The Use and Abuse of Credit
The question of the proper use of credit is closely allied with the purchasing of goods. A great many business failures can be traced directly to overexpanded credit. Any battery service station proprietor who does not place a voluntary limit on the amount of credit for which he asks is, to say the least, running a very great business risk. The moment he expands his credit to the limit, he leaves himself with no margin of safety, and a sudden change in business conditions may place him in a serious situation.
Commercial agencies usually call this condition a lack of capital. The real cause, however, is not so much lack of capital as it is too much business on credit. This does not mean that credit should not be sought; or that all business should be done on the capital actually invested in the concern. Credit is necessary to commercial life. Very few business concerns are so strong financially as to be able to do without credit.
Credit should be sought and used intelligently, and it is not a hard matter for any battery service station proprietor to keep his credit good. All that is necessary is to take a few precautions, and observe in general the principles of good business. The first requisite, of course, is to accept no more credit than the business will stand. Sometimes it is possible to secure enough credit to ruin a business. Its present condition and future prospects may appear so good as to warrant securing all the credit possible under the circumstances.
It requires courage to limit the growth and the temporary prosperity of a business by keeping down the credit accepted. It is very hard to refuse business. It is difficult not to make extensions when there is enough business in sight to pay for the extensions. But the acid test of whether or not you should extend and borrow is not the amount of business that can be done, but the amount of money that can be spared. The mere fact that you have the money or can get it does not in the least mean that it should be spent.
And the reason for this is that, in order to keep your credit good, you must meet all obligations promptly. Nothing has a more chilling effect on any business than failure to meet all indebtedness when due. As soon as additional time is requested in which to meet obligations, your credit rating begins to contract; and if, at the same time, your credit has been overexpanded the business is placed in a most difficult position. More than one concern has gone to the wall when faced with this combination.