CHAPTER V MERCANTILE CREDITS Definition. Mercantile credit is the credit one merchant extends to another when selling goods on time for resale. Theoretically, it is the power to obtain merchandise for resale purposes in return for a promise to pay at a specified time in the future. It includes the credit granted by different sellers of goods in the process of distribution from the time the goods are in the state of raw materials until they reach the hands of the retailer. Function of Mercantile Credit. The principal purpose of mercantile credit is to facilitate the transfer of goods from the producer to the ultimate consumer. It does not include credit given by the retailer when selling on time, or that extended by manufacturers and functional middlemen when selling directly to the consumer. Mercantile and Retail Credit.-The fundamental difference between retail and mercantile credit is that the former comes into existence as a result of a sale of goods for consumption purposes, whereas the latter results from transactions involving transfers of goods for purposes of exchange. The scale on which transactions involving mercantile credit are conducted is also much more extensive than that on which retail credit transactions are carried on. Attention must be directed at this point to the fact that much of our credit structure is built around retail or personal credit. The motives compelling the retailer to grant credit to his customers have already been given exhaustive treatment. In order to be able to operate on a credit basis, the retailer, in turn, requests credit from the wholesaler. Accordingly, the wholesaler must be given time within which to collect from his trade and pay the manufacturer out of the proceeds. Since many growers and original producers of raw materials are financially weak and seldom in a position to finance through credit extensions, manufacturers or wholesale middlemen, these concerns turn to financial houses, such as selling agents, factors, commission houses, or supply houses, to supply them with necessary funds. What has just been described constitutes the "regular" or "usual" channel of distribution, to which numerous exceptions are to be found. Viewed from another angle, mercantile credit makes the neighborhood store possible, by enabling its owner to overcome financial handicaps. Without this intimate financial aid, men with limited capital would be handicapped in entering business and many struggling merchants of ability would be unable to continue if credit arrangements were to cease and cash were demanded for all purchases. To the extent to which these stores are desirable, is mercantile credit beneficial. This class of credit also tends to stimulate competition by bringing into existence numerous small retailers. Keen competition, if not excessive, fosters improvements in management and operation and reduces prices to the consumer. Tendencies in Mercantile Credit.-Prior to the Civil War, jobbers and manufacturers were visited by retailers approximately every six months to purchase goods. Transportation facilities were exceedingly poor and the journey consumed considerable time. Because of the great distances separating retailers on the one hand and jobbers and manufacturers on the other, and the many handicaps incident to inferior and inadequate transportation means, some of the smaller retailers were compelled even further to limit their trips to the sources of supply. Sometimes purchases were made only once a year. Due to these conditions, retail dealers had to anticipate the local demand a long time in advance, and purchase infrequently and in large quantities. As a result, much of the stock on the shelves was unsalable and obsolete, although changes in style. were fewer than today. The retailer was financially unable to carry the large merchandise inventories necessitated by the conditions described, hence he turned to the jobber or manufacturer for credit. This was granted, usually in exchange for a promissory note payable, as a rule, in six or eight months from date of purchase. The development of railway transportation, coupled with the introduction and extension of adequate and suitable means of communication, such as the telephone, the telegraph, and expeditious mail service, brought about a complete change in the circumstances surrounding the mercantile credit system. Retailers also increased in number and thus competition became keener. Retail dealers now visit the market more frequently and buy in smaller quantities, but at close intervals. Orders are also taken at present by traveling salesmen representing sources of supply, who visit the trade periodically. In the absence of traveling representatives, orders may now be placed by mail more expeditiously. The radio is also likely to produce marked changes in buying in the days to come. Because of the importance assumed by the style element and frequency of its changes, the practice of carrying small inventories of up-to-date and fresh, salable merchandise becomes a necessity. Consequently, credit periods are considerably shortened. An additional factor contributing to the shortening of credit terms is the development of banking facilities, so that a retailer may now borrow at his bank and pay his bills with the proceeds from the loan. TERMS OF SALE Terms of sale commonly comprise two distinct elements: the extension of credit, and the discount which is usually coupled with it. The Credit Period. The length of credit granted varies not only with different lines of business, but also with different houses in the same line, and not infrequently no rigid policy is adhered to within any given establishment handling a single line. Rate of Stock Turnover.-In general, the credit period tends to conform roughly to the receipt of income, on the part of buyers, from the sale of their goods. The rate of turnover of the purchaser's stock of goods is the most fundamental and determining factor as to the time involved in mercantile credit. Around it all the other factors revolve. These may, however, at times so modify the credit period as to, at least immediately, almost completely obscure any relationship existing between credit extension and turnover. Thus we find 30 days to constitute the prevailing terms in the grocery trade. In the hardware and dry goods trades, where the rates of turnover are lower on the average, we find 60 and 70 days, respectively, generally given to the retailers. Again, from 60 to more than 120 days are granted retailers in the jewelry business, where the turnover is still less frequent than in the aforementioned trades. Location of Customers and Transportation Facilities.-The rate of turnover is, in turn, affected by such considerations as the geographical location of the customer and the transportation facilities available for shipment of goods to him and the time consumed in the process. The longer the goods are in transit the slower the rate of turnover, since larger quantity purchases are necessitated and more merchandise must be kept on hand, therefore, the longer the credit period that is required of sellers. With the improvement of transportation service and the growth of appreciation on the part of merchants of the economies resulting from rapid stock turns there is a possibility of shortening credit extensions to a considerable degree. Length of Credit Received from Preceding Sellers.—In numerous instances the credit period, as well as the discount offered for cash payment, is determined in large measure by terms granted by the preceding seller. Jobbers' terms to retailers on both anthracite and bituminous coal, for example, are similar to those received by them from the coal mine operators. Terms on automobile accessories given by accessory jobbers, in general, parallel those obtained from the manufacturers. On electrical products, wholesalers generally give their customers the same cash discount as they receive from the manufacturer, but the credit period varies. Competitive Conditions. -Competitive conditions are often responsible for deviations from the regular terms in any given trade. Under such circumstances it is not uncommon to find many customers taking advantage of the situation and running their accounts even beyond the extended net period. A case in point is afforded by many wholesalers of electrical supplies. Here the keen and growing competition has forced them to give many concessions to their customers. A similar situation obtains in the coal business. Sometimes even exclusive connections are established when the buyer is carried by the seller. Character of Commodity.-Distinction in terms is frequently made on the basis of the character of the commodities involved in the transaction. Fresh meat is generally sold on "cash terms," requiring payment withi seven days after delivery, whereas provisions, including hams, bacon, lard, and barreled beef and pork, are sold on 30 days net. Both of these classes of products. are sold by the same meat-packing houses, yet the terms are different. In the grocery trade the credit period is longer and the cash discount larger on tea than on coffee, the time on the former ranging from 60 days to 4 months and the discount from 2 to 5 per cent, whereas the time on the latter ranges from 30 to 60 days and the discount from 1 to 2 per cent. Where little competition is experienced from exclusive tea and coffee houses, the tendency is for wholesalers to reduce the terms on both teas and coffees to 1/10, net 30 days. The Credit Risk.-The character of the credit risk must also be considered in accounting for the length of the credit period in any transaction. When the risk is doubtful or inferior, the terms are very short. In many cases they may be sold on C.O.D. or "cash" terms, or cash may be required with the order. Type of Ultimate Consumer.-Lastly, the type of ultimate consumer is a contributing factor in the determination of the length of credit extensions. In certain mining regions where the ultimate consumer-the miner-demands retail or personal credit and where sales fluctuate violently at times, due to local conditions of employment, the terms granted by jobbers are longer normally-save to bad risks-than in communities where business is done by retailers largely or entirely on a cash basis. The same situation obtains in railroad and steel mill towns where the retailer carries the wage earners from one pay day to another. Terms to the retail trade must thus be adjusted to local conditions and corresponding adjustments must frequently be made in selling to the wholesale trade. Again, wholesalers dealing in farming communities, where many of the soil tillers are carried by the retailers, must grant such terms to the retail merchant as to enable him to meet the demand of his customers for credit extensions. This observation applies with especial force at times of inactivity and business depression, such as were experienced during 1921 and the latter half of 1920. Some concerns offer their customers the choice between two sets of terms. They may be allowed to buy, for instance, on a 15-day basis when the terms are 1/10, net 15 days; or on a 30-day basis with 2/10, net 30 as the terms of sale. In other instances, distinction is made between city and country trade. One or the other class may be favored, depending upon the keenness of competition and the convenience in making payment for both seller and purchaser, |