ing credit, of creating in her the desire to continue her pleasant relations with that particular establishment.

REFERENCES

Beebe, Dwight E. Retail Credits and Collections.

Walter, Frederick W., Ed. The Retail Charge Account.

CHAPTER XXVII

INSTALLMENT SALES AND COLLECTIONS

Extending the Time for Payment.-During the past decade, selling on the installment plan has seen phenomenal growth. For many years before business men realized the full possibilities of this method of sale, though it was more or less common to sell real estate, furniture, and pianos on the installment plan, to think of selling other articles in a similar manner was out of the question. Thus the growth of installment sales dates practically from the beginning of the twentieth century, its possibilities foreseen by the growth of the automobile industry and the incorporation of companies to finance the purchase of cars on the installment plan. Articles of every description for modern consumption are now being sold on this basis. The government itself used this plan in floating the Liberty Loans, with the result that a market hitherto non-existent was created for the sale of billions of dollars worth of bonds.

Ethical Considerations.-Ethical considerations weigh heavily when viewing the ease with which installment credit may now be received. With a nickel assuming such proportion as to serve as initial payment on a phonograph, the question arises whether it be ethically sound to urge such liberal credit-a credit that may prove the indirect means of mortgaging the average individual's entire income through monthly payments due for desired possessions. Whatever the considerations involved, it is true that installment sales and credits are coming to occupy a large part in sales transactions and offer a large profit to the successfully operating installment

house. The question as to whether or not such selling is desirable depends upon the answer to the question, "Is the buyer more productive through the use of these goods than without the use of these goods?"

Plans of Payment.-The credit aspect of installment selling differs only from ordinary credit transactions in that payments on the particular articles are arranged in consecutive order in such a way that in a period of time individual commodities are completely paid for while the buyer has the use of these commodities during that period. It is, of course, a lengthening of the credit term with an attempt to withhold good title in a more or less durable object until the terms have been complied with. The merchant who sells on the installment plan has the advantage over the merchant operating on the retail charge account basis, in that he usually receives a cash down payment and withholds complete title to the possession of the goods by the purchaser until such time as payments have been satisfactorily completed. His credit risk is, however, necessarily greater, his major activities resting in the credit and collection departments.

With the growth of those establishments which sell merchandise on installment credit primarily, it has become necessary for the retail establishments to encourage sales within their stores on the installment basis. Such sales furnish a large field for advertising and sales promotion, vastly enlarge the field of credit operation, and, it has been asserted, encourage the sale of approximately fifty per cent more merchandise. Through the offering of contract sales, people with little money are enabled to purchase now and pay later, thus encouraging thrift that payments on an enjoyed article may be completed and its final possession secured. The retail establishment, however, operates on a smaller margin of profit. The down payment is therefore apt to be greater and will be dependent upon

the resale value of the article. For example, furniture and rugs usually require one-fourth to one-third down payment; musical instruments, one-tenth; draperies, one-half. The greater the equity a purchaser has in an article, the more careful he will be in his use of it and the more anxious he will be to pay his obligations. Payments are usually distributed so that the account will be cleared in not more than a year.

Operating as it does with a larger margin of profit, the installment house is able to take greater risks, selling its goods with an initial payment often as low as 8 per cent. Subsequent payments are usually heavier, however, with the indebtedness distributed in such a manner as to secure its clearance in not more than five months.

The installment business offers increased opportunity to the buyer as well as to the seller. As his benefit, the buyer receives the use, enjoyment and future possession of articles which he might otherwise be unable to purchase. The seller is afforded an opportunity for increased business and increased profits if he is careful in his selection of credit risks, in his decisions on values and terms of sales, in his collection policies and in his determination of the point at which repossession of the articles sold is desirable and justified.

Financial Problems of Installment Selling. The business house which expects to sell on the installment plan must face squarely certain problems in order to insure success. The first problem is, of course, the increased demand for capital. The need for working capital comes from the cost of the goods, the selling cost which must, necessarily, be added to the cost of the goods which are to be sold, and the administrative costs which must also be included. If there is any variation in the plan of selling by which the time is extended from the date of selling to the date of collection, there is a resultant increased demand for working capital. Any expansion of sales

is apt to work disastrously to the firm unless there is sufficient capital to meet this demand. Let us take the hypothetical case of a product which sells at a retail price of $100.1

Coming back now to the financial problem of carrying on an installment business, let us take the hypothetical case of a product which sells at a retail price of $100. We will say that the cost to the manufacturer or retailer is $60, the selling expense is $20, and the overhead charges, including collection expense and loss, are $10, leaving net profits of $10. We will assume that the firm which sells this product disposes of 50 of the articles during the first month of operations; 100 the second month; 150 the third month; 200 the fourth month; and thereafter regularly sells 200 each month. We will assume, further, that installment payments are made at the rate of $10 per month. In order to simplify the problem, we will make the arbitrary assumption that the whole $90 outgo, including collection expense and loss, is incurred at the time each sale is made. Under these assumed conditions, how much working capital will be required to "swing" the stated volume of business? During the first month outgo would be 50 times $90, or $4,500, and the cash receipts would be 50 times $10, or $500, leaving a cash deficiency of $4,000. During the second month the outgo would be 100 times $90, or $9,000, while the receipts would be $500 covering sales made during the first month, plus $1,000, for sales during the second month, making a total of $1,500; leaving a cash deficiency of $7,500.