A while ago, I posed a question over at the Construction Credit Professionals Linked in group: “Why Doesn’t Everybody Secure the Debts Owed to Them?” With the variety of ways to secure outstanding debt, and new technology making it easier for any type of business to gain that security, it seems to me that the default business standard should be to secure every extension of credit. The better a company’s credit management, the fewer accounts go unpaid – and securing the debts owed to a business, when this protection is available, is good credit management. Businesses, for some reason, do not agree with me. Not every debt is secured, and many businesses don’t secure any of their extensions of credit, let alone all of them. Why is this?

Does Securing An Extension of Credit Sour Business Relationships?

After all, if you don’t think you can trust somebody to pay what they owe, why are you doing business with them?
A couple weeks ago, I was having a conversation with a successful small-business owner who has never secured credit accounts, and deals with credit management on a case-by-case basis. Because I am always curious for potential blog fodder, I asked him to explain his thought process. He said that one reason he chose not to secure his extensions of credit was that he didn’t feel like starting a relationship on the right foot – that contemplating non-payment as one of the first steps in a business relationship was at best awkward, and at worst an indictment of the character of the person (or business) with whom he was doing business. I can this the “Character Argument”.

Is this really the case, though?

It’s easy to see where this viewpoint comes from – many successful businesses have been built on trust, mutual respect, and the power of looking somebody in the eye, shaking his hand, and assuring him that he’s making the right decision. There’s something honest, and, at least to our minds, American about doing business that way. After all, if you don’t think you can trust somebody to pay what they owe, why are you doing business with them? This viewpoint, the Character Argument, is a nice nostalgic view of business through rosy-tinted glasses.

The fact of the matter, though, is that businesses have been securing the debts owed to them for a long time. I think the Character Argument is generally raised by businesses that are 1) small to medium sized; and/or 2) much of their business is conducted face-to-face, not through paper or electronic communication.

Small to medium size businesses may not secure their extensions of credit because they are unfamiliar with the process, they don’t understand how security works or why it would benefit them, they can’t spare the manpower and/or hours to properly secure their credit extensions or learn how to comply with the legal complexities, or they view securing amounts due as something for a bigger business. And, if much of a company’s business is conducted face-to-face, it may be uncomfortable to bring up security interests (at least at first).

Securing the debts owed to a business is obviously beneficial to businesses of all sizes. If more small to medium sized business incorporated security into their credit policy (or even drafted a credit policy to begin with), the stigma of requesting security when credit is extended would gradually fade away. Even before this happens, though, I think the aversion to requesting or taking security when credit is extended is misplaced. Most businesses are, at least to some extent, pragmatic. People understand that sometimes events happen that can’t be foreseen, and even if you fully expect a party to pay what they owe, circumstances may occur that make it difficult – taking all available precautions just makes business sense, and people and businesses on both sides of the equation understand that. People don’t get too upset when they buy a car, or a house, and a lender takes a security interest – they know that the lender is just taking the precautions afforded to it, and agreeing is necessary for the purchase. The fear that a business deal would sour over the same type of transaction, and that a business is less business-savvy than individuals in that type of situation, is, in my opinion, blown out of proportion.

Is Security Too Costly to Be Beneficial?

With advances in technology, gaining the benefit of security is easier and faster than ever.
The statement that it is too expensive, time-consuming, or wouldn’t result in an appropriate return on investment, the “Cost-Benefit Argument”, is more likely to be employed by a larger business.

This, like the Character Argument, is misplaced.

With advances in technology, gaining the benefit of security is easier and faster than ever. It is a fact that the laws can be convoluted, and that deciphering them – especially if a company works in multiple states – can be a herculean task. But, with companies providing outsourcing, the rise of electronic filing, and even the revision of the laws themselves in some instances, the ability to secure the debts owed to a business is getting more and more attainable, without the need to appoint a full-time employee to handle at the exclusion of other duties.

The fact that the security aspect of a robust credit management scheme may not require the resources (in terms of employee hours) that it used to changes the conversation as to whether securing all credit accounts comes out of the proper side of a cost/benefit analysis. Now, the ability to collect a single account that previously would have been written off as bad debt may be enough to justify securing every extension of credit.

Securing the debts owed to your company just makes good business sense. And, the reasons for letting security slip past you are rapidly falling apart. Why, then, would a business choose to not secure each extension of credit?