3. Arguments in favor of. credit insurance.—Ac cording to the credit insurance companies, such in surance: protects you from losses occasioned by your errors in judgment in extending credit ; from losses occasioned thru erroneous mercantile credit ratings furnished you ; from your inability to collect what is rightfully yours because of the insolvency of your debtor, due to floods, crop losses, wars, strikes, fires, and other unexpected and uncontrollable causes.
It is further claimed that credit insurance gives the business man control of his costs. Since he knows in advance what costs are due to bad debts, he can enter his insurance premium upon his books at once instead of waiting until the end of the year. By add ing this amount to his other fixed expenses, the ex act cost of doing business is easily ascertained. Ac cordingly, he can compute his profits with certainty. His mind is thus free to apply itself more fully and profitably to the productive part of his business. It is possible to increase sales to the maximum amount and still keep losses at a minimum.
As by the terms of the indemnity bond he is of fered protection only within certain restrictions, the credit man learns to watch his customers' accounts more carefully in order that he may obtain lower in ' surance rates the following year as the result of a reduction of his average loss.
It is also claimed that credit insurance tends to promote trade and to prevent panics, since the confi dence which it begets makes business men more ag gressive and enterprising.
4. Arguments against credit insurance.—Business men, however, are not all convinced that the claims made for credit insurance as a "paying" innovation in the conduct of business have been realized. Many business men ask whether it is not a fact that the normal loss—which they in every instance must bear, and which represents the aggregate of all credit losses during a number of consecutive years—includes the very risk's that the indemnity company offers to insure.
This argument appears to be well founded, espe cially when we consider that in the nature of things every credit loss is abnormal. The normal course of every credit transaction is its ultimate liquidation by payment at the expiration of the credit period. But since experience proves that in practically every whole sale business some accounts remain unpaid, and that the amount of losses thus incurred are about the same from year to year and represent a certain percentage of gross sales, the wholesaler is in the habit of off setting this loss by adding his loss percentage to the selling price of his goods. He protects himself in
this way against diminished profits caused by bad debts. But having done this, he is likely to regard any premium which he is asked to pay for "losses" above this amount, as an added expense for which he • receives no adequate return. He knows that even tho in some one year his losses should slightly exceed this normal amount, it is extremely improbable that the average losses of the next five or ten years would be higher.
Nor does it appear, as some seem to think, that credit insurance permits less vigilance on the part of the credit man, since by the terms of such insurance he is compelled to watch his accounts even more closely than before, lest by a violation of the insurance com pany's stipulations he should forfeit his right to in demnity when a loss occurs.
That credit insurance, even if it were more com monly used than at present, should be able to exert any appreciable influence upon the causes that pro duce a financial panic, is, to say the least, doubtful. We have seen in an earlier chapter of this volume that panics are commonly brought on by an over-ex tension of credit. The remedy lies therefore plainly in the direction of conservative credit management and is not found elsewhere.
5. The National Association of Credit Men.— Among the factors that cooperate in promoting sound, efficient and honorable principles in the conduct of American business, particularly in the department of credit, a prominent place must in fairness be accorded the National Association of Credit Men. Organized in 1896 at Toledo, Ohio, this association was a direct outcome of the deliberations held at the World's Mer cantile Congress, conducted under the auspices of the Chicago World's Fair in June, 1893.
Prior to that date certain associations of a some what similar nature had already come into existence. These, however, were chiefly credit companies or bureaus organized for the exchange of credit infor mation. Their operations were therefore necessarily limited in scope; nevertheless, they formed the nucleus of the national organization with which subsequently they became identified.