Credit And Collection Information
( Originally Published 1918 )
Credits and Collections
As already stated, there is no clear line of demarcation between the work of the credit man and that of the collection manager. Collections should begin in the credit department; and the experience of the collection manager in the collection of his accounts bears very directly on the granting of credits. The information necessary for the credit man is also needed by the collection manager. Both must know more or less definitely the financial status of the customer—the credit man to decide the credit to be granted; the collection manager to decide the best method of handling the collection.
Speaking generally, the information relating to customers must be as detailed, as specific, and as extensive as it can reasonably be made. It will, of course, vary with the individual. Some customers are so well known and of such unquestioned financial stability that the merest reference to a rating book is sufficient to justify any ordinary credit. There are many grades of credit applicants below this for whom the ordinary report and ordinary investigation will suffice. When, however, the credit manager reaches the doubtful line, it is time to use exceeding care. His reports should be complete, his in-formation absolute, and his investigations searching, and of sufficient scope to cover all danger points.
It may be noted in passing that credit is not an exact science—that the credit manager must usually take some chances. The credit man who refuses all credits which are not unquestionably and obviously safe will incur no losses for his house, but he will in most cases seriously curtail its business and its profits. In other words, he will cut out a large volume of business, the profits on which would more than justify the risks involved. But while the credit man should be willing to take some risks, he must not gamble. The risks he does take must be intelligent risks.
In addition to the special information in regard to individual customers, the credit man and the collection manager should keep thoroughly posted as to current matters affecting their work. If there is a failure, a death, a fire, a flood, a disturbance of financial condition, or any other disaster or event which affects their customers, they should be prompt to discover the fact, and be as prompt to act upon the information thus obtained. In short, the credit man and the collection manager must both be alert, mentally quick, and continuously "on the job."
Scope of Investigations
In securing credit and collection information the three important "C's" of the credit man—character, capital and capacity—should never be lost sight of. No matter what a man's capital, he is not worthy of credit unless he has character; nor is he a safe credit risk unless he has capacity as well. Character is perhaps the most important of the three, for it means that willingness to pay his debts without which no man is a safe credit risk, no matter what his capital or capacity. All three are, however, essential for the safe extension of credit if the amounts are large; and it is to the establishment and the measurement of these three requisites that credit investigations are mainly directed.
Sources of Information
The credit or collection manager will naturally avail himself of every possible means of securing credit information. Ordinarily he cannot undertake personal investigations, but must depend upon the reports of others. The ability he displays in doing this is largely a test of his fitness for his position.
Important investigations, especially when they are near at hand, occasionally justify field work on the part of the manager. He should not go in person unless the matter is of sufficient importance, and of such a nature as clearly to call for his personal effort. When, however, the need arises, he must not hesitate to desert his desk and become inquirer, investigator, or detective, as the case demands.
The usual sources of credit and collection information are as follows:
(1) Reports of commercial agencies.
(1) Reports of Commercial Agencies
The commercial agency report is the usual source of information when questions of credit arise. There are but two national commercial agencies from which such reports are obtained; but there are numerous local and trade agencies which supply reports within a more limited territory, or within special lines of trade.
(2) Statements Furnished by Applicants for Credit
The statements which the customer himself furnishes give his own view of his financial condition. Such statements are valuable, but must not be relied upon too fully, as self-interest may lead to misrepresentation or partial information. Even when offered in the best of faith, they usually give the most optimistic view possible of a customer's financial status; and therefore must be regarded as merely a basis for investigation. The statements of such a report are to be substantiated, if they are capable of substantiation, or to be discredited if they are false, or to be brought down to their proper proportions if they are inflated. It is frequently desirable to have these data approved by a certified public accountant, and then analyzed and transferred to a comparative form, in order that the changes in the various items over a period of years may be noted.
The credit manager will usually make up his own form of statement for the applicant to fill out. Some of the more important matters to be covered by such a statement are as follows :
(1) Members, if a firm, or officers, if a corporation.
In making such a statement, good-will is not considered save under exceptional conditions; and the same rule applies to patents and other assets of an intangible nature.
It may be of interest here to give the "short form" statement recommended by the American Bankers' Association when applications are made for loans.
The searching nature of this statement shows the care with which banks scrutinize applications for loans—which are, in fact, nothing more than applications for credit. The general procedure and the care to be exercised are the same, whether the property involved be cash or merchandise. True, there is a margin of profit when a bill of merchandise is sold which may justify a greater risk than do the small interest returns on a loan, but the general conditions are the same; and the credit man should study the conditions of a proposed credit as carefully as the bank does the conditions of a proposed loan.
That this fact is recognized by the prominent credit men of the country is shown by the very searching forms of statement recommended by the National Association of Credit Men which are given on the following pages. The first form presented is that to be employed when the applicant for credit is a corporation; the next is a portion of the form used for firms, showing the variations occasioned by the different forms of business organization.
It is not probable that any of the usual forms of statements or reports will exactly meet individual requirements. The credit man will in most cases find the reports required by the Credit Men's Association and by the commercial agencies too complete; and, in fact, he would find difficulty in inducing his credit applicants to submit so searching a statement. It is, however, easy to select the more essential features from the various reports and combine them into a statement that will meet particular requirements.
(3) Reports of Correspondents
Reports of this nature are useful as confirming or refuting the statements of the applicant for credit and as bringing out new facts. Correspondents' reports will come from various sources. If the house has agencies or representatives in different places, these will naturally supply credit information. As they are "in the family," their reports will, of course, be reliable, and as complete as they can be made.
Where the concern has no representatives, it is some-times desirable to arrange with local attorneys for reports on credit applicants from their respective territories, paying a stated fee for such reports, or perhaps letting the attorneys' compensation come from the collections and other business placed in their hands. It is obvious that, as the attorney is liable to be called upon to realize upon any bad credits made on the strength of his reports, he is in a somewhat delicate position and will be apt to use much care in his statements.
(4) Reports of Salesmen
The traveling salesman is invaluable as a credit re-porter. He usually knows the applicant, and, in a general way, knows his circumstances. Also he can, if he will, circulate among the acquaintances of the applicant and in this way get at least an approximate statement of his property and his condition, and a very accurate knowledge of his general reputation. For this reason, if for no other, a friendly feeling should always be cultivated between the credit, the collection and the sales departments, so that when information is required, the salesman will be willing and anxious to obtain it.
It will be found convenient to have special cards for salesmen's reports. These the salesman carries with him, and reports on each sale as made. A very good form of report card for this purpose is as follows :
The proper arrangement of such a card is important. Only essential information should be required, and the questions intended to elicit this should be so worded and so disposed upon the card that the answers may be entered readily. If a card is troublesome to fill out, the salesman postpones it to a more convenient time, which rarely comes, or fills it out hastily and in a partial and inaccurate manner, or gets disgusted and does not bother to fill it out at all. It is usually easy for the salesman to get all the information shown on the foregoing form of card, and it is also easy for him to enter it, as most of the questions can be answered by "Yes" or "No."
(5) Collectors' Reports
The reports of the collection manager's own collectors should be of the greatest value. These collectors are the manager's direct representatives. They are working with him and under him, and, as soon as they have had sufficient experience, will secure exactly the information he requires. A special form of report for their use will be found advisable. This will vary according to conditions. A good form of report on an individual is that on the following page, which gives an excellent basis both for extension of credit and collection of accounts. Much of this information will be within the collector's own knowledge, or can be obtained from people who know the debtor, and it may be added that much of it could be obtained in no other way. When a collector can be trained to do detective work of this sort with intelligence, he naturally becomes much more valuable even for his ordinary routine duties; and this result is all the more desirable on account of the difficulty usually experienced in obtaining adequately equipped men for this work.
Any mortgages on the property of a debtor can be discovered by looking over the county or municipal records. Much information of this nature the collection manager can secure for himself. In all the large cities some legal publication is issued daily which publishes all liens placed on real and personal property; and the collection manager can keep in touch with this by subscribing for such a paper in every district in which important customers owning real estate reside. This will give him prompt notice of any encumbrances placed on their property—information of material value.
The collection manager, or one of his collectors, usually maintains a personal supervision of recorded encumbrances in the home city. He may keep informed as to what is done in other cities, as intimated, by means of published reports. Frequently, however, and necessarily for the smaller and more remote places, he depends on correspondents—usually local attorneys—to keep him in-formed as to any liens filed on the property belonging to his customers.
(6) Reports from Banks
The reports of applicants for credit obtained from banks are frequently meagre and unsatisfactory. This is so because banks are very reluctant to make any statements in regard to the financial status of others. If the prospective credit risk is a depositor of the bank, it naturally does not wish to say anything which might injure him. If he is not a depositor, the bank does not, as a rule, wish to take the responsibility of making a report that might possibly involve it in trouble later.
If the collection manager, or his house, does business with, or is on friendly terms with, any of these banks, he may be able to get inside information of material value; but otherwise he will, as a rule, get but little from the banks. Bankers in the smaller towns, however, will frequently give valuable information, especially in regard to the standing of farmers, of which they usually have an intimate knowledge.
(7) Information from Merchants' Association
There is much freemasonry among merchants in regard to credit information, and in many cases this free-masonry has crystallized in the form of local merchants' associations, organized for the interchange of information in regard to debtors. These associations are very effective and productive of much good.
When a merchants' association is formally organized, an office is usually rented, a secretary with competent assistants is employed, and the merchants composing the association send in reports of their experiences with different customers, and especially with those who are slow pay, or difficult, or bad risks. The secretary of the association keeps this information systematically filed for reference, and furnishes it as desired to any of the members. All the members stand ready to give any proper information asked for on any customer. In this way the deadbeat within the purview of such an association finds it practically impossible to get credit, and moves away to some other place where the merchants are not so progressive and well organized.
Frequently, after a merchants' association of this kind is well organized, a rating book is issued, classing each person as good, slow or bad. The merchant may rely on this book if the requested credit is small, but if the amount of credit asked for is larger, or if he has any doubt, he will ask for a special report from the secretary. Merchants' associations of this kind are frequently termed "credit clearing houses." Of late, largely owing to the influence and educative work of the National Association of Credit Men, merchants and banks have entered into a free interchange of ledger experience on a reciprocal basis; and this is becoming a most valuable aid to the credit and collection departments.
Another important method of getting at credit and collection information is through customers, who will usually talk very freely about themselves, their neighbors and acquaintances. Such information, while not entirely re-liable, is apt to be correct. In most cases it is helpful, and should be made a part of the records in some permanent form.
This method of securing information is, of course, practicable either for the traveling salesman or for the collector as he makes his rounds. Both salesmen and collectors can also secure much valuable information by mere observation. If a home is trim, neat and in good repair, it speaks well for the general character of the family. If a farm is well kept, the machinery properly taken care of, and the buildings in a good state of repair, it is a natural and usually correct inference that the farmer is thrifty and prosperous, and a good credit risk.
In this connection it may be stated that farmers generally make the best of customers, and that it is almost always easy to determine their financial condition. Also, while farmers are commonly slow pay, it is but rarely that a good farmer is bad pay. Many farmers are able to go to the bank and cash their note for any reasonable amount, and through this, by a little management, the "slow pay" feature, which is somewhat characteristic of farm accounts, may be eliminated entirely.
The collection manager does not usually need the same exhaustive information as does the credit man. He does, however, at all times, need some information on the ac-counts in his hands, and, in the case of bad accounts and under certain circumstances, he needs the fullest information possible. He should, therefore, know how to secure this information when it is necessary, and—equally important—know how to record it so that it is conveniently accessible at all times.
There will doubtless be other facts the collection manager desires to bring in on his cards; and the form can be changed to meet any special requirements. The cards when filled out are filed alphabetically, or, if the number is large, under a geographical arrangement; i.e., all the cards for a certain district or a certain city are grouped together. For instance, under this plan all the cards for the city of Cincinnati are filed under "Cincinnati," and come, on the general alphabetical scheme, under "C." These cards under Cincinnati are in their turn arranged in alphabetical order. Then, if the collection manager wishes information in regard to James, Frohman of Cincinnati, he opens his card file at the "C's" and turns to Cincinnati. Under Cincinnati he goes to the "F's" and finds James Frohman's card.
Any special reports may be filed by themselves in jackets or envelopes, and the card on which the name and general statement appear may refer to these special re-ports, so that a glance at his cards tells the collection manager whether any special reports have been made, and, if so, where these reports are to be found.