The most important function of the credit man is the determining of the credit risk—the amount of credit that can safely be extended to each individual. When he consents to the delivery of goods to be paid for at a future date, he is loaning his firm's money.
Before credit is granted extreme care must be exercised in determining the ability of the purchaser to pay, or that he will be able to pay when the bill is due. After necessary precautions against assuming too great a risk have been taken, a further insurance against loss is included in the amount added to cost—a certain per cent of the profit is expected to offset the risk.
In determining the credit risk, different classes of information are necessary in different lines of business. While certain specific information about individual applicants for credit is necessary, the subject may be divided into two general classes—wholesale and retail. Under the head of wholesale, is included information about all business concerns, whether a single proprietor, a partnership, or a corporation. In a general way also, the same information is required in respect to these concerns by the banker, the manufacturer, the jobber, and the wholesaler. Under the head of retail, is included the transactions of a retailer with his customers, who may be regarded as individuals.
Leading authorities on the subject of credit place the factors which determine the credit risk in two classes—the man and the business. Under the first heading is considered the business morals of the debtor and his ability in, and familiarity with the business in which he is engaged. The second heading—the business—is considered from the financial standpoint, divided as to its assets and liabilities, and the profits or losses made in its operation.
But as to the relative importance of the two principal factors—the man and the business—authorities differ. In his valuable contribution to the literature of credits, Mr. E. St. Elmo Lewis takes the stand that the man—his character—should be considered secondary. To quote from Mr. Lewis' book:
If goods are the basis of all credit, character of the owner is and should be an after consideration. The very first question any credit man should ask, is, can he pay?
The question of a man's ability to pay is becoming of greater ease of solution.
The question of the intention or inclination to pay must always be shrouded in the nebulæ of psychological theory.
What is the applicant worth? is the crucial test. Then we shall test him by another. What sort of a man is he?
Do we buy a law suit when we sell him goods?