FACTORS THAT DETERMINE CREDIT TITLE 1. Ability and willingness to. pay.—Every credit transaction embodies two characteristic features : One is that such transaction involves the future; the other, that it constitutes an implied contract. Hence, in endeavoring to determine an applicant's title to credit favors, the credit-giver must take into consid eration, first of all, the probability of the credit-taker's being able to make payment at the expiration of the credit period—whether this be thirty or sixty days or longer. He must also consider the probability of the debtor's being willing to do so. To make the trans action safe from a credit viewpoint, there must be present both ability and willingness to pay.
The first of these considerations necessarily takes account of the applicant's business capacity and fi nancial strength; the second, of his integrity or moral character.
Obviously, there is an element of risk in every trans action that involves the future. Of every credit transaction, therefore, this is true. The credit-giver must assume this risk, tho he tries, of course, to re duce it to a minimum. In other words, he takes due account of all the factors that bear upon the proba bility of the account's being paid when due.
The foregoing statement applies with equal force to a wholesale and to a retail business. In the lat ter, as was mentioned in an earlier chapter, it is not always easy for the credit-giver to assure himself as fully as he would like as to the credit title of his cus tomer. Consequently, the retailer's individual risks are larger, tho the separate amounts involved are usu ally smaller than in the wholesale trade, where the amount of a single sale frequently runs into thou sands of dollars, and where the percentage of profit on each sale is necessarily smaller than in the retail trade. In the wholesale trade it is absolutely necessary that definite credit principles be established and that cer tain standards be fixed by which every applicant for credit may be measured, so that the risk involved may in each case be determined with reasonable accuracy. We shall indicate briefly the lines of reasoning upon which credits are granted in the wholesale trade.
2. Biginess ability, native and acquired.—Other things being equal, the person who possesses native ability has a distinct advantage over his less fortunate competitors. The keen-witted, able-minded, aggres sive man is far more likely to succeed in business than the dull, slow-thinking and easy-going one. Acquired ability, however, may be just as valuable an asset and frequently, it may be regarded with even greater favor by the credit-grantor. Business ability may be con sidered under the technical and financial heads.
3. Technical ability.—The careful manufacturer or wholesaler before extending credit to a retailer will always assure himself that the latter "knows his busi ness." This expression, however, may be made to mean much or little, according to the standard of the investigator. For example, it may mean merely that the credit-seeker knows quality and prices, or it may imply a broad and thorn understanding of materials, manufacturing processes, selling qualities and mar kets. It may also include a knowledge of storekeep ing from the viewpoint of attracting and holding trade by means of well-kept store premises and neatly ar ranged, well-displayed goods, together with courtesy and tact on the part of the proprietor and his helpers. Lastly, it may also be made to imply his possession of that selling ability which insures the turning of his capital a sufficient number of times a year to make the business profitable. No one questions that the more ability of this sort a credit-seeker possesses, the clearer will be his title to credit favors.
In the experience of credit-givers, there is con stantly brought to light an amazing amount of what is commonly called "dry-rot" in the management of business concerns. Slip-shod methods of conducting business, coupled with unprogressiveness in manu facturing and selling processes, are responsible for a large percentage of failures. One bank, in response to an inquiry regarding the credit title of a local manu facturer, answered: "It is an old mill, operated by old machinery, carrying an old mortgage, turning out old-style goods sold in an old-fashioned manner." This designation would fit more than one concern, and describes the condition of "dry rot." 4. Knowledge and experienee.—Thoro technical knowledge is not rapidly acquired. It comes only with experience. The inexperienced man who "goes into store-keeping," is handicapped from the outset and finds the chances of success decidedly against him. Such a man might be likened to a ship without a rud der. In the choppy sea of competition, such a craft, if not swamped at the very start, is almost certain, sooner or later, to meet destruction upon some hidden reef or rocky shore. Not infrequently, farmers, in their desire for an easier life and larger profits, be come storekeepers; but their training and experience are of little value to them in the conduct of a store, and they usually discover their mistake before long. tho not always before their small capital has been ex hausted. For this reason, inquiry should always be made with regard to the length of time the credit seeker has been engaged in his present business.