Bankruptcy
Question: I think what may happen–or maybe should happen–is a tightening of the credit requirements for businesses. I realize that small businesses cannot afford to deny credit to potential customers, but perhaps businesses should have to go through a credit check just as individuals do, or use a business c.c. before they can run up a bill.
Answer: Most businesses do exactly this. There are several services which maintain the credit histories of businesses, but it is up to the vendor to decide whether to extend credit to a new or suspect account. In some industries putting someone on C.O.D. is a sure way to make them an ex-customer, even if they *will* pay the bill.
I work for a family biz that probably does around $10m a year gross, and nearly all of our customers are industrial, from giants like Union Carbide down to Dad’s Dry Cleaners. As our comptroller once complained, “anyone who walks in the door instantly has $99,999,999 in credit, because that’s how many digits the computer has.” But if we didn’t work that way we wouldn’t have any business _at all_. If we don’t extend credit our competitors will. We understand that putting a customer on C.O.D. is the last resort, right before suing them (if we think they have the money). If we don’t give them the credit, they will go to our competitors, who will. Then, if they do pay the bill, we’re out that business because we weren’t competetive enough.
In practice the cost of deadbeat business customers has to be built into our profit margin, so our non-deadbeat customers end up paying for them. Fortunately it’s manageable, but there have been occasions where we have been stiffed for $10’s of K — I can think of four off the top of my head, and there are probably others I’m not aware of because I wasn’t involved with them.
It should be obvious that in bankrupcy other members of society pay for the defualt, either directly or indirectly. What isn’t so obvious is that this isn’t necessarily a bad thing. Economists consider a certain percentage of business start-up failures a necessary thing, and given that it certainly makes more sense to give the bankrupts another chance than to spend money holding them in debtor’s prison. Bankruptcy is just one of the costs of capitalism.
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