How much must we add for moral insurance against loss?
Character is of vital importance in small concerns; of vital importance in concerns doing a large business on small capital, and it becomes of less importance as we progress into the field of corporations.
In direct contrast to this contention are the views of Mr. Ernest Reckitt, as expressed in an address delivered before an organization of bank clerks. After naming the factors to be considered by the banker before extending credit, he said:
You will note that in enumerating these factors I place first, and purposely so, "The Man Himself," and I believe I am correct in stating that bankers are now placing more stress upon this point than ever before. The man of good character and intelligence, who is full of energy and perseverance, will not find it difficult to obtain a reasonable line of credit with his bankers, while the man who is deficient in those qualities, whatever his reputed wealth may be, will be looked upon with suspicion. It therefore behooves you to become students of human character as well as students of banking, if you are to fill the highest positions within your reach.
These comments may be out of the range proposed by this paper, but I feel I cannot leave this topic without giving you an illustration of the point I wish to emphasize, namely: That it is the character of the man, or men, in a business, which must be first considered before the banker makes a loan. Some time ago, in a certain city, there was a large corporation reputed to be very wealthy, whose balance-sheets were beautiful to behold. Their business being large, they were borrowers of some of the largest banking institutions of their city. Apparently without any warning the corporation was declared bankrupt and went into the hands of a receiver. Later, investigation showed that the balance-sheet was misleading; some people might have called it a worse name, for the assets had been overstated and the liabilities understated. I happened to be in that city at the time of this failure, and, meeting a director of one of the banks with whom I was well acquainted, I inquired if his bank had been caught. "No," said he, "they did try and open an account with us some time ago with the object of becoming borrowers, but we turned them down." I asked him what reasons he and his colleagues on the directorate had for such action at a time when this corporation was supposed to be so prosperous. "Well," said my friend, "some time ago it came to my knowledge that this corporation paid no water tax and that its personal property tax was a mere bagatelle to what it should have been, and I figured out that the officers of a corporation that would be guilty of petty bribery would not be good customers for our bank."
So it will be seen that a knowledge of the business morals of the men in your community and a high ideal, on your part, of what constitutes good business morals is a most essential quality in the make-up of a banker, and that it was these factors that enabled the bank of which my friend was a director to escape what otherwise would have been a bad debt.
Financial Statements. Without attempting to decide the relative importance of the two principal factors, it can safely be stated that one of the first steps to be taken by the credit man is to secure a financial statement from the applicant. And the character of the statement may serve as a guide in determining the character of the man with whom he has to deal.
Most business men are willing to comply with any reasonable request relative to their financial standing, when applying for credit. Until recently, the average man had objected to giving out such statements, except to his bankers, but with the more universal demands for such statements has come a change, and now a statement of some sort is almost always obtainable.
The form of statements used by banks differ somewhat from that used by manufacturers and jobbers, and, while it differs slightly as between banks, and also as to whether the borrower is an individual, a partnership, or a corporation, in general the statement required follows the lines of the form shown in Fig. 1. This statement is signed, in the name of the firm by a member, in the case of a partnership; and in the name of the company by one of its officers, in the case of a corporation. A statement in the same form gives all of the information of a financial nature required by the manufacturer or merchant.
Analysis of the Statement. Of equal importance with the statement is the ability to read it—to correctly interpret its real meaning. This calls for a careful analysis of the several items of which it is composed. To make a correct analysis means that the credit man must have a general knowledge of the business in which the one asking for credit is engaged. The banker must know, for example, whether the season is one in which more capital is likely to be needed in the trade of the borrower, or one in which he should be liquidating his indebtedness.