CHAPTER IV CLASSES OF CREDIT AND CREDIT PERSONAL CREDIT Personal credit is the credit a merchant extends to an individual or his family to enable them to obtain goods for their own use or consumption. In short, it is this kind of credit that is of primary interest to the credit man or owner of a retail business. Retail credit, however, is of the utmost importance to the jobber, the wholesaler, the manufacturer, the bank, and every one along the entire line of distribution and financing. The jobber extends credit to the retailer to give him time to realize on the merchandise purchased. The manufacturer for the same reason extends credit to the jobber, and so on down the line. Let us assume that a certain retailer is very careless in his credit granting and by reason thereof suffers severe losses and is unable to pay the jobber. It is easy to see that if several retailers buying of the one jobber did likewise this jobber's position would be perilous, and unless he were unusually strong it would not be long before he would "go to the wall." His failure, together with the failure of other jobbers, would mean ruin to some manufacturer, and so on through the entire mercantile structure. Of course the poor retail credit conditions would have to be very extensive indeed to bring about such a collapse as we have pictured. This, however, was the condition in the South in the fall of 1914 immediately after the outbreak of the great European War. Due to the cotton situation, consumers had no funds with which to pay retailers. The retailers in turn were unable to pay the wholesalers. This caused embarrassment to a number of wholesalers. Even though the retail failures, resulting from poor credit granting, were not so extensive, nevertheless, the other merchants in the chain, that is the jobbers and manufacturers, would suffer some loss through non-payment by those retailers who failed or through decreased purchases by the retailers who remained in business. For if the retailer who suffers losses from improper credit granting is to continue in business, he must exact from the consumer who pays, higher prices to compensate him for the loss. This results in larger margins of profit for the retailers referred to, and consequent higher prices for the consumer, and a decrease in the quantity of merchandise sold. This decrease is accounted for by the elimination of purchases by the marginal consumer, who cannot afford to pay the higher prices. Who, then, suffers by the retailer's improvident credit granting? First, of course, the retailer himself. Second, the honest consumer; he must pay higher prices. Third, the manufacturer, jobber, and other distributors; they suffer financial losses through retail failures. It is unnecessary to dwell upon the extensive use of retail credit or upon the stupendous losses, caused mainly by improper retail credit granting, to convince the retailer and other merchants of the importance of this subject and its relation to mercantile credit. The facts are well known and are sufficient in themselves. REASONS FOR CARELESS RETAIL CREDIT GRANTING That the retailer has been careless in credit granting is hardly controverted. And yet how few have investigated the causes! There are many reasons accounting for this neglect on the part of retailers in making a proper or a sufficient inquiry into the limit of credit to which the consumer is rightfully entitled. The first and foremost reason is the ignorance of many retailers of their costs of doing business. If retailers kept proper books from which they could ascertain the added expense of collections and credit losses, they would not be so desirous of extending their business by the granting of unwise credit. The second reason is the retailer's quite natural desire to outdo his competitor in volume of business, forgetting entirely about the quality of the business. The keeping of proper accounts would soon impress upon the merchant the foolhardiness of doing a large business built upon unsound credits. The third reason is the retailer's fear of driving away customers by asking them questions absolutely necessary to enable him to pass on the credit risk. This fear is not unfounded, for a great many consumers do have a false idea of the humiliation attendant upon such inquiry, and deeply resent the giving of any information that they consider "strictly personal." Fourth, retailers are negligent in setting a definite date on which payment is expected. Thus, the retailers do not take advantage of the psychological effect of, first, naming a definite day to meet the salary requirements of the consumer, say, weekly on Mondays, or monthly on the first, on which payment is expected, and second, of getting the consumer into a habit of making payments at regular intervals, both of which so greatly help in collections. Fifth, there is lack of co-operation among retail credit grantors. The baker, the butcher, or the grocer seldom, if ever, in most communities call upon each other for information as to how Jones is paying, or to what extent he is owing. Such co-operation would prevent over-extension of credit to one individual. Again, when Mr. Newcomer arrives in a town, seldom do the retailers of this town attempt to find out his paying habits in his previous residence. Professional crooks could be thwarted by such co-operation. Lastly, retailers have not had sufficient facilities for obtaining credit information. Rating books and reports are published by retail credit bureaus 1 in but few communities. These retail bureaus are still in an embryonic stage, but they are doing a great deal in dispensing information concerning the credit standing of consumers in the community. How are these conditions to be remedied and how is the standard of retail credit granting to be raised? These questions are vital to every merchant who would further safeguard his own interests. Before we can 1 A thorough discussion of the organization and workings of retail credit bureaus will be found on page 151, post, attempt to discuss them it will be necessary to set forth certain principles governing the proper basis for retail credit granting. THE PROPER BASIS FOR RETAIL CREDIT GRANTING In the granting of retail credit, as in the granting of any credit, there are three factors controlling the limit of credit to be granted-character, capacity and capital. The consumer's character is all important. A man with character of the right kind will not attempt to purchase what he does not expect to be willing and able to pay for, at the proper time. Even should a man with character suddenly meet with reverses, and find himself temporarily unable to pay, he could be relied upon to pay as soon as possible under the circumstances. But the retailer should consider not only the character of the credit applicant, but also his capacity, his ability to pay for what he buys. One who purchases beyond his means, that is, beyond his income, or extravagantly and carelessly, should not be entitled to credit. On the other hand the wealth or capital of a person should not be given too great a consideration. While it is true that one who is slow and negligent in making payments and is wealthy can probably eventually be compelled to pay, the expense of collecting and the time required to make the collection would hardly warrant granting credit to such a person. There are a number of methods by which to test these three factors in the credit risk. The best criterion is the past record of the credit applicant. How |