carefully investigated. Such in-
quiry should consider not merely his past record regarding
fires and failures, but his previous business connections and
occupations, and his personal record at his various places of

Appraisinsr the New Customer

The first step in investigating a new customer is to con-
sult the rate books of the commercial agencies. The second
source of information is the detailed report from the com-
mercial agency, giving a brief history of the business and
often a copy of a signed financial statement. This report
furnishes a basis of request for certain specific information
from attorneys and banks. Such reports show the names
and ages of partners and whether married or single. The
latter is important, as it determines the amount of exemp-
tions to which individuals are entitled, and such exemptions
reduce the net worth in accordance with the laws of the vari-
ous states.

It is of vital importance that the name and address on

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the report agree exactly with the name and address of the
request, especially in large cities and inaccessible country dis-
tricts. Mistakes are often made, not only in the credit de-
partment in calling for reports, but by the clerks of the com-
mercial agencies, who are not supposed to be mind-readers,
and who fill carelessly worded requests as completely as
they can.

The chief objection to the reports of commercial agencies
is that they are not always up-to-date. Their custom is
to revise twice a year; but if a merchant submits a statement
in January, it is not probable that he will make another dur-
ing the same year unless there has been a material change in
the business. The average merchant takes inventory only
once a year (if then), and any figures taken six months later
can be only guesswork. It is seldom that a statement from
a small merchant deals with the actual inventory figures.
He thinks that his estimate should be given in round num-
bers, and from this the credit man naturally concludes that
the whole statement is purely guesswork.

Capital and Expenses

The question of capital as affecting credit should con-
sider the way in which the customer uses it ; whether he ties
it up in hard accounts or hard stock, or whether he restricts
both of these and turns his capital frequently. In judging
a credit one should therefore consider his information
incomplete until he- has definite knowledge of the volume of
business transacted yearly by the customer and the amount
of his expenses. If the credit man uses his own form for
taking a property statement he should provide spaces for an-
nual rent and clerk hire. With these two items he can easily
approximate the merchant's total expenses. A small mer-
chant may not keep close track of his yearly expense, but he
can always tell what he spends for rent and' clerk hire; and

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the size of the business will indicate what amount should be
allowed for other operating expenses. If the total given by
the merchant's report shows a wide variation from what it
ought to approximate, an inquiry should be made into the
reasons for the discrepancy. If the credit man will make a
practice of such investigations he will soon learn to tell at a
glance just how the expense item should stand. It becomes
second nature, like estimating an order by running over the
order sheets.


In reading the asset statement of a report on a merchant,
due allowance should be made for shrinkage, even though the
report states that this allowance has already been made. A
stock of goods under the hammer is never worth what a
merchant can obtain in the ordinary course of trade. Ac-
counts receivable will likewise suffer considerable shrinkage
if the merchant should for any cause discontinue business.
The item of furniture and fixtures, except in a large business
house, is mainly valuable in connection with the business as
a going concern. The small merchant usually lists his fur-
niture and fixtures at first cost, and the credit man in his
mind eliminates a cash register and the computing scales.
He feels that they are there, at full value, but perhaps with
a lien retained by the manufacturers until all the lien notes
are paid. The merchant may. not have them, and also he
may not have a big stock of patent medicines, but the chances
are that he has both. In this class of report, such items as
live stock, farming implements, and household goods must
be looked at with suspicion, for in many cases all are exempt.
Any other assets which can be transferred or readily dis-
posed of must receive their share of attention from the
credit man.

The item of real estate in a report should be noted and

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carefully investigated. The agencies exercise great care in
this particular, investigating the court records as well as fol-
lowing up transfers, mortgages, and other changes affecting
title. Real estate may be made the basis of a specific request
when writing to banks or lawyers. It is better to spend a
dollar or two establishing facts regarding real estate than to
see this item vanish when the business is taken in hand by a
trustee or assignee. Along with the laws of exemptions the
credit man should read the various statutes governing the
rights and titles to real estate, as every state has its own laws
on these matters.


An equally careful study should be made of the liabil-
ities. The loans from banks and individuals should be
checked up and investigated by means of letters to the banks
and lawyers. If it is a very small concern which is being
investigated, both of these sources should be asked to give a
list of other inquiries which they may have received recently.
It is important to establish the item of merchandise indebt-
edness as far as possible, and this leads to a consideration
of the information to be derived from the trade through an
exchange of ledger experiences. This is so broad and im-
portant a subject, appl3ring as it does to the million-dollar
house as well as to the cross-roads store, that it is specially
treated in Chapter IX.

If satisfactory information regarding liabilities cannot
be obtained from the reports of the commercial agencies, it
is well to ask the customer for a signed statement on a blank
specially printed for this purpose. Very often the small mer-
chant does not realize the purpose of a statement until it is
explained to him. He does not know how to fill out a blank
properly, and he usually regards the representative of the
commercial agency with suspicion. A tactful and friendly

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letter, however, will in most cases bring the desired in-
fornation. When the statement is received the post-marked
envelope should be carefully preserved, and on this should
be placed the signatures of at least two responsible parties
who can testify to the receipt of the letter through the mail.
This point is covered more specifically in Chapter XI.


Another consideration of vital importance in granting
credit is insurance, for insurance^-or the lack of it — is the
reef on which many ventures have come to grief. The
great majority of merchants are careless about insurance.
Even if they are amply covered, few ever read their policies
to see whether they are written alike. So profound and so
widespread is the ignorance regarding insurance matters,
that practically all the states have passed laws throwing cer-
tain restrictions about agents and companies. Fortunately,
these laws in great measure protect the insured against
"wildcat" insurance, but there are no laws which protect the
merchant against his own carelessness and ignorance.

Credit men have long recognized the necessity for bring-
ing merchants, especially small merchants, to realize not
only the importance of carrying ample insurance, but also
the advantage of reducing the hazard of their own risks and
thus making their property acceptable to the insurance com-
panies. Country stores are known as special hazards, and
are underwritten by very few companies ; and these few have
been able to show but little profit on this class of insurance.
Unless a merchant shows enough outside assets to cover a
possible loss by fire, the credit man takes a long chance when
he ships to an uninsured store.

Local Conditions

In connection with the investigation of the prospective

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customer, local conditions should be considered. This has
reference to crops, labor, and emplo3rment, both in local in-
dustries and on public works in the customer's immediate
vicinity. Competition is an important factor when consid-
ering the ability of the customer to succeed. Reports on
these conditions may be obtained by direct inquiry from au-
thorities and from the traveling salesman, especially if the
customer is in the country or in one of the smaller cities. If
the order is from one of the trade centers — ^that is, a city of
considerable size — late information regarding local condi-
tions may be obtained from the weekly papers issued by the
commercial agencies.

General Business Conditions

To dismiss the subject of granting credit would hardly
be advisable without a few words as to the general conditions
which aflfect business as a whole. The credit man for a
small grocery concern may ask what he has to do with the
fluctuations in stocks or the price of pig iron. He has his
opinions as to whether business will be good or bad during
the next few months, and he relies on his ability as a col-
lector to retrieve his errors in crediting in case of a general
financial panic. On what does he base his opinion as to the
future? Doubtless on the newspapers, which are usually
optimistic in regard to business, and report the conditions
existing from day to day. It is a common saying that a
panic comes out of a clear sky at the time of seeming great-
est prosperity. When the panic does come the man who
has been "guessing" usually helps to keep up the percentage
of the ninety per cent who are born to fail.

Fundamental conditions can be analyzed with arithmetical
precision. The daily papers report bank clearings, crop
conditions, commodity prices, and other important items.
These reports mean little to the average man, who usually

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makes no attempt at tabulating and comparing them from
week to week or through the year. To compile such records
would require more time and money than the average busi-
ness can afford. While the commercial agencies supply some
records, they have not gone into the subject of tabulating
and forecasting like the statistical organizations which are
now developing this into a business.

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Classification of Business as to Credit

In the preceding chapter it was brought out that the basis
for credit varies according to the factors which enter into the
business structure of the house. Having briefly considered
these factors, and discussed credit from the standpoint of
the customer, we will now consider the application of the
principles of credit-granting to a business in operation. For
this purpose it may be well to divide the various classes of
business into three groups :

1. The local jobber who operates in a restricted ter-

ritory and sends his salesmen in all directions,
covering the surrounding territory within a radius
of a hundred miles or possibly two hundred miles
from the home base.

2. The large wholesale and specialty house, the mill

agent, and the commission house; all of which
operate over the entire country.

3. The manufacturer, who might be included in the sec-

ond division, as he sells from coast to coast ; but
as manufacturing credits are somewhat different
from the credits of the regular jobber, they will
form the third division.

Credit Conditions

The jobbing houses which are included in this first divi-
sion are principally concerned in supplying staple goods,


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such as groceries, dry goods and notions, shoes, clothipg,
hardware, hats, and millinery. These jobbers work thor-
oughly, selling goods on credit to almost every store in their
territory. They bear the burden of selling the very small
trade, which is not solicited by the big houses of the large
trade centers. It is a peculiar fact that the larger and better
stores in such restricted territories almost invariably refuse
to buy from their local jobbers, preferring to go to distant
markets for practically everything except groceries. The
proprietor feels that he must take a long trip to a large city
as a matter of advertisement. His customers are probably
occasional visitors themselves at the nearest jobbing center,
and they like to feel that they are getting their merchandise
from a distant city which, they imagine, sets the fashion.
In this way the cream of the trade is in large measure taken
away from the local jobber, purely through ignorance and
prejudice on the part of the buying public.

In order' to increase the volume of his business, the local
jobber usually takes long chances and sells many merchants
who are not technically d>eserving of credit. These are the
cross-roads stores, which do not carry insurance and would
not do so even if they could get it — stores which sell on
credit to neighbors and strangers alike, and collect their ac-
counts, not "every little while," but "some time perhaps."
They have as assets but little more than a small stock, some
farming land, and perhaps their store buildings.

With such conditions, why are these merchants sold?
What excuse have they for being allowed to remain in busi-
ness ? Simply that they are "long" on that valuable asset —
integrity. Such merchants will always make a desperate
effort to pay some time, and the jobber may be said to fur-
nish them the capital with which to run their business.

The credits granted by the local jobber might properly
be styled the "hard job of the credit man who does every-

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thing." In the local jobber's business the credit man is
usually one of the firm, and has not only the responsibilities
of the credits and collections, but often has the finances to
look after also, and, it may be, the supervision of the of-
fice as well. It seems useless to speak of avoiding detail
work in such a case, but just as sure as the credit man with
a heavy burden already on his shoulders attempts to do de-
tail work in addition, to just that extent is he lessening his
' value as a producer of results. The heavier the burden, the
more time does he require for thinking and planning. It is
poor economy to save in office wages and lose accounts on
the books from inability to give them proper attention at the
right time — ^which means all the time.

The weaker the customer financially, the more informa-
tion should the credit man accumulate for his file. This
is a case in which all the information must be obtained. Not
only must credit reports be had from all sources, but the
traveling men must be trained to gather every possible item
of information that might indicate success or failure. Here
it might be added that with the grocery jobbers, while the
credit lines are large, the terms are short, and the salesman
is usually a collector. The small profits on sales should be
an incentive to keep losses through the credit department
down to a minimum.

By covering a small territory thoroughly, the credit man
comes in personal contact with the lawyers and banks, and
is enabled to procure their assistance and co-operation in his
work. He has also a better opportunity to meet his cus-
tomers face to face, and there is nothing like a personal
heart-to-heart talk in getting a purchaser to reveal his true
condition. This calls for tact, as no man likes to be taken
into a private office and put through an inquisitorial process,
or be told how he must run his business if he wishes to re-
ceive credit from the house.

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When the credit man approaches a customer with sym-
pathetic interest and succeeds in getting him to talk about
his own affairs, he will in most cases obtain more informa-
tion than if he conducted an exhaustive cross-examination.
If the customer does the talking he will often drop items that
are of vital importance, and which would not be thought of
by the credit man himself. The personal element enters
strongly into business of a local nature, and the small mer-
chant wants to feel that he has placed himself in the hands
of friends to whom he can look for aid if he requires it. If
such a mutual interest is created, the merchant may be con-
sidered a permanent customer to whom a certain amount of
goods can be sold each season. Where the scope of its op-
erations is limited by the extent of its territory, the house
must depend on these permanent customers for the volume
of its business.

Credit Precautions

In dealing with a small merchant the credit man must
know the houses from which the customer buys other lines
of goods. He must know their attitude toward him and
their general policy toward customers. The reason for this
is apparent. If, for example, a concern is carrying the mer-
chant for a liberal credit on clothing, and this merchant is
also dealing with a grocery house which has a reputation
for close collections and harsh methods in cases of weakness
or trouble, it is well to watch the account very closely and
always to keep an anchor to windward, as it were. In such
a case it would be well for the credit man to confer with the
largest creditors in staple lines and learn whether they would
co-operate, if necessary, to carry the debtor over any rough
places. If the debtor cannot depend on such assistance, it
is well for the credit man to reject the risk.

As mentioned in connection with the investigation of the

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customer, in Chapter IV, local conditions which might have
an influence on the credit of the house must be carefully con-
sidered. The credit man must have information constantly
regarding crops, weather, and labor conditions; also any-
thing else that would be likely to affect credit conditions in
the neighborhood of his customers.

Constructive Credits

Taking up again the advantage of a close personal
knowledge of customers, a house is sometimes able to adopt
a liberal attitude toward a merchant who is to all appear-
ances financially weak, because of its intimate knowledge of
the conditions. Bill Jones of Cedar Grove may show little
in the way of tangible assets, but some Saturday night when
the credit man is going over the accounts with the salesman
in that territory the latter may tell of a personal conversation
he has had with a relative of Jones, who is much interested
in his success, and who has expressed a willingness to help
Jones whenever called upon. When Jones gets behind in
his payments this relative indorses a note, and the country
bank discounts it and thus helps the local jobber with whom
Jones is dealing, to carry him until he collects his accounts
or sells the produce taken in exchange for goods. Such in-
formation as this is of the greatest practical value to the
credit man.

In a restricted territory the credit man must be construc-
tive — a builder of business, and never its antithesis. There
are hundreds of jobbers throughout the country who have
grown rich with many customers like Jones on their books.
In the case of the local jobber, the country merchant fur-
nishes integrity, a part of the capital, and the ability to con-
duct the business, while the jobber provides the remainder
of the capital by carrying the account and extending liberal

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Large Jobber's Advantages

The jobber who covers the entire country is able to
solicit a much better class of trade than the local jobber, be-
cause the line of goods he carries is far more extensive, and
because his establishment in one of the large trade centers
gives him an advantage of location. As the large jobber is
able to fill every want of the customer in his line, his credits
run large; but his customers are in better financial condi-
tion and realize that good credit standing results from
prompt attention to business obligations. In the .matter of
collections he can insist upon his bills being met at maturity,
l)ecause the stronger a merchant becomes financially, the more
attention he gives to his credit standing. It must not be
thought, however, that the work of the credit man for the
large jobber is so much easier than that of a similar official
in restricted territory. His credits being larger, individual
losses are necessarily far greater, and continual care must
be exercised in opening new accounts and in watching these
accounts after they are opened. Another thing to be given
consideration is that the large jobber encounters in occa-
sional accounts in the large towns and cities, forms of dis-
honesty which are not practiced in the rural districts.

Rating the Large Buyer

Mill agents and commission houses sell to those mer-
chants who are able to use goods in solid cases shipped
direct from the mills. As a rule such shipments are billed
on short time, and the margin of profit is very close; con-
sequently, such credits should be treated! as in a class by
themselves. One loss of considerable size will absorb the
profits on sales running into many thousands of dollars.
The credit man can afford to take little chance in such cases.

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and must know that the customer is not only soimd finan-
cially, but that he has a reputation for discounting or pay-
ing promptly at maturity. In checking through a com-
mercial report it should be noted whether purchasers of
this class show a proper ratio in quick assets; that is,
whether a reasonably large proportion of their assets can

Online LibraryBen H BlantonCredit, its principles and practice; → online text (page 4 of 24)