Credit And Collection Problems Of The Small Dealer
( Originally Published 1918 )
The Small Dealer
Scattered over the country are many thousands of small dealers. The average capitalization is low—perhaps a few thousand dollars—but in the aggregate these small dealers transact a large volume of business. They are found in the city and its suburbs, in large towns and in small, and at country crossroads. Frequently they are not of sufficient importance to be rated in the mercantile books at all, but in the sum total their transactions are imposing; and the large wholesale houses of the country look to them for support.
The smaller the business, the more important is the matter of collections. Ready capital is limited and must, of necessity, be kept in hand. If the small dealer did not collect closely, he would not be able to meet his own payments promptly or keep his business moving properly. As a matter of fact, however, both the accounting methods and the collection practices of these small concerns are frequently of the most ancient and inefficient character. Better methods would bring about fewer failures, better bank accounts, better business conditions, and a more rapid promotion from the ranks of the small concerns.
The Extension of Credit
The great trouble in the case of the small dealer is the difficulty of refusing credit. It is not pleasant to decline to trust a customer under any circumstances, and when this customer prefers his request for credit with a tactical skill born of long experience, it requires more strength of character than the average storekeeper possesses, to refuse. Especially is this true when there is a competing store and the dealer fears that a refusal to grant credit may drive the customer into the arms of this competitor.
In the country the standing of those who apply for credit is usually well known to the dealer, and he under-stands exactly what risk he is taking. In the city the difficulties are greater. It is almost impossible for the ordinary small storekeeper to "size up" the applicants for credit with any accuracy. Competition is keen, and he cannot risk offending his customer. Mrs. Jones has been dealing with him quite regularly for three or four weeks and has always paid cash. Some fine day she comes in and buys a dozen eggs, a half pound of butter, and a quarter pound of tea, and discovers that she has not enough money to pay the bill. It is then the most natural thing in the world for her to suggest, and for him to agree to, charging the goods until "tomorrow"—a to-morrow which does not usually coincide closely with the tomorrow of the calendar; and the account is started.
Securing Credit Information
Many times the small dealer gives credit when he would not if he were an entirely free agent. It is but seldom that he can exercise the careful discrimination that should govern the granting of credit. He should, however, do the best his circumstances permit.
If he must give credit when he would rather not, let him keep this credit at the lowest possible figure. If his accounts will not justify the careful investigations and close watchfulness that prevail where larger credits are at stake, let him give such care and watchfulness as he can. To this end he should secure as full information about applicants for credit as may be done without neglecting more important matters. After the account is opened, let him watch the customer as closely as he can; and in all cases of doubtful credit let him keep the indebtedness at the lowest possible limit.
The sources of information for the small dealer are not as abundant as for the credit man of the larger concern. They are, however, sufficient if he knows how to avail himself of them. The applicant for credit should be closely questioned. Other customers will afford a valuable means of securing information. References given by the applicant for credit will supply the dealer with further data. Even better than this, if he is located in a large city he should be a member of the retail credit association, which keeps at its office a secretary for the purpose of supplying its members with just the credit information the small dealer needs.
Such an association is co-operative in its workings, the members coming to it for information, and in turn re-porting any derelictions of the people to whom they give credit. As a consequence, the black sheep in the fold so guarded are pretty sure to find that they are blacklisted and must pay cash for what they secure; and that, as far as the membership of that association is concerned, their careers as petty swindlers are barred.
Where the credit association does not exist, the small dealer must make his own investigations. Frequently he can secure much information from his other customers. Shoppers at the small stores are very apt to be gossipy, and by discreetly leading up to the affairs of the "credit risk," the dealer can usually get information in quantity. He must use judgment in applying this information, and should, if possible, get the point of view of several of his customers, as a single opinion may be prejudiced or unreliable. When he has this, he can usually, by comparison and elimination, discover with fair accuracy the property, standing and reliability of the person who wishes the charge account.
Opening the Account
One of the first questions to ask the applicant for credit is his exact name. There are but few names that are not more or less closely and numerously duplicated, and, if the individual is ever to be traced in case of need, his full name must be recorded. The storekeeper must also be particular to get the correct address, street and number, of his customer, if the town is one of any size. Also, where he is a newcomer, his former address should be secured. Where the account is likely to be more than a petty one, this will give opportunity for investigating his standing with tradesmen in the place from which he came. For this purpose the applicant should be required to give the names of at least two merchants with whom he has done business, and a confidential letter should be sent to these merchants asking what amount of credit they extended him, and the manner in which he met his bills.
Another method of opening an account and of getting security for its payment at the same time, is to require the customer to sign an application for the line of credit he wishes—say to the amount of $25. If he is anxious to get the accommodation, he will be perfectly willing to sign this application, which can be so drawn up that it is in fact a note, giving the merchant, in case of non-payment, an assignment of wages and a lien on all personal property and real estate owned by the applicant. This note can also be made to acknowledge judgment on non-payment, and when properly drawn is a strong security.
If the merchant decides to use this method, it will profit him to pay a good attorney to draw up the application according to the statutes of the state in which he is doing business. The form should contain the name and address of the applicant, the name of the employer, the wages received, the name of his wife, the number of children, the date of pay-day, references, and any other data desired. The merchant will thus secure all the information he needs from the form itself and will be sure that he has not overlooked any points. The form of report given in the chapter on "The Collector and His Work" (Chapter XV) covers all the information which will usually be necessary in this application note.
If it can be done without giving offense, the smaller city dealer, or anyone else selling to wage-earners, should make weekly payments of accounts a condition. As a rule, accounts will not reach serious proportions inside a week, and, if the dealer insists strictly on weekly payments, he is not risking a great deal. He must, however, adhere religiously to payment on the appointed date, or other-wise stop furnishing goods. This is the only safe plan unless security is taken, or unless the customer is known to have valuable unencumbered property. Even then, thirty days should be the extreme limit for small accounts.
Sales and Collections
The smaller dealer should constantly keep in mind that, no matter how satisfactory the volume of business, his profits depend upon the collections of his accounts. It avails him nothing to sell goods if he does not get paid for them, and goods in hand are better than a bad account.
The writer was recently called in to take charge of the bad accounts of a small concern, and found a neat and attractive store, an active and apparently prosperous business, and a proprietor thoroughly in touch with his line. The profits were, however, disappointingly small.
A very superficial investigation disclosed the trouble. The selling, the buying, and the ordinary routine of the business were taking all of the proprietor's time and that of his clerk. As a consequence, accounts were not properly attended to; and, while sales were satisfactory, collections were not.
In taking over the accounts, the effects of this neglect were everywhere apparent. In some cases the very names of customers were not correctly entered. In many cases addresses were incorrect or were missing entirely, and apparently the proprietor was trusting almost everyone who came along. One customer was credited, not because of his present financial ability, but because he expected to receive money from an estate, and on this shadowy basis he had already run up a large bill and was still getting goods.
The merchant is dealing with the living present, not the dead past nor the visionary future ; and credit should be extended only on existing security. What a man is going to receive is no basis for credit—unless it be some-thing reasonably sure, such as wages, regular interest, or annuity payments.
But if credit has been given, the pressing question is how to make collection. The point that cannot be too strongly emphasized in connection with small accounts is the necessity of a close follow-up. This is true in a general way with all accounts, but more particularly so with the small account. If it is not closely followed, it is neglected, forgotten or purposely evaded by the debtor. If, on the other hand, it is properly followed up, fraudulent evasions will be few; customers will never be allowed to run into debt beyond' their means; and, if any turn of circumstances makes it really impossible for them to pay what they owe, the loss to the dealer will not be serious.
Do not let accounts run behind. If fixed dates for payment have been agreed upon, payment should be made upon those dates, or the matter should be taken up at once for investigation. Good reasons may be given for a temporary postponement, but if the dealer is wise he will not let these postponed payments aggregate any large amount, unless as a matter of friendship or charity.
If an account is not paid promptly on the proper date, the first step is to make out an itemized statement of the account, giving the debtor's full name, and either call on him or write him a letter asking him to call at the store. A heart-to-heart talk will usually bring about an under-standing of the situation. It will also bring a good deal of information as to the customer's real financial status. If he cannot make full payment at once, it may be possible to arrange for a certain amount down and weekly payments for the balance. An honest man will be glad to make such an arrangement; and, if collections are closely followed, the money will eventually be paid. Or in some cases the customer may be willing to give an order on his employer for the money due. If so, the employer must be followed up as regularly and carefully as if he were the customer, until the amount is paid.
In the case of laboring men who are behind in their payments and will not give an order on their employers, it may be necessary to call on the employer direct, or to notify him of the overdue account and request his assistance in securing its payment. This, however, should be done with discretion, or it may result in the dismissal of the employee, with a resulting loss to the dealer of the entire account.
The small dealer frequently encounters difficult and even painful cases—particularly when he is dealing in the necessaries of life. Let him be as easy in collections as may be with deserving debtors, but when he lets small accounts run over, or gives additional credit to customers who are already behind, let him recognize this as generosity or charity, as the case may be—not as business.
One exception to this general statement must be noted. A small dealer will sometimes "stake" a customer who is out of employment, or who for some special reason is unable to pay at the time, and will perhaps carry him for weeks or even months. In such cases the dealer knows the customer and relies entirely upon the personal equation, feeling confident that the credit risk will "pull out," will pay for what he has already had, and will thereafter be a steadfast and profitable customer. Such a proceeding is somewhat outside the realm of ordinary business, but is entirely justifiable and in fact commendable. The dealer should, however, be sure of his man, or otherwise he may suffer a financial loss, and in addition a loss of confidence in human nature, which is even more serious.
Credit must be given. But the dealer must remember that it is worse than useless to sell goods unless he is paid for them, and that it is as much a part of his business to see that payments are made as to sell the goods in the first place.