A Culture of Dishonesty

At the very heart of credit transactions is honesty. Without it there can be no credit. When a seller extends credit to a buyer, there is the assumption that the buyer will repay the seller. It is the belief that the buyer will do what he promises to do because he is honest. Character is the first “C” of credit, the reliance of the buyer to repay, because he said he would.

Most debtors who default do so, not because they are dishonest, but because they are unable to repay the obligation. They intended to, they wish they could, but they just cannot. We presume, because we still have a certain amount of faith in the goodness of our fellow man that most people will pay if they are able and only a few actually intend from the very beginning to renege on their bills.

A function of credit management is reviewing and analyzing the data from credit applicants to determine their honesty. While there are precise mathematical formulas to asses a customer’s ability to pay, determining an abstract such as honesty, character and integrity is almost entirely subjective. It is important that all available information is reviewed before making a major decision.

An equipment company granted a credit sale in the amount of $80,000 basing the decision solely on the customer’s credit references. The references were bogus, the customer was fictitious and the equipment was last seen headed for Africa. The credit manager neglected to obtain a credit report from Dunn and Bradstreet or some other credit reporting agency which would have at least confirmed the legal status of the business.

So often the litmus test for honesty is a gut feeling. Asked why he continued to allow an auto glass distributor to charge even after already defaulting on nearly $300,000, a branch manager stated the owner of the businesses was a well known member of the local church. All the while he was illegally transferring title and assets to friends and family.

Sometimes collectors themselves get too close to the customer and are unable to make the right decision. A collector for a ready mix company started to ignore the growing delinquency of a particular customer because they had started dating. Clearly the customer was taking advantage of the collector.

Dishonesty is not limited to small or fly-by-night outfits. A national building material supplier chain routinely back charges its vendors for damaged goods in excess of its purchases. It is so institutional that managers are coached in ways to deduct a few dollars here and there from the vendors’ billing. It is not seen as fraud, but rather creative bookkeeping. If the vendors complain, they risk losing future purchase orders.

What happens when a company’s culture of dishonesty does not directly impact the credit trends? A national distributor of auto glass was recently indicted for insurance fraud, even though they never missed a payment to their suppliers. The strategy may be to monitor the customer closely, keep a tight reign on the credit line and level of delinquency and hope that when and if there are substantial penalties and the principals are jailed, the exposure will not be too great.

Thus, dishonesty is not necessarily a reason for denying credit. It is merely another factor that may or may not influence payment. Back in the early 1960s a lumber company in Los Angeles extended credit, without worry of not getting paid, to a family member of the notorious Dragna mobsters. When it came to running a legitimate business, the family kept their suppliers happy. They had enough headaches with their other, illegal endeavors.

In times like these, when nothing is black and white and everything is gray and nothing is certain, extending credit is more than a science. Perhaps, a lot of it is judgments based on experience. That’s where CreditPowers can help. If your credit department is having trouble making those tough decisions, contact us and we can walk you through the minefields and get you to where you want to be safely. Email your comments to patrickpowers@sbcglobal.net and watch for our website strategiccreditmanagementsolutions.com