Credit, its principles and practice;

Front matter

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Preface

It is not to be supposed that any set of rules can be drawn up that will apply equally well to all classes of credit. At the same time it is evident that the underlying principles of credit must in all cases be the same and that the methods developed in the credit department of one line of business may be easily adapted to the requirements of a line entirely different. For this reason the principles developed in the following pages and the plans suggested for the handling of credit problems, which are the result of twenty years of actual experience in the credit office, will, the author trusts, be found generally available.

There is but little literature on the subject of credits. The situation is one not unusual in connection with intense business activities — the experienced credit men have found no leisure to write down the results of their experience for the benefit of others and books are few and far between. The present volume, therefore, requires no apology, and while it is intended primarily for younger members of the profession, the author believes that the experienced credit men will find in it much that is helpful.

The methods of credit-granting have undergone radical changes during recent years, due to the influence of commercial agencies, trade bureaus, the National Association of Credit Men, and the revision of business laws. The principles and methods discussed in the present volume will, the author trusts, be found in accordance with the most recent practice. But little attention has been paid to systems, to methods of preserving records, and other similar matters of routine. Every credit man has his own plans and

iii k^*ik M M t^ m^ iv PREFACE

methods, and the author has only gone far enough to give the general principles which must govern in all such cases.

Part IV, which deals with insolvency, is the only part of the book at all technical. Here the author has drawn largely upon his own experience. The point of view is for the most part that of the layman, for it was felt that the average reader is unfamiliar with legal technicalities. Frequent reference has been made to the leading authorities on bankruptcy law, such as Remington, Loveland, and Collier, and to these writers the author wishes to express his obligation. The careful study of their works will well repay the active credit man.

In conclusion, the author wishes to express his obligation to the large number of credit men who have so kindly supplied him with illustrative forms, and to the National Association of Credit Men and particularly to J. H. Tregoe, its Secretary and Treasurer, for material help and assistance given. 1 *

Ben H. Blanton

March i, 191 5

Part I— Credit Office Routine

I The Credit Department . . . 13 Old Methods and New The Work of the Credit Man Relations with Other Departments Expense Allowance of Credit Department Determining a Policy Liberal Policy Toward Customers Relations with Competitors

II The Credit Man 22

Selecting the Right Man

Special Qualifications of the Credit Man

The Test of Results

Attitude of the Credit Man

Importance of Full Information

Ethics of Bad Risks

The Credit Man as a Business Advisor

Tact the Credit Man's Asset

All Men Presumptively Honest

Caution a Requisite

Watching the Accounts

III The Credit Office Machinery . . 36

The Office Force

The Credit Brief

Office Methods and Equipment

Forms and Blanks

Sources of Information

Banks as Sources of Information

Salesmen's Reports

The Customer's References

IV Credit-Granting — ^The Customer . 44

Confidence and Credit V

VI

CONTENTS

IV Credit-Granting — ^The Customer — Continued The Basis of Credit-Granting The Customer's Ability Integrity Essential to Credit-Granting Investigation of Habits Appraising the New Customer Capital and Expenses Assets Liabilities Insurance Local Conditions General Business Conditions

V Credit-Granting — ^The House . . 54 Qassi6cation of Business as to Credit

1, The Local Jobbing House

Credit Conditions Credit Precautions Co^^structive Credits

2, The Large Jobbing House

Large Jobber's Advantages Rating the Large Buyer

3, The Manufacturer

Credit Conditions

Effect of Mill Conditions on Credit

The Responsibilities of the Credit Man

Favorable Conditions of Manufacturer's Credits

The Instalment Trade

VI Bank Credits . . . . 66

Basis of Bank Credit

Bank Credits and Mercantile Credits

The Bank Credit Man

Functions of the Bank Credit Department

Credit Information

A "Live" Report— French Method

Practical Uses of Bank Records

Bankers Promote Sound Business

CONTENTS vii

VI Bank Credits — Continued Stock and Bond Investments Commercial Paper Relation of Banker and Broker Rating Commercial Paper Indorsed Paper Desirable Mutual Interests of the Bank and Its Customers

Part Ii— Credit Information And Protection

VII The Commercial Agency . . . 8o The Rise of the Commercial Agency Agency Publications The Agency Organization The District Reporter Agency Information Agency Contracts

VIII The National Association of Credit

Men 88

Purpose of the Association

Origin and Ideals

Practical Work of the Association

Working Committees

Benefits of the Association

IX Interchange of Ledger Experience . 95 The Interchange or Trade Bureau Interchange of Ledger Experience The Credit Gearing House Qearing House Methods— the District Office Compiling a Local Report Compiling a General Report Advantages of the Qearing House Method The Qearing House and Commercial Agency Compared

X Checking Orders for Credit . . 107 Incoming Orders Investigation of Orders Commercial Agency Reports viii CONTENTS

X Checking Orders for Credit — Continued Analysis of the Report Credit Gearing House Report Conclusions from Reports Collateral Data Handling the Order

XI Safety Appliances in the Credit Department ii8

The Signed Statement — ^Verbal Statement

The "Container"

Getting the Statement

Investigating the Statement

False Statement Laws

Prosecutions — State Courts

Prosecutions — Federal Courts

Ethics vs. Prudence

Recoveries

Replevin

Reclamations

XII Credit Insurance 127

The Function of Credit Insurance

Origin and Methods of Insurance

Insurance a Precautionary Measure .

Scope of Credit Insurance

Work of the Credit Insurance Agent

Limitations of the Insurance Bond

A Wrong View of Credit Insurance

Advantages of Credit Insurance

A False Objection to Credit Insurance

The Credit Man Indispensable

Credit Insurance and Fire Insurance

I XIII Incidental Problems of the Credit Man 139 Credit Diplomacy

1. Failure to Pay Interest

2. Excessive or Unjust Discounts

3. Unjust Claims

4. Returned Merchandise

5. Cancellations

Effect of Trade Abuses on Credit Standing

CONTENTS ix

PART III— THE COLLECTION DEPARTMENT XIV The Collector and His Methods . . 147

Qualifications of the Collector

Relations of the Credit and Collection Departments

The Collector and the Customer

Delinquent Debtors

1. The "Collection Agency" Method

2. The Draft Method

3. The Collection Agency

4. Legal Proceedings The Collection Attorney Collector and Attorney

XV Collection and Credit Correspondence 156 Power of Expression Attitude Toward the Customer The Cost of Making a Customer • Collection Correspondence Form Letters

Requests for Credit Information Requests for Security Importance of Notes as Evidence Refusal of an Order Answers to Complaints

XVI Collection Agencies . . . .163

Collection Nomenclature Dun's and the Gearing House The Work of the Collection Agency Advance Fee Collection Agencies Adjustments Collection Attorneys

XVII Adjustments and Adjustment Bureaus 170

What Adjustment Implies

The Adjuster

Elements of an Adjustment

The Credit Man as an Adjuster

Details and Advantages of a "Real" Adjustment

The "Good Samaritan" View

Bankruptcy Method of Settlement

Credit Association Method

CONTENTS

Part Iv— Insolvency Chapter

V XVIII

XIX

XX

XXI

XXII

Causes of Failure Analysis of Failures Incompetence Lack of Capital

Neglect, Speculation, and Extravagance Fraud Failures from Disaster and Competition

The National Bankruptcy Law

State Bankruptcy Laws

Bankruptcy Jurisprudence

The Credit Man and the Bankruptcy Law

Involuntary Bankruptcy

Procedure in Bankruptcy

The Petition in Bankruptcy

Filing the Petition

The Referee in Bankruptcy

Proceedings of Creditors The Bankruptcy Court Filing Creditors' Qaims Creditors' Meetings Election of Trustee Duties and Prerogatives of the Trustee

PAGE l8l

Claims

Proof of Claim

The Affidavit

Consideration for Qaim

Secured Qaims

Assigned Claims

Who May Make Affidavit and Qaims

Affidavit to Corporation Qaim

What Debts May Be Proved?

Filing Qaims

Examination of the Bankrupt Rights of the Bankrupt

CONTENTS

XI

XXII The Bankrupt — Continued Duty of the Bankrupt Fraudulent Statements Settlement by Composition Procedure in Composition Settlement False Qaims and Extortion of Property from Bankrupt

XXIII Discharge in Bankruptcy .

Discharge of Bankrupts Opposition to Discharge Acts Barring Discharge Concealment of Financial Condition False Statement as a Bar to Discharge Fraudulent Conveyance of Property Refusal to Obey Court The Act and the Credit Man

1. Salesman's Report

2. Salesman's New Customer Report S-9. Trade Inquiry Blanks

10. General Inquiry Blank

11. Inquiry Blank for Bank 12, 13. Attorney's Reports

14. Property Statement — Individual or Partnership

15. Property Statement — Corporation

16. Property Statement — Individual or Partnership

17. "Self-contained" Property Statement — Individual, Partner-

ship, or Corporation

18-20. Financial Statements

21. Financial Statement — Introduction

22. Guarantee Letter

23. Guaranty

24. Form for Qassi6cation of Information

25. Credit Clearing House Report

26. Petition in Bankruptcy

27. Qaim in Bankruptcy and Power of Attorney

The Bankruptcy Act

Credit, Its Principles and Practice

CHAPTER I THE CREDIT DEPARTMENT Old Methods and New

It is only within late years that the granting of credit has been placed upon what may properly be called a scientific basis; and though it may not yet have assumed the dignity of a full-fledged science, it will be admitted that the work of a well-managed credit department is now conducted with a thoroughness of method and a certainty of results which characterize scientific processes in other lines of activity.

One of the most important factors entering into the profitable management of any business is the rapidity with which capital can be turned, and this is mainly dependent upon the soundness of credits and promptness of collections. In the old days of the hit-or-miss policy of gambling on human, nature, it was impossible to forecast the results of business with any degree of certainty; but the scientific methods and clean-cut principles and practices of the credit office of today have changed this, and have made it possible to conduct a business with a precision that forecasts gains or losses in per cents, and thus gives confidence to managers and investors.

In the good old days of long profits, and before the advent of the highly specialized salesman, credit was largely dependent on the personal acquaintance of buyer and seller. If on being introduced to the head of the firm the buyer made a good impression, an account might be opened on the spot. It is true that large houses used the commercial agencies and made investigations after a fashion, but not as it is done under the stimulus of the razor-edge competition of today, when business is conducted on a continually decreasing margin of profit, goods sold on definite terms, and payments expected promptly at maturity of the bills. Sales are no longer made on long datings, and the rates of discount have been reduced; in fact, a strong agitation is on foot looking toward a net basis of payment and the entire elimination of discount for payment of bills before they fall due.

The Work of the Credit Man

The importance of the credit man's work is recognized in his own immediate sphere, and more broadly as a factor in the improvement of conditions which affect the credit interests of the country as a whole. Through the organized effort of credit men many of the states have enacted better credit and collection laws, and national laws have also contributed to the improvement of our entire credit system. The credit men of the country are leading in the fight for better fire protection, whereby our excessive fire losses, which are regarded as criminal by the insurance authorities of the old world, may be reduced and our resources thereby conserved. The insurance world has recognized the importance of the credit man in this field by enlisting his services to assist in both the passing of laws and in the educating of the small merchant in matters of insurance.

Not only as a member of an organized body, but as an individual, the credit man of today is found among the

THE CREDIT DEPARTMENT leaders in every movement for the betterment of business conditions and in extending influences for good among his fellow men in all walks of life. One has only to glance over a list of the various committees of the National Association of Credit Men, to realize how important a place the credit man fills in the general scheme of business life in these early years of the twentieth century.

From this it will be seen that the position of a credit man is invested with dignity and responsibility, and that the credit department is, or should be, one of the strong bulwarks of any business. Not only does it guard a large part of the assets of the business in the form of outstanding accounts, but the credit man furnishes the sales manager with information concerning business conditions in various parts of the country, thus enabling the latter to outline his selling campaign with a view to covering the localities where business may be had with the least effort and expense. The credit man furnishes information of equal importance to the advertising department of the business; and through his study of fundamental business conditions he also supplies the financier with the statistics necessary to an intelligent study of the money market and the profitable placing of loans.

Relatiims with Other Departments

While the functions of the credit department are thus of prime importance, the department must not be assertive, but must rather remain in the background, and work in close harmony with the other departments in the upbuilding of the business structure. Particularly in its relation with the heads of the business, should there be a feeling of harmonious S)mipathy. It is easy to criticize; and the credit department, from its peculiar position in the business organization, sometimes receives more criticism from other departments than is justifiable. If the credit man tries to eliminate hazardous risks, he is criticized by the sales department. If he makes an unwise credit and sustains a loss, he is censured by heads of the firm. While the constant aim of the credit man should be to approve only such accounts as may be sold with safety, he may occasionally go wild on some risk. Bad accounts will inevitably arise; they are the left-overs, the remnants of the credit department, similar to the hard stock and unsalable merchandise of the purchasing department. In any event, it is only fair that the credit department should receive the same s)rmpathetic encouragement and support as is accorded to the other departments.

The credit man's position is, at the best, a difficult one. He has a heavy weight of responsibility on his shoulders ; and under a pressure of work demanding every minute of his time, it is not unusual for him to be "high-strung," his nerves being sufficiently in evidence to make him smart under unjust criticism. The head of the business may not know all the facts which the credit man took into consideration in forming his opinion, nor the conditions which set at naught his calculations in determining the advisability of the credit, but the criticism comes just the same. The "flare-up" that sometimes follows is not always unjustified.

On the other hand, while a change in the management of the credit department is always attended with more or less interruption to its work, and is to be avoided if possible, it should still be borne in mind that the demands of the business are above personal considerations, and if the conduct of the credit department provokes constant criticism, whether just or unjust, it is best for the business that the offending party be removed, and at once.

Expense Allowance of Credit Department

A feature of the credit department not generally under-

THE CREDIT DEPARTMENT

Stood by the executive heads, is the expense connected with procuring information. In a later chapter it will be shown that it is vitally necessary to procure all the information possible regarding the financial worth of a customer in order that the decision of the credit man may be correct This involves a very considerable expenditure in the course of a year; but when it is taken into consideration that one loss which might have been avoided through this service will often equal the entire annual expenditure for agency information, the advisability of spending money liberally for it can hardly be questioned. This is not an argument in favor of giving a credit man full power to buy agency service without any regard for expense, but rather, a plea for a liberal allowance. It will be found that such an investment will pay handsome dividends.

The same argument applies equally to the policy of furnishing the credit department with a thoroughly efficient force to carry on its detail work. The liberal salary paid to the credit man is supposed to be a reward for the use of his brains, not for the work of his hands. He cannot bring to bear upon his credit decisions a clear and accurate judgment if his mind is crowded with items of petty detail which should be relegated to minor clerks.

Determming a Policy

At the moment of organization of the credit department it is essential that a definite policy for its conduct be determined. This policy is usually elaborated by means of conferences among the executives, and is the natural outcome of certain fundamental conditions. It is admitted that the chief reason for carrying on a business is the making of a profit for those who contribute the capital. The credit department is not, therefore, a mere machine to pass on credits and collect the accounts, but is, beyond this, the agency for carrying out the general policy of the house as to terms on which the goods are sold; as to discounts for cash or payment of accounts before maturity, and in fixing a safe margin for accounts receivable ; or, more properly, for that part of the capital which can be safely invested in the book accounts for merchandise sold.

The manufacturing or the purchasing department will naturally determine the prices of goods and the discounts to be allowed, as such conditions are regulated by the cost, the usages of the trade in that line, competition, the financial condition of the customer, and the size of the order. All these factors enter into the making of the terms of sale ; and when considered in connection with the amount of capital invested, and the firm's credit, or borrowing capacity, they determine the volume which the business may reach with safety and the amount in dollars and cents which may safely be invested in accounts receivable. No attempt will be made to discuss this phase of the business, as it is largely a matter of theory and of particular conditions. The idea here is to emphasize the necessity of fixing a policy for the credit department. We shall pass, therefore, at once to a discussion of the attitude of the house toward its customers, or, more properly, the attitude of the house through its credit department toward such customers.

Liberal Policy toward Customers

Whatever the kind of business, whether manufacturing, jobbing, retailing, or banking, or the character of the transaction in which the item of "accounts receivable" originates, it is a fact that a liberal policy is necessary to growth. Do not confuse a "liberal" policy with a loose policy. A liberal policy is not necessarily an easy-going policy. A liberal policy in the granting of credits should always be backed up by what may be termed a "close" policy in the collection of

THE CREDIT DEPARTMENT accounts. A broad, liberal policy toward customers means much more than the mere granting of credit and taking a chance on undesirable risks. At no time is the indiscriminate granting of credit to be approved. On the contrary, this form of gambling should be eliminated through the granting of credit on scientific principles.

A new house entering the field of competition against well-established concerns is usually forced to sell to merchants that are not freely solicited by the older houses. This is especially the case with the small jobber operating in a restricted territory; and until he gets on his feet, he is forced to content himself with whatever business he can pick up. A credit man for such a concern is obliged to pass credits that contain an element of risk, in order that his house may attain the volume of business necessary to move its merchandise on a profitable basis. He realizes that such credits are undesirable, and he ships the bills with the intention of discarding the accounts as soon as his house becomes established. His investigations are usually very thorough ; and, while the account is outstanding, he watches it closely, follows it up to the date of maturity, and then proceeds to collect as vigorously as possible. His attitude toward the customers in handling complaints and in adjusting the differences which are constantly arising, is as liberal as prudence will permit in order to gain their confidence and to assure them of a square deal in all their transactions with his house. At the same time he must know just where to draw the line to prevent a customer from imposing on the house; and this discrimination is one of the finer points of judgment which enter into the making of a good credit man.

Relations ynih Competitors

In the attitude of his department toward competitors, the credit man should lose sight of the selling end entirely when it comes to the interchange of credit experience. The jealousies of the sales departments should never interfere with a harmonious and even friendly feeling between credit departments. It should be the aim of the credit department to give the credit man of a competing house any exact information at its command in regard to an account of common interest; and it should serve this competitor with as much courtesy as it would grant to a credit department in a non-competing line. If a credit man conducts himself in this way he has a right to expect and demand the same treatment; and right here it might be well to remark that the interchange of credit ideas and experiences is entirely a reciprocal affair, and that a credit man gets out of the competitor just as much as he gives. Human nature is strong, and in recent years credit men have become very clannish, as they realize how dependent they are on one another and how much good can be accomplished by mutual kindness and genuine human fellowship.

In order to judge intelligently of a credit it is necessary to know as far as possible the names of other houses selling the customer — not only those in the same line, but in all lines that the customer carries. Such investigations naturally throw the credit department into contact with the same departments of other houses involved ; and, as they impart their experience with the customer in question, the courtesy ought to be returned with as much care when inquiries are received from them. Even in dealing with strangers a similar policy is the part of wisdom.

Some years ago, when it was the custom simply to inquire regarding a risk, the answer would come back "O K" or "Good as Wheat," or some like comment; but now, a credit man wants definite information as to the exact standing of the customer. This includes not only the ledger experience, but some comments which indicate the degree of

THE CREDIT DEPARTMENT 2 1

confidence with which his brother credit man regards the risk. Every credit man today can give numerous instances where he has been saved from loss by the courtesy of another credit man — ^an absolute stranger, who instead of giving merely the ledger experience, stops his work to dictate a letter of comment or even mails his entire credit file for inspection. Just as there has been a wonderful improvement in the handling of credits, so also has there been an equally wonderful change in late years in the attitude of credit departments toward each other.

CHAPTER II Selecting the Right Man

The object of this chapter is to state the indispensable qualifications of the credit man, qualifications without which it would be impossible for him to aspire to the ranks of those who are endeavoring to put credit-granting on a scientific basis.

At the outset it is necessary to lay down a rule which may provoke adverse criticism, but which from the practical standpoint is sound. The credit man should be an employee — ^not a member of the firm nor an officer of the corporation. An inspection of the personnel of our business houses, and particularly of the medium and smaller concerns, will show that the credit man is in most cases an officer, or a partner, or is otherwise financially interested. Recognizing the importance of the work, the direction of the credit and collection departments is assigned to that officer, or member of the firm, who shows aptitude for office work and the handling of finances.

There is often a feeling that it is not s^fe to intrust to an outsider — ^to a mere employee — ^the handling of a class of assets of the business which often exceed all others combined. While this feeling is entirely proper, it overlooks the important fact that the handling of credits in late years has developed into a scientific process which should be entirely separate and apart from the detail office work, and which should be handled on a purely business basis. If a member of the firm assumes the conduct of the credit department and proves unable to cope with its problems, the business will suflfer to the extent of his inefficiency, as it is not possible to discharge him and employ a more efficient man.

The delegation of the work of credit-granting to an employee leaves the proprietor or officer free to work for the upbuilding of the business ; and the credit man, relieved of executive details, can perfect his own organization, study individual credits, and by this specializing in one department, bring it to a high state of efficiency. Just as highly developed salesmanship is the result of specialization, so the handling of credits and collections as a department in itself may, through specialization, be brought to a much higher development than generally exists.

By delegating the work of the credit department to an employee, the executive may try out different men until one is found who comes up to the required standard of efficiency. While it is admitted that the changing of credit men is like swapping horses while crossing a stream, it is, as already intimated, folly to retain a man who cannot produce satisfactory results.

While the writer has the greatest respect for the ambition and general efficiency of the average young business man, it is rare that safe and sane business judgment exists in any man much under thirty years of age. A younger man may have "drive" and be invaluable in pushing the business forward, but — and the same may be said of a member of the firm passing on credits — in his eagerness to see the business grow he is liable to allow this desire to influence his judgment unduly when passing upon credits.

A salaried credit man, on the other hand, realizes that his very living depends on his ability to produce results in his department; and this means not only the upbuilding of the business, but keeping down the percentage of losses to a figure of safety. And when it comes to taking wild chances, the man of settled judgment, in view of such responsibilities, is going to think twice before making his decision. This settled judgment, or power of wise decision, can come only from years of experience in the credit office and from thoughtful study of its problems. The very young man cannot have had such experience.

Special Qualifications of the Credit Man

What, then, are the qualifications for a good credit man ? And by qualifications, let it be understood, is meant rather those qualities which are the essential elements of the character and education of one who desires to enter upon a life career in the credit office. In the first place, he must be a student, with an aptitude for credit problems and the ability to digest and put to practice the lessons he learns. He must be a ready correspondent. By this is not meant the mere ability to frame letters, perfect from a rhetorical viewpoint, for such ability is, in fact, only one of the attributes that contribute to the highest success. So important is this matter that a separate chapter has been given to its consideration.*

A knowledge of the law is absolutely necessary to the credit man; not only a knowledge of the general laws of credits and collections, but of the statutes of the states in which he operates and which directly concern his work. He should be an expert accountant, able to analyze financial statements and to tell at a glance the true condition of the business of the prospective customer. He should also be a good collector. Even though collections are handled by a separate department, the work of collecting is so closely related to the credit department that it becomes one of its special features. Above all, the credit man should be a sound business man, not only for the good of his own firm