Creditworthiness and the Judgment of Men

10.1 How to Know Whom to Trust

No single fact proves that a merchant deserves credit.

Judge the whole man.

Character: Ask whether he keeps promises when keeping them becomes costly. Many men appear honorable while agreements favor them. Character is tested when circumstances change.

Ability: A trustworthy man can still lose our money if he does not understand his business. Examine whether he knows his goods, customers, costs, accounts, and risks.

Liquidity: Property and profit are not enough. Ask whether cash or reliable collections will be available when our invoice matures.

Experience: A merchant who has passed through several difficult markets without dishonoring obligations has given stronger evidence than one whose reputation was built entirely during prosperous years.

Order: Disorder in books, warehouses, correspondence, or payments often precedes financial difficulty. A man who cannot tell us what he owes others may soon be unable to tell himself.

Independence: Determine whether his business depends upon one customer, one lender, one prince, one voyage, or one commodity.

A merchant may appear strong while everything he owns rests upon one uncertain event.

Incentive to protect reputation: A merchant with years of useful commerce ahead of him has much to lose by dishonoring his word. A man already excluded from good markets may care less.

Conduct under pressure: Observe how he behaves when challenged. Does he communicate early? Does he make partial payment? Does he offer evidence? Or does he disappear, delay, and provide a new excuse each week?

Begin with little: New relationships should ordinarily receive small limits. Let performance purchase greater trust.

A merchant who pays five modest obligations properly gives us more useful evidence than one who speaks impressively about paying a large one.

Separate confidence from evidence: Personal liking is not credit analysis. Neither is disliked.

We should be able to explain why we trust a man using facts another experienced merchant could examine.

10.2 Family, Reputation, Property, Correspondence, and Past Conduct

Credit judgment is assembled from many sources. None should be accepted without considering what it actually proves.

Family: A strong family may provide capital, introductions, guarantees, and assistance during difficulty.

But do not assume a father will pay a son’s debt, or a brother another brother’s, unless the obligation truly binds them.

Kinship suggests possible support. It is not itself security.

Reputation: Ask men who have actually traded with the borrower.

Do not ask merely, “Is he good?” Ask precise questions: Does he pay at maturity? Has he requested extensions? Does he dispute invoices after delivery? Are his bills readily accepted? Has his behavior changed recently?

Specific questions produce useful answers.

Property: Determine what the man truly owns and what claims already stand against it.

A warehouse may be mortgaged. Goods may belong partly to partners. Land may be entangled in family settlements. Ships may be heavily financed.

Gross possessions are less important than what remains available after prior claims.

Quality of property: Ten thousand lire in cash or marketable goods differs from ten thousand in a distant estate that cannot be sold quickly.

When judging credit, consider both value and liquidity.

Correspondence: Letters reveal much. A merchant who once answered promptly but now delays, avoids figures, changes explanations, or repeatedly promises remittances that do not arrive deserves attention.

The change in behavior is often more important than the absolute condition.

Past payment: Record how obligations were actually settled. A customer who routinely pays thirty days late should not be described as a thirty-day customer merely because the invoice says so.

Public conduct: Lawsuits, protested bills, hurried sales, dismissed servants, closed warehouses, or unusual borrowing may indicate strain.

Private expenditure: Extravagant living does not prove insolvency, but a merchant whose household continually consumes more than his business can support deserves closer examination.

Political connection: A man close to a prince or magistrate may obtain privileges and opportunities. He may also be difficult to compel if he refuses payment.

Influence and collectability are different matters.

Independent confirmation: Never rely exclusively upon the borrower’s own account of his condition.

Use correspondents, brokers, bankers, suppliers, notaries, and other reliable sources where appropriate.

Translator note: Merchants around 1600 lacked modern credit bureaus and standardized financial statements. Creditworthiness was reconstructed through correspondence networks, payment experience, public records, notarial instruments, market reputation, observation of property, and reports from other merchants.

10.3 Setting Credit Limits

Once we decide a man deserves credit, the next question is how much.

A sound customer does not deserve unlimited credit merely because we expect him to pay.

Set total exposure: Count everything at risk: unpaid invoices, bills accepted for him, loans, guarantees, goods consigned, and obligations created through other offices.

A customer owing 5,000 lire in Genoa and another 5,000 in Spain owes the House 10,000, not two separate sums of 5,000.

Relate the limit to capacity: Consider the customer’s capital, liquidity, turnover, debts, and the size of his normal business.

An obligation small to one merchant may overwhelm another.

Relate it to our own House: Even an excellent debtor can represent excessive concentration if his failure would materially damage us.

Credit limits protect the lender as much as they judge the borrower.

Begin smaller than the theoretical maximum: New customers should prove themselves through repeated performance.

Increase limits gradually as experience accumulates.

Consider terms: Ten thousand lire for thirty days is not the same exposure as ten thousand for one year. Longer terms allow more circumstances to change and keep our capital unavailable longer.

Secured versus unsecured credit: Reliable collateral, guarantees, or other security may justify greater exposure, but only after examining the security itself.

Seasonal limits: Some customers require greater credit during harvest, fairs, or production seasons. Temporary increases may be sensible if tied to understandable commercial needs.

Temporary increases should also have an expected end.

Authority: Factors and branches should have defined limits for extending credit. Larger exposures should require approval from Genoa or another senior principal.

Review: A limit is not permanent. Reduce it when conditions weaken and increase it only when new evidence justifies greater trust.

Large customers require more scrutiny, not less: Merchants often investigate small customers carefully while allowing famous houses enormous balances because “everyone trusts them.”

The greater the possible loss, the stronger the examination should be.

Record exceptions: If a limit is exceeded for a special reason, record who approved it and why.

An exception remembered only after a failure was never properly governed.

10.4 Warning Signs Before a Merchant Fails

Merchant failures often appear suddenly only to those who were not watching.

Look for changes.

Slower payment: A reliable customer begins paying fifteen days late, then thirty.

Requests for extension: One request may reflect an ordinary delay. Repeated requests suggest a deeper shortage.

New borrowing: The merchant seeks money from unfamiliar lenders or accepts unusually expensive terms.

Protested or unpaid bills: One dishonored instrument may have an explanation. Several require immediate investigation.

Changing excuses: The story concerning a missing remittance changes each time it is told.

Urgent sales: Good goods are offered below ordinary prices merely to raise cash.

Loss of suppliers or lenders: Others shorten terms, demand cash, or refuse further business.

Unexpected commercial loss: Shipwreck, capture, failed harvest, customer default, or adverse price movement can weaken a merchant whose position previously seemed sound.

Departure of trusted clerks: Senior employees sometimes observe deterioration before outsiders do. Their sudden departure deserves inquiry.

Secrecy: A borrower who formerly discussed his business openly becomes evasive about debts, inventory, or collections.

Extravagance during weakness: Continued large private spending while creditors wait may indicate poor judgment even where assets remain.

Concentration: Discovering that most of a merchant’s fortune depends upon one prince, customer, cargo, or market changes the risk immediately.

Rumor: Do not condemn a man on rumor alone. But repeated independent reports are evidence that deserves verification.

Markets often reveal concern through rising borrowing costs, discounted bills, or suppliers refusing ordinary terms.

Change matters: A merchant who has always paid slowly may be less alarming than a formerly punctual merchant who suddenly begins delaying.

Classify important debtors simply: sound, watch, reduce, or collect.

The classification should determine action, not merely decorate a report.

10.5 What to Do When a Debtor Begins to Delay

Delay requires attention before it requires anger.

Ask immediately: Contact the debtor as soon as payment is missed. Determine whether the cause is clerical, temporary, or evidence of deterioration.

Silence gives weakness time to become insolvency.

Stop increasing exposure: Do not continue shipping large quantities simply because stopping might offend the customer.

An unpaid balance is not improved by adding another unpaid balance.

Seek a concrete plan: If the difficulty is temporary, agree upon specific payments and dates. Vague promises such as “soon” or “after the fair” are not plans.

Request partial payment: A debtor unable to pay all may still pay part. Partial payment both reduces exposure and tests willingness.

Strengthen security: Where appropriate, obtain guarantees, pledges, assignments of receivables, or other protection before the debtor’s position worsens.

Security offered after every good asset has already been pledged elsewhere is of little use.

Do not exchange one doubtful asset for another: A weak debtor may offer questionable land, slow-moving goods, or another man’s uncertain note in settlement.

Accept such substitutions only after valuing them independently.

Increase information: Speak with correspondents, suppliers, bankers, and other creditors where proper. Determine whether the problem is isolated or general.

Coordinate the House: Inform foreign offices so they do not extend new credit while Genoa is attempting collection.

Know other creditors: If several lenders are pressing simultaneously, speed may matter. But reckless seizure can destroy value that orderly negotiation would preserve.

Negotiate before litigation when sensible: A structured extension, partial settlement, additional security, or orderly sale of assets may recover more than immediate legal action.

Compromise should be judged by expected recovery, not by pride.

Become firm when delay becomes avoidance: If the debtor hides assets, lies, favors insiders, or repeatedly breaks new agreements, greater patience may simply improve the position of other creditors at our expense.

Record the lesson: After collection or loss, examine what warning signs appeared and whether the original credit limit was too high.

A bad debt should purchase knowledge as well as pain.

My son’s credit is the art of deciding when another man’s promise may safely be treated as part of our wealth.

Judge character, ability, liquidity, property, reputation, past conduct, and concentration. Increase trust with evidence and reduce it when behavior changes.

Set limits before the desire to make a sale tempts you to ignore them. Watch changes in payment, borrowing, correspondence, and market reputation. When delay begins, ask early, reduce exposure, obtain information, and distinguish temporary difficulty from approaching failure.

Never assume that a powerful debtor is safe, that a wealthy debtor is liquid, or that an honorable debtor is solvent.

Credit is given to men.

It is repaid from cash.