Credit Management Strategies for Small Firms

Authors

  • Fredrick C. Scherr West Virginia University

Abstract

When a small firm sells goods or services to another firm, it generally grants trade credit to the buyer for these purchases. While the acade1nic and practitioner literature on credit management for large firms is voluminous, there is little in this literature which suggests appropriate credit Management strategies, given the particular characteristics of the small firm. Several characteristics of small firms can lead to advantageous credit policies which are different from larger firms. Among these are returns-to-scale problems in adopting several credit management strategies, Management which has limited expertise in finance, and restricted access to outside financing. In this paper, the effects of these differences on trade credit strategy are considered. Four areas of credit strategy are analyzed: credit investigation and risk assessment, credit-granting decisions, collections, and bearing credit risk. The paper presents and critiques trade credit policies for the small firm in each of these areas, including policy alternatives which involve the outsourcing of one or more aspects  of  credit management.

References

Al tman, E.1., ( 1 968). Fi nancial ratios, discri mi nant analysis and the pred ict ion of corporate bankru ptcy. Journal of Fi nance, September, 589-609.

Ang, J.S. ( 1 991/ 1 992). On a theory of fi nance for pri vately held fi rms. Journal of Small Busi ness Fi nance, I (3), 1 85-203.

At k i nson, J.A. ( 1 992). Gi ving credit where it's due. Small Busi ness Reports, J u ne. 1 5-19. Beranek, W.B., & F.C. Scherr ( 1 991 ). On t he sign i ficance of t rade cred it l i m i ts. Fi nanci al Pract ice and Education, Fa l l/Wi n ter, 39-44.

Bleakley, F.R. ( 1 995, J u ne 14). When corporate purchasi ng goes pl ast i c. Wal l St reet Jou rna l, B-1 , B-9

Ch rist ie, G. N., & A.E. Bracuti ( 1 986). Credi t Execut i ves Hand book. Col u mbi a, Md.: Credi t Research Foundation.

Coats, P.K. ( 1 988). Why expert systems fai l. Fi nancial Management, Au t umn, 77-86. Cred i t cards and s1nall busi ness ( 1 987). Credi t Manage1nent, Febru ary. 29-31.

Cred i t scori ng and analysis: 1 995 soft ware reviews ( 1 995). Busi ness Cred i t. May. 20-23. Effect i ve credi t polici es: Maxi1n ize sales and 1ni n i1ni zc had dehts ( 1 987 ). S1nal l Busi ness Reports. J u ly, 50-53.

Faria, A.J. ( 1 976). Reduci ng bad-check l osses: Sc)Jne practical gu idel i nes. Jou rnal of S1nall Busi ness Mana ge1nen t. Janu ary, 7-1 1.

Farri nger, E. ( 1 986). Factori ng accou n ts recei vable. Jou rnal of Cash Managc1ncnt. March/April, 38-42.

Gelli ng customers to pay on t ime: How to i ncrease your cash flow and pro lits ( 1 990). Profi t-Bu ildi ng Strategics for Small Busi ness. Ju l y. 5-7.

Gol ob, A. ( 1 987). The cred i t domi no. Credi t Management, Decembe r, 29-30.

Grabowsky, B.J. (1 976). M ismanagement of accou n ts recei vable by sma l l busi ness. Jou rnal of S111a ll Busi ness Man agc1nent, October, 23-28.

K nowles, D.W. ( 1 989). Collect ion programs fuel cash llow. Small Busi ness Reports, Ju ly, 45-47.

Mca ll , L. ( 1 993). Tak i ng t he pai n out of debt collect i ng. Aceountarn;y, September, 59-62.

Mi an, S.I.. & C.W. S1ni th Jr. ( 1 992). Accounts rccci vahlc 1nanagc111e11t: Theory and evidence. Jou rnal of Fi nance, March, 1 69-200.

Myers, S. ( 1 984). The capi tal struct u re puzzl e. Journal of Fi nance, J u ly, 575-592.

Pen i t, R. R ., & R.F. Singer ( 1 985). Smal l busi ness fi nance: A research agenda. Fi nancial Managc1nent, Aut u1nn, 47-60.

Scherr, F.C. ( I989a). Modern Work i n g Capilal Managc1ncnt: Text and Cases. Englewood Cl iffs. N.J.: Prcn Licc-Hal l.

Scherr, F.C. ( I 989b). Bargai n i ng i n trade credi t grant i ng: A prcl i1n i nary anal ysis. Jou rnal of the M idwest Fi nance Association. Vo!u1ne 1 8. 29-36.

Scherr, F.C. ( 1 992). Credi t-g rant i ng decisi ons under risk. En gi neeri n g Econon1ist, Spri ng. 245-262.

Smit h, J.K. ( 1 987). Trade credi t and i nformational asy mmet ry. Jou rnal of Fi nance, September, 863-872.

Sm ith, J.K., & C. Sch n ucker ( 1 994). An empirical examinat ion of organ izati onal struct ure: The economics of the factoring decisions. Journal of Comorate Finance, March. 1 1 9-1 38.

Srini vasan, V., & Y.H. Ki m (1988). Designi ng expert financial systems: A case study i n cred i t 1nanagc1nent. Financial Manage1nent, Autumn, 32-44.

The impact of onli ne busi ness i nfonnation on the commercial user ( 1 987 ). Cred i t Management, February, 18-20.

Walker, E.W., & J.W. Petty II (1986). Fi nancial Management of the Small Fi rm. Englewood Cliffs. N .J.: Prentice-Hall.

Downloads

Published

1995-06-10

Issue

Section

Articles

How to Cite

Credit Management Strategies for Small Firms. (1995). Journal of Small Business Strategy (archive Only), 6(2), 33-46. https://libjournals.mtsu.edu/index.php/jsbs/article/view/317