CREDIT AND COLLECTION - The government that borrows heavily may have

Lender – This is the person or entity that lends a certain to curtail important projects when most
amount of money on credit to an applicant, who is the necessary
borrower, who must repay the amount borrowed, plus CLASSIFICATIONS/KINDS OF CREDIT
the interest agreed upon the contract, within a As to Maturity
predetermined time frame. 1. Short-Term – payable within one year
Borrower – It refers to the party requesting the loan, 2. Medium-term – payable from one to five years
who receives the resources from the credit grantors and 3. Long-term – payable for more than five years
agrees to repay the money received, plus interest, in 4. Call-loan – with indefinite maturity, payable
accordance with the terms of the signed contract. immediately upon the demand of the creditor
Individuals, businesses and organizations of all sizes can As to Source
be borrowers. 1. Public – granted by government institutions
Credit –The ability to obtain things of value in exchange 2. Private – granted by commercial enterprises, banks
for a promise to pay at a determinate future time and other financial institutions
(Debtor’s viewpoint). As to Payment of Interest
Credit – Willingness to accept the debtor’s promise 1. Ordinary – interest is paid together with the principal
based n trust and confidence (creditor’s viewpoint) on maturity date
Credit – A transfer of resources giving rise to obligations 2. Discount – interest is automatically deducted from
that must be discharged in the future. the principal at the time is granted
PROVISIONS OF THE LENDER As to Method of Release
- Rights 1. Lump-sum – the principal is given once to the debtor
- Goods 2. Installment – the principal is broken down in
- Services staggered releases.
- Funds As to Source of Payment
- Property 1. Self-liquidating – repayment will come from the
SIGNIFICANCE OF CREDIT income derives from the use of the principal
- Promotes the functions of the regular medium 2. Non-self-liquidating – repayment will come from the
of exchange personal income (salary) of the debtor.
- Promotes full employment As to Purpose
- Provides financial means for businessmen 1. Agricultural – granted to finance agricultural needs
- Allows the possible production of goods such as for irrigation system, acquisition of seeds and
- Allows consumers to buy goods and services fertilizers and others.
beyond their ability to buy or what they can 2. Commercial – used to finance short-term working
actually afford. capital needs such as payment of maturing accounts
ELEMENTS OF CREDIT and purchase of inventories
- Trust 3. Personal or Consumer – granted to individuals to
- Futurity facilitate the consumption of goals and services
- Risk 4. Real Estate – used to finance the acquisition and
CHARACTERISTICS OF CREDIT improvement of real estates
- It is bilateral or a two-party contract 5. Industrial – granted to financial long-term capital
- It is a personal contract needs such as expansion expenditures and acquisition
- It is a pecuniary contract of fixed assets
CASES WHERE CREDIT ARISE As to Loan User
- Deferred payment for goods and services 1. Agricultural – farmers, fishermen and others engaged
- Money loans in agricultural activities
- For services rendered where individuals receive 2. Personal or Consumer – persons who will use the
their wages or salaries after rendering their loan for medical, education or emergency needs or for
respective labor and talents the acquisition of consumer goods such as household
ADVANTAGES OF CREDIT equipment and appliance
- Credit supplement the monetary system 3. Commercial – wholesalers, retailers, importers,
- Allows the immediate use of goods and services insures and brokers
- Shopping convenience 4. Institutional – manufactures, processors and others
- Provides a temporary solution to unexpected engaged in the production of goods
financial difficulties 5. Export – exporters or wholesaler who sells to
- It is ab agent of production merchants or industrial consumers in foreign countries
- Credit gives fluidity to wealth 6. Public Utility - franchise holders and operators of
DISADVANTAGES OF CREDIT public utilities
- It costs money 7. Real Estate – developers, brokers, contractors,
- It encourages overspending condominium owners, purchasers or lots and persons
- It ties up future income contracting, repairing or renovating their houses
- It may result in losses LOAN CONSIDERATIONS
- Liberal credit can to over-expansion or over- - Purpose
speculation - Interest
- Types and Size of Loan
 - Maturity 2. Credit Risk – the risk of repayment, i.e., the
- Security possibility that an obligor will fail to perform as agreed
- Loan Liquidation 3. Interest Rate Risk – may be defined as the danger
COMMANDMENTS OF CREDIT that a bank may incur loss or lose money in granting
5 C’s of Good Credit loans, taking and placing funds, or trading in financial
1. Character – refers to the borrower’s payment habits instruments as a result of changes in the market
and attitudes that is, his willingness to pay interest rates or some unexpected adverse conditions
2. Capacity – means the company or person you are 4. Transaction Risk – it happens when information
lending to have the ability to repay the loan systems failed to provide adequate information to
3. Conditions – refers to economic factors which may identify concentrations. Expired facilities or stale
affect the borrower’s line of work or industry and how financial statements
changing economic conditions might affect the loan 5. Compliance Risk – captures the legal and financial
4. Capital – refers to the borrower’s net worth position penalties for failing to act under internal and external
relative to his outstanding debt regulations and legislature
5. Collateral – refer to any asset which may be pledged 6. Liquidity Risk – is a financial risk that refers to the
against the debt uncertainty of being able to sell a commodity, financial
5 C’s of Bad Credit asset, or security immediately in the market
- Complacency 7. Reputation Risk – it can occur through various factors
- Carelessness that can damage a business’s reputation, such as
- Communication scandals, lawsuits, poor performance or negative
- Competition publicity
- Contingencies TEST OF CREDIT DEPARTMENT
Credit Management The tools or indexes are designed to provide credit
Risks in Credit Process management with some means for testing the efficiency
- Managed of its credit operations
- Controlled IMPORTANCE OF TOOLS/INDEXES
THE CREDIT MANAGER - The periodic calculation of ratios, percentages
- Financial Vice President and other figures is necessary to measure credit
- Credit Manager and collection results
- Credit Man - Accumulation of records kept on the same basis
- Assistant Treasurer from year to year enables to compare current
- Credit Correspondent credit and collection performance
- Loans Manager - May compare shown in the firm’s figure with
- General Credit Manager those reported by other firms
- Branch Credit Manager - Keeping these statistical records makes it
QUALITIES OF CREDIT MAN possible to set up standards or goals to shoot at
- Competence and Capability in each phase of the credit and collections
- Communication activity
- Constructiveness - If the firm’s credit business is large enough to
- Creativity require the time of more than one person,
- Conscientiousness comparison often may be made between
- Consistency different individuals
- Certitude and Celerity - The records may be used in forecasting future
- Contact trends in credit sales volume, collections and
- Cost-consciousness other aspect of the business
- Character TOOLS/INDEX
- Confidence - Bad-Debt Loss Index
- Considerations - Credit Sales Index
- Computer Literacy - Number of Accounts Opened
- Congeniality, charming personality, courage - Past Due Index
- Common Sense - Aging of Accounts
FUNCTIONS OF CREDIT DEPARTMENT - Acceptance Index
- Gathering credit information - Cost Analysis
- Credit checking and authorization - Collection Percentage, Days to Collect and
- Analyzing credit information Turnover of Receivables
- Filing and recording
- Collection correspondence
- Credit adjustments
- Other functions
RISK ASSOCIATED IN LENDING
1. Risk – the potential that events, expected or
unexpected may have an adverse impact on earning or
capital