6. HOW TO GIVE CREDIT FOR INCREASED SALES VOLUME

WHAT ARE THE ADVANTAGES OF SELLING ON CREDIT? | KNOW THE PRINCIPLES OF A SOUND CREDIT SYSTEM | HOW GOOD RECORD KEEPING WILL AID YOU IN CREDIT SALES | HOW TO CHECK A CUSTOMER'S CREDIT | HOW TO CHECK THE CREDIT STANDING OF A BUSINESSMAN | HOW TO EVALUATE A BUSINESS FOR CREDIT PURPOSES | HOW TO ANALYZE YOUR CUSTOMER'S FINANCIAL STATEMENTS | HOW TO COLLECT OVERDUE ACCOUNTS | KNOW THE IMPORTANT LAWS AFFECTING YOUR COLLECTION METHODS.

Selling on credit helps to build up a clientele of regular cus­tomers. Cash customers are anybody's customers. Charge cus­tomers  are customers  of record.  Other  important  points  are:

Charge customers usually are not as concerned with the prices of goods as are those who pay cash. They tend to buy a higher quality of merchandise, and they frequently buy more of it.

Credit is an accommodation to customers so that they generally have a feeling of good will toward the store. A more intimate relationship can be built up between the cus­tomers and the store.

Goods can be sent on approval to customers.

Charge customers provide an excellent mailing and promotion list.

Adjustments can be made more easily.

Along  with   these   advantages  come   disadvantages,   which you must also consider:

Capital is tied up in merchandise charged by customers.

No matter how efficient the merchant's collection system, some losses are bound to occur. Credit customers may pur­chase beyond their ability to pay.

Credit customers have a greater tendency to return goods than cash customers. Credit adds to the cost of operations, since an account must be maintained  and  monthly  statements  prepared  and mailed.

A SOUND CREDIT SYSTEM

Credit can be either an asset or a liability to a businessman. Properly controlled, credit selling can increase sales and bring a steady, well-satisfied customer. Handled in slipshod manner, it can cause an over-investment in accounts receivable, large bad-debt losses and certain failure of the small business.

If you give credit, you should understand and apply the following six principles of a sound credit system:

1.Investigate applicants for credit. The first step should be the investigation of the customer, or an interview with the applicant, or both.

2.Carefully consider the- applicant's character and credit record, his earning power and ability to pay, and his capital and property. Along with these factors, you may Have to take into account the personal background of the applicant—his social standing, general reputation in the community and business career.

3.Limit on credit is set. You should not decide to open an account without considering the dollar amounts in­volved. The amount of credit granted to a customer should be based largely on his income, and will vary, of course, with the type of business.

4.Terms of payment are defined. As a safeguard against bad-debt losses, you should have a definite understanding of credit terms with the customer. Stipulate that pay­ments are to be weekly, monthly or on paydays. In some cases monthly terms are satisfactory. In others even longer terms can be used successfully. What should be avoided is selling on credit without you and the customer knowing the exact time payment is expected.

5.Account is controlled. From the day the account is opened, you should see that the customer upholds his part of the agreement. If credit is on a monthly basis, permit no further charges on an account if it is not paid by the end of the month in which payment is due. Others insist on giving personal approval to additional pur­chases on such accounts. How much credit should you give?

Some hold that the limit should not exceed 30 per­cent of the customer's monthly income. Others, more conservative, prefer to start the ac­count with a smaller limit, increasing it as the credit relationship with the customer proves satisfactory.

6.Delinquent accounts are followed up promptly. When a customer has not paid his account within the specified time, suspend the account. No further charges should be made until the account is paid or a new agreement reached. It is dangerous to allow old balances to be carried over indefinitely, or beyond a reasonable period. The main reasons for this are:

The older an account becomes, the harder it is to collect. When merchandise is no longer new, the customer feels that he is paying for a "dead horse."

Customers have greater respect for the merchant who handles his business according to agreement.

Customers with unpaid accounts, fearing the merchant will ask for the money, avoid his store and buy elsewhere.

Carrying accounts beyond the agreed time increases the mer­chant's operating costs.

In deciding whether to suspend the account, considerable judgment and discretion must be used. In smaller stores, personal contact with customers is usually frequent. In the case of old customers with good credit records, definite arrangements may be made to pay overdue balances, instead of placing them on a cash basis. The amount overdue can be set up as a separate account. The customer can arrange to make regular payments on that past-due balance, along with the payment of current bills.

For instance, if the customer owes $40, it may be arranged that he pay $4 a week for 10 weeks. Once a new agreement has been reached, the businessman should insist on its observance. When a customer is able but unwilling to pay, you should act decisively—perhaps under competent legal advice. The cus­tomer should be warned that the account will be turned over to a collection agency or to a lawyer unless paid by a certain date. Having issued the warning, carry through with it. If a small busi­ness does not, it will acquire the reputation for being easily put off.

Good record keeping will aid you in credit sales. Record keeping is not a remedy for bad credit practices. But record keeping can provide the information that will warn the retailer in time if his credit business is getting out of control. Record keeping cannot run a credit business. But a credit business cannot be run with­out record keeping.

What should your records tell you?
How much extra credit you are in a position to offer. You get this from the total amount owed by customers, compared to what you set as the limit your business can stand. You cannot do this without records.

// charge sales during a week (or other period used to check) are more than collections, it may mean that the charge business is increasing. Or it may mean that collections are poor. If charge sales amount to more than collections the following week, and the next, it may be a positive danger sign. There should be a close relationship between collections and charge sales. The dan­ger is when collections lag behind charges week after week. Your records should tell you where you stand.

Your records should compare charge sales with the amount owed by customers on a given day during each week. That gives an idea of the age of the accounts. If terms are weekly, the out­standing accounts at the end of any week should approximate the amount of one week's charge business. Customers do not always pay their bills on time. For that reason the amount on the books may be in excess of the charge sales during the credit period.

HOW TO CHECK A CUSTOMER'S CREDIT

A customer's credit should be investigated through the local credit bureau. It is an integral part in the extension of consumer credit. The bureau verifies the information contained in the application and checks the bank and credit references. It adds such other pertinent information as is found on file, such as legal records, claims for collection, newspaper clippings and other information relating to the applicant's responsibility.

Any reputable merchant, by arrangement with his local credit bureau, may obtain these important services. Since all credit bureaus are affiliated with the Associated Credit Bureaus of America, Inc., information can be exchanged on a national scale.

The completed report will show whether the credit applicant has means sufficient to assume the obligation and pay it according to the terms.

If there is no credit bureau in the community, the merchant may obtain information from other businesses, the applicant's place of employment, his bank and his neighbors.

When the information developed in credit investigation does not clearly suggest a decision, certain other factors might be considered before opening or declining the account. They might be:

Stable employment record Maintains checking account Maintains savings account

HOW TO COLLECT OVERDUE ACCOUNTS

The small businessman must be informed about the causes of the delinquency, not guess or follow stereotyped routine.

Then he must determine with intelligence whether slow rehabilitation or decisive action is more desirable. Collection often takes special aptitudes and knowledge. They include: Insight into the behavior of people; a knowledge of psychology.

Ability to be persuasive and stimulate others to action. Capacity for following through; absence of indecision or tendency to dawdle.

Ability to write letters and use telephone with firm­ness and conviction, yet without loss of respect­fulness.

Cold logic of mind but friendly manner and sym­pathetic disposition.

Knowledge of the ruses and tricks of delinquents. Collection pointers. A sale beyond the ability to pay means the unhappy birth of a bad collection problem.  But suppose you have done it. Now you must collect. Perhaps you can use these time-tested aids:

Call upon your debtor personally, telephone him or write him. The size of the claim, the relative danger of loss, the cost involved are all factors in determining which to do.

Get in writing, by responsive letters if possible, or by taking se­curity notes or other instruments, admission of facts that eliminate possible claims, defenses or counter­claims.

See if it is advisable to charge interest; sometimes this gets action.

Offer some bargains; this may induce a debtor to clean up his account.

Use the telegram; it spurs and suggests action and successfully competes for attention.

A person-to-person telephone call may do the trick.

Sometimes a good heart-to-heart talk after a good dinner is effective.

Shrewd inquiry to debtor's bank sometimes impels action.

Sympathetic help often encourages more effort to pay up. Help the debtor save face; have a whipping boy handy. This often helps you get paid.

Get him to start with a token payment, to start the collection ball rolling.

If he is sluggish, prod him first gently, then become increasingly firm, retaining his goodwill for future business. If he is on brink of disaster, don't dally; act swiftly to save him if you can.

If he is dishonest, "beat him to the punch" by frustrating his designs, with or without cooperation of other cred­itors. Don't "pussyfoot." If confronted with a bad account, get collection department under way.

Make your plan of debt payment an accomplished fact. Exact promises, and press him to fulfill them.

Get collateral security, notes, dated checks, sureties or other feasible assurances of payment; perhaps return of mer­chandise or extra allowance is acceptable.

Never be satisfied with signed papers that merely presage a business funeral; get signatures of responsible persons.

Watch debtor's pattern of action after plan of payment is placed into effect to see if he is mulcting the business, giving preferences, etc.

Much  has  been  said  about  collection letters.  Experts list these rules:

Don't write anything that you will be sorry for later. Avoid bad taste, insults, recriminations and defamation. Be friendly, yet firm and confident in tone. Use impersonal forms when prodding is needed. Turn complaints into goodwill by being helpful. Where appropriate, show that effective collection policy is followed to keep up quality of service or produce at minimum prices for all customers. Remember  that  a  soft  answer  turneth   away  wrath. Whether to be solemn, humorous, angry or gentle in tone depends on the personality of the recipient as well as the occasion for the letter.

Experts urge that letters be easy to answer. Perhaps stamped envelopes should be enclosed, or notes already filled out.

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