CREDIT&COLLECTTOW

cREDIT& cO

5. The most common practice in business transactions.

6. Regular terms used for orders which will give
manufacturer or importer time to get the merchan
CHAPTER 7
made tö plan and to operate more economically. CREDIT MANAGEMENT
7. Retailers practice where buyers are Required to m
monthly payments to cover part of their outstand’
obligation. EARNING OUTCOfgES
8. When conservative businessmen refuse to sell goods
1. Know the importance of credit management;
credit to those customers with doubtful character 2. Understand credit investigation and appraisal;
unknown capacity to pay. 3. Know the credit work;
9. When the seller recognizes the distant location of 4. Identify what a credit policy;
buyer and accordingly make a concession in the ma 5. Explain the credit file;
of terms. 6. Identify credit policies of commercial houses;
10. It is where the nature which generally circumscribe 7. Value of granting credit;
terms of seller. 8. Understand the importance of sound credit management; and
9. Explain what credit frauds are.

The function of credit may be briefly summarized in the following words:

To [Profits in the field of business activity which lies between the area of safe
risks those definitely poor.

For this very reason, the boundless effort of every business organisation to
üose its profits by doing and arrying all the business it can on sound footîng has
ri birth to the science of credit management.

’portance of Credit Management

There is hardly any business concern today which is not engaged in the
lit of credit of one type or another. However, briefly pointed out, granting credit
we thing and collection another. Thus, there is a need for a system which will
tii e close collaboration between the grant of credit and its collection. While it is
t Ihat selling goods and rendition of services only to customers who have shown
‹demonstrated their willingness and ability to pay on the basis of their past
oi'ds would doubtlessly reduce the incidence of risks, nevertheless, such policy.
1 evidently result in a reduction in sales volume and ultimately work adversely
lust the interest of the firm.

On the other hand, precipitous and indiscriminate granting of credit to all

us of customers, while increasing sales volume, could undermine a firm and
ur its collapse. Hence, the need as well as the importance of a sound and
efficient tlit management.

94
 The Credit Man in the Business World
dit Department.
For quite sometime, the credit man was looked upon no differently
glorified clerk or bookkeeper whose job consisted mainly of keeping fl'lie credit department does not grant or extend credits. Its task and
Pro
financial transäCÙOns of the firm's customers. sibility revolve around the gathering of all credit information about the
records of
rit and assembling them in such a way that they could be of help in properly
That, of course, is now a thing of the past. Today, g the loan officers in their assessment and analysis for purposes of establishing
important contribution of the credit man to the successful there is recognition of
operation of the comp
credit ratings.
So important is he that his bords generally carry much weight. It is he who
recommendationsbased upori investigations, studies In a number of instances, one overriding factor which the credit department
m and analyses, whether gl ve weighty consideration is, not only with respect to the degree of
cT should be granted or denied. profitability thrived from the credit operation, but also its influence as a
Failure on his part to discharge properly the task and responsibility repo booster in the f t›tlaer goods of the company.As may be observed, many large
establishments
sell goods and/or services on credit maintain credit departments which
upon him by virtue of his position in the company could adversely affect pt to evaluate the paying capacity of present and potential customers on the
business world in general. Lack of judicious care in the grant of credit will not o ol' information gathered and analyzed.
trigger losses for the business concern but, at the same time, result in a diminutio
credit to those who are deserving and are actually entitled to it. Undue laxity, Credit and sales departments must cooperate closely with each other. A
w increasing the volume of business, could mean one thing: bad debts sales tive who does not support the efforts and policies of the credit
books of aCCounts of the company which are difficult, if not department i› much harm to his company. The same holds true for a credit
cluttering
impossible, to collect. executive who I sidles-oriented. The effective use of credit and the proper
On the other hand, the overzealousness of the credit man to application of credit pbument help develop business operate on a sound basis.
for the company and thUS become overly strict with respect to the present los
grant of In the particular case of banks, the credit department collects and files every
could generate the loss of customers and tains, consequent reduction
cre in liible bit of information concerning people or firms that borrow money. In a
the vol of business.
lied manner, its main work consists of investigating, assembling, analyzing and
ThUS, it is perhaps correct to sày that a credit man must be a student ruling credit information for the guidance of the loan officers of the bank. The
trade and business equipped with a thorough understanding of the prevail cei's use the information in processing loan applications and moreover by and
economic conditions and their implications. He must have a keen foresight in
future conditions that affect business in one way or the other. In the e in reaching decisions with respect to actions it will choose to take.
words of Bee
and Morton , in their book “Credits and Collections”, the credit
man “has wi The functions of a credit department of a bank may be briefly stated as
his power to drive Old Customers away just as he could likewise help educate
stubborn customers as to earn their everlasting goodwill”. histing of a systematic and judicious collection of data respecting the financial -
ptinsibility, character, antecedents, and business qualifications and abilities of the
Efficiency of the Credit Man in HÎS WoFk k's customers, the classification of the data on each customer in chronological
t*’, and their systematic preservation for future reference and comparison. Thus,
et4less to point out, an orderly and well-arranged credit file will immediately
It is exceedingly difficult to lay down specifir criteria for judging th close at a glance the entire career and present business standing of any customer.
effectiveness of the credit man in the performance of
his task. For while it may
b true that bad debts are held to the minimum, however, such cannot be a safe
Not infrequently, the credit departments or banks furnish a valuable if
gau if at the same time it has resulted in small volume of business. Thus, it is t indispensable service for customers and friends of the bank by making
as well as necessary, in the case of a retailing or wholesaling
importan credit ftirmation available for them under proper circumstances. This courtesy is
establishments to kno how many orders were refused as well as how many were often value to non-borrowing customers, to other banks, and also to business
accepted. concerns.
It goes without saying that it is far easier to refuse orders than
to sele he Credit Manager
reasonable risks or to handle doubtful customers in such a manner that
. be future boosters for the company. Clearly, then, different cases must be they wil
The credit manager, paradoxical as it may seem, is a man who occupies
different ways. a cry important position in the structure of a credit economy and yet is little
known nd least talked about outside the world in which he lives. Upon hiss
decision resets
‘ ‹ '

fi*’ •,•P ’ " “ ‘’' mw ** .". m ••”‘ .• n'vr > ’ I "s ' “ " ‘ • -" • 8,
the success or failure of a credit granting organization. In small concerns, he is th
credit investigator, credit appraiser, credit supervisor, and credit manager (if not On clients seeking loan aCcommodations or credit O¿
Administration Department through Marketing Managem.
loarting officer at the same time) all rolled into one. ’O
On clients applying With the International Banking Depai
A real good and capable credit manager, in a very correct sense, owes hi availment in the form of Letters of Credit, Import/Export Bills,
position to himself. For, while he was appointed by someone at the top of th and other forms of accommodatiOns;
organization to his position, such is due in large measure to his proven abili
as demonstrated in every position he has held before in the past. Moreover, hi On clients opening current/savings accounts with the Cash Administ.
appointment is a tribute to the organization he represents for having chosen th the first time (which, of course, is no longer common nowadays in view the
right man for the right position. competitive nature of the banking business);

In a big concern, he is the head of a staff of trained, experienced and through the
On clients transferring business with the Treasury Department
capabl men charged with credit work. Such men are known as credit investigators, money desk;
cre appraisers, and cf.edit supervisors. A good credit manager is progressive in his
ide and thinking. Moreover, he should be devoid of prejudices against and On co-makers and guarantors for credit;
biases ' favor of any man or organization. Otherwise his thoughts and views will
be colore by them. He should be, over and above everything else, morally On old clients for updating client information;
upright an intellectually honest, and must have a complete knowledge of the facts
surety;
surroundin every application for credit, if he is to discharge his responsibilities tin insurance companies requesting accreditation or offering to act as
well.
On beneficiaries named in the Letter of Credit;

CREDIT INVESTIGATION AND APPRAISAL On prospective buyers of assets acquired by the bank;
contractors of
At this point, let us focus our attention on what a typical bank credi tin prospective suppliers of office equipment and supplies and
department does with respect to credit investigation work. Like that of any financi services; and
institution that is engaged in the grant of loans or extension of credits, sound b
management dictates that a thorough and careful credit investigation of clients-an Others, subject of special cases.
appraisal of security(ies) as collateral be conducted before any accommodations ar
made. This task is generally performed by the Credit Investigation and Apprais Upon reteipt of a request or Credit Investigation Report andproper supporting
study
an investigator is assigned to handle the case and to conduct a
Section of the Credit Department. Doubtlessly, the quality of information gathere
is largely dependent on the ability and resourcefulness of the credit investigator the applicant's background. The assigned credit investigator initially checks
and appraisers. notes down
e subject with bank's credit files and prepares a tickler where he
(ttals which he thinks will require some degree of emphasis during the
Credit Investigation conduct
lais investigation. Within a specified period of time, usually three days, the
credit
vestigator is expected to come out with a Credit Investigation Report.
This task is performed by the back's credit investigator who has, as hi
main objective, the verification as well as evaluation of the applicant's character he Scope of Credit Investigation.
credit standing and integrity through the process of data-gathering of all.essentl
upon the
facts. Generally speaking, the elaborateness of a credit investigation as a practic The scope of credit investigation depends, to a large degree,
matter depends upon its cost relative to the magnitude of the principal and iriteres l1‹›wing factors:
involved and the security being offered by the applicant. The results obtained from
credit investigation is an essential part of credit analysis for the proper evaluation o
credit risks which necessarily cannot be any better thart the facts assembled.

The request for Credit Investigation Report (CIS) may come from any officers
departments of the bank for any ot the following purposes:
- . ' c ’' .“ *fi•,. ' '*.’. ' ' ‘ ’ '
” • CREDIT & COLLECTION '” “
caroir bROLL

1. Purposes and types of investigation. Whether the investigation is a rou Secondly, whether the contract of partnership is registered or nOt Wlth
matter or a special case and the purpose is general or specific. the Securities and Exchange Commission. However, registration With the
Securities and Exchange Commission is not a pre-requisite for the acquisitionof
2. Company credit policy. Whether the policy is a conservative or liberal one, juridical personality of a partnership since the juridical personality begins
whether it requires a comprehensive investigation of eases, or a representati the moment of the perfection of the contract.
sampling would suffice.
The credit investigator should also take into account and
c onsider the following characteristics of a partnership such as:
3. Client classification. Whether the client is new or an established one; a past-d
account or a valued one.
+ There must be a contract;
4. Amount involved. Whether the amount involved is big or small. If it is a sm
one, chances are a limited type of investigation will suffice. If it involves a fair • The partners must have legal capacity to enter into the contract;
large sum, investigation may be rigid and thorough relative to the risks involve
And, of course, with respect to the amount of income to be derived • There must be mutual contribution of money, property or industry for a
measure profitability. common fund;

5. Time and resource constraint. The scope depends on such factors (time • The purpose must be to obtain pecuniary profits and to share the same;
resource constraint) since the report must be finished on the date it is
needed the requesting officer/department of the bank and also, on the • The purpose for which the partnership is formed must be lawful; and
availability of credit investigator who will conduct the investigation.
• Moreover, the Articles of Co-partnership must not be kept secret.
Generally, the scope of credit investigation covers and includes the followin
Other important matters that must be looked into are those relating
I. Company's background/history to the contribution of each partner, in what form (property, money or
industry), citizenship of partner's agreement With respect to division of
This covers the complete business record, such as the date of incorporatio profits.and losses,
the type of business organization, record of registration with the proper authoritie term and designation of officers, etc.
most
Corporation. The reader need not be reminded that a corporation is the
the names of incorporators, and the summary of operating records. In the case ct›mplicated form of business organization and moreover is classifiable into
an individual, his personal background, business, idéntity, and membership various types. However, the most common classes are: public and private
organizations will be necessary together with bank and trade references.
corporations, sub-divided into stock and non-stock, and as to place of
The investigator also takes into account the requirements common in Incorporation, sub-divided into domestic and foreign.
following types o1 business organization:
The legal existence of a corporation begins from the date of the issuance
a. Single proprietorship. He sees to it that the owner has the capacity to enter int tif the certificate of its incorporation by the Securities and Exchange Commission.
a iawful contract. If the owner is a married woman, she must possess the Important matters which a credit investigator should carefully considerin the
leg right to transact business as required under the Civil Code of the Articles of Incorporation are the following:
Philippines.
• Name of the corporation. This is essential inasmuch as its name helps
b. Partnership. The first fact to be ascertained is whether it is a general or a to establish its identity and distinguishes it from the others. The
limite partnership. This is important and essential since under a general Securitiesand Exchange Commission in its recent ruling prohibits the
partnershi all the members are general partners. As such, they are liable to the use of the words
whole exte of-their separate properties, either subsidiary and pro rata or "Maharlika", "State", etc.
solidarity, I partnership debts. In a limited partnership, one or more
• Its purposes, objectives, nature, and powers. Although a corporationmay
membersp aside fro
the general partners, are limited partners who as such shall not be bound by th be formed for as many lawful purposes as the incorporators may desire,
obligations of the partnership.
nevertheless, the corporation law and other pertinent special laws, expressive
IOO
or impliedly, prohibit
certain corporations from
having
more than one

. . .. *. .. _.. . - .- r .... . ,..............................•’

 purpose. They are corporations “formed” for the “purpose tif engaging in Financial Conditions
the
business ot transportation by land or water, or of maintaining a telepțione, Herein is represented in summat form a breakdown of the financial
telegraph, or wireless communication system” and corporations for whic
special provisions are established by law, such as railroad companies statement of the company reflecting its latest financial condition and the results of
building and loan associations, religious corporations, trust corporations operation for the past three or five years.
colleges and other institutions of learning. Banking corporations an
insurance companies are governed by the General Banking Act (Republü Aside from the balance sheets and income statements, it may include
Act No. 337) and the Insurance Act, respectively. schedules, explanations or extraordinary items, breakdown of merchandise and
expląnations Of all inter-company loans and merchandise
The location or place of business. transactions.

The łerm of duration of corporate existence. Such term is not to exceed 5 JH. Dealings with Government Lending Agencies
years. While a term may be decreased, however, it cannot be increased bj
subsequent amendments o1 the articles of incorporation. With lending agencies of the government. The credit investigator concentrates
on the size and degree of fluctuatío£lS on borrowings as well as the nature of
The names and residences of the incorporators. This determines whether the security pledged to secure the loan. In case of long- term loans, the yearly, semi-
the statutory requirements that the majority of the incorporators must b annual, quarterly or monthly installment payments to mãMTlty must also be
residents of the Philippines has been fully met and complied with. ascertained, (including arrearages, if any).

Names of incorporating officers. b. A multitude of facts that could be obtained from merchandise suppliers. They
amount owing,
may be very useful in matters pertaining to incidence of credit,
the subject of
The capital stock and the number of shares into which it is divided. amount past due, if any, terms and payment performance of
inquiry.
The names and citizenship of the stockholders and the amount or number o
institutions. The investigator should focus his.inquiries on such
shares they have actually subscribed to and the amount paid on Öther banking
subscription In cases where capital is divided into par value shares, at least matters as the following:
20% of th. capital stock should be subscribed. Where the entire capital
stock is divide. into no-par value shares the 20% requirement shall be Nature oï the credit accommodation granted.
computed on the bas oİ number of shares.
Whether borrowings are on secured or on clean
As to corporations granted franchises for operations of public utilities, minin
and agricultural corporations and other corporations organized for the dispositio basis.

If secured, whetherreceipts,
the security consists of real estate mortgage, shares of
stock, warehouse chattels, assigned receivables, discounted notes
exploitation, development or utilization of the natural resources of the country, a
least 60% of the capital stock of such corporations must be owned by citizens of receivables, assignment of claims under a government contract or some
th› Philippines. other forms of security.

The acknowledgment of the duly executed Articles of Incorporations befor IV. Bank's Experience with the Subject
a notary public.
Has there been any previous relationship established in the past?
The company's history also covers the complete record of the men wh
comprise the operating management of the business, their respective ages, whethe. . Court Cases
they are married or not, and if they have children, the number, sex, and age of
children. It also includes íriformation on their educational attainment, their previou From the Credit Management Association of the Philippines data on court
employment, if any, and their particular experience in their respective lines o uses could be gathered information about the subject s involvement in, not only
businëss. otlection and other civil cases, but also criminal cases, as well, if any.
• CREDIT & COLLECTION ’“ “
CkEDIT& CO

It is important as well as necessary to point out the fact that when a

clos study is being made, it is essential to check with trade competitors on the 8. Performs other related functions from time to time, such as:
subject (‘
it is a business concern). In such "competitive checking", the following informatio a. Trains the new associates of the Section and counsels and guides them
must be sought: in the performance of their jobs.

a. The importance of the subject in its particular line of business, the gener b. Prepares a list of assignments for each analyst. This includes gathering
reputation, the ability of the management and the quality of the products and of all data required.
or services being offered.
c. Recommends to the department head, acquisition of financial books,
b. The general outlook as to the conditions in the subject's line of business j'ournals, magazines, and periodicals rèlevant to the improvement ó1
an whether the operating methods used are considered sound. analysis preparation.

c. Whether the subject resorts to unfair method of competition. , Senior Credit Analyst

d. Names of either concerns to whom the subject may be known. 1. Assumes responsibility of the supervisor in his/her absence.

2. Concentrates on evaluation of Cash Flow Projections based on the projected

THE CREDIT WORK Income Statement and Balance Sheet and Feasibílity Studies of various
companies.
The efficient performance of the credit work revolves around the presen
and cooperation of a staff of trained, experienced and capable personnel who 3. Conducts an intensive research on the business prospects of industries for a
task and responsibilities are delineated by the kind of positions they hold in more effective financial and credit evaluation of Cash Flow Projections and
department, such as credit supervisor, credit analysis, credit appraiser, and cre feasibility study reports, submitted to the bank.
investigator. The job description of each is presented in summary form in
following paragraphs. 4. Works continuously on the revision of present and future credit rating sheets
of credit evaluation reports to cope up with the changing economic/financial
A. Supervisor - situations.

1. Handles the over-all supervision of his section òr department. 5. Assists supervisor in discharging his/her duty in time of heavy work load.

2. Receives request for Credit Investigation Report/Appraisal Report . Junior Credit Analyst
an assigns them to senior credit investigators/appraisers for
completion an submission on a certain date. 1. Assist senior credit analyst.

3. Reviews, edits and makes necessary corrections on the Credit Investigatio 2. Studies financial statements and other documents submitted by the client
Report/AppraisalReport submitted by senior credit investigators/appraiser and prepare the following reports:

4. Answers credit inquiries from banks, trade firms, bank clients and othe a. Credit Analysis and Rating. An evaluation of the financial status of
financial institutions. the client/company, industry standing, availability of collaterals for
evaluating credit worthiness of the chent and/or to pinpoint other bank
5. Implements procedures and ascertains that all matters as well as services which can be offered.
inquiries importance are given top priority.
b. I-infiticial Analysis. An analysis of the post-operating rating performance
6. Undertakes to maintain or improve existing relations with other bankin of the client and may include a projection of future performance.
institutions and other sources of credit information.
c. Cash lloc Lualuation. A:n analysis and projection of cash generation
7. Supervises the preparation of monthly reports on output. capacity and future cash requirement of the client.

104
CREDIT & COLLECTION ' “

d. Project Eunfu«iton. A complete study of the technical, financial, marketing, 5. Assists in the development of efficient and comprehensive credit files.
and management aspects of a client's project proposal; including effects 6. Gathers information concerning other banks' credit procedures.
of the project on the economy as a whole.
7. Performs such other functions as may be assigned from time to time.
D. Senior Appraiser
G. Credit Investigator
1. Receives and assigns reqtiest for Appraisal Report to appraiser(s).
1. Conducts checking and evaluation of applicants for credit accommodation
2. Edits Appraisal Reports prepared by appraiser(s). as well as of existing clients.

3. Assists the appraiser(s) in carrying out their functions. 2. Interviews co-makers and employers of applicants/clients to verify data
gathered.
4. Conducts inquiries/surveys on the current market value of real and other
properties acceptable to the bank as collateral. 3. Undertakes bank,-trade, government and court checking regarding credit
dealings of the applicant/s.
5. Performs such other functions as may be found necessary from time to time.
4. Prepares Credit Investigation Report, memos, letters, and other
E. Appraiser correspondence.

1. Conducts ocular inspection of properties offered as collaterals. 5. Assists collection group in locating the whereabouts of clients with past-
due obligations and real estate properties registered in their names.
2. Sketches the vicinity and location of the property under appraisal.
6. Conducts special investigations, surveys as per requests of other
3. Verifies the authenticity of original/transfer certificates of titles with the department heads.
Register of Deeds.
7. Performs other functions as may be assigned to him from time to time.
4. Summarizes in a report form findings on the ocular inspection made on the
properties offered as collateral. ecessity for Close Supervision

5. Entertains inquiries/checking of appraisers of other banks. The necessity for a considerable amount of supervision on the part of
the t'dit manager over his staff is quite apparent. Credit men operate during
6. Conducts inquiries/surveys on the prevailing market values of real and much I the working time away from the home office removed from definite
othe properties acceptable to the bank as collaterals.
and direct ecutive control. However, one method which could make the credit
men do their b, as expected of them, is to give them a "deadline" for the case they
7. Performs other functions that may be assigned from time to time. have under vustigation and study.

F. Senior Credit Investigator Psychologists suggest three important appeals for use in attacking the
itiblem of supervision, such as:
1. Receives and assigns request for CIR to credit investigator and sets date o
completion. I'ride in accomplishment.
2. Initially reviews and edits CIR prepared by credit investigator. Monetary reward for a difficult job done, like collection of a bill that is about to
3. Entertains credit inquiries from other banks and commercial houses. be written off, and
4. Occasionally assists credit investigators in carrying out their functions. Commendation and praises. This may be done through letters of commendation
if not through the awarding of plaque or certificate of merit.

106
CRSDITmCOLLECTlOH

Bank Appraisal Report umbrances

Generally speaking, a bank appraisal report contains, among others, Names of mortgages and amount
foLowing information: Others that might be annotated in the Original or Transfer Certificate of Title
A. Subject of Appraisal

1. Name of registered owner IT POLICY

2. Location of the property
Iti most instances, a bank's credit policy evolves from an unwritten set
B. Land Identify of ltds, sometimes very nebulous, to more specific criteria covering the conditions
which loans are made. Where a bank is small, such policies are seldom
1. TCT number ' In writing. However, the policy although not expressed is given meaning
2. Technical description bstance through practice and implementation. As the bank grows in size
3. Lot number re back personnel are involved in extending credit to customers, it becomes
4. Block number sential that appropriate guidelines and standards should be established in as
5. Land area ve o manner as possible and expressed in clear and urunistakable terms.

C. Description of Land A policy has been described as a “decision in advance”. Owing to the fact
that re range of loan function of a commercial bank is basically interwoven
with clsi on can but result in the elimination of flexibility and could work
Shape
against
2. Frontage
•rcsts of the bank. A sound credit policy with sufficient degree of
flexibility help contribute to the successful operation of commercial banks
D. Neighborhood Data
insofar as nctions are concerned.
Commercial
ank Loan Policy is Formulated
2. Semi-commercial
Residential
Any loan policy that may be formulated by a bank reflects but one phase of
4. Industrial
er-all policy program of the institution. Such a policy must obtain the stamp
Raw land
riinatur of the board of directors.
6. Others
As in generally observed, as a common practice among banking institutions,
Public Utilities
uaI preparation of policy statements is usually carried out by the president or
ltaan and credit officer, depending in large measure upon the size of the bank
Electricity, water, telephone, gas, etc.
e staff available.
2. Kind of transportation facilities available
A statement of loan policy, among others, includes reference to types of
Improvements
loans c basis upon which loan applications may be considered. Such, however,
are scribed by the provisions of the General Banking Act which
1. Full description of improvements
governs the Hons of commercial banks.
G. Valuation
Also, the kinds of securities that are considered acceptable by the credit-
¡i institution are also the subject of loan policy. And, so with amounts
Market and appraisal values of land
vd. In fact, when a certain amount involved in a loan application does not
2. Net value of improvements
d a certain ceiling imposed by the board of directors, it is subject to the
3. Total appraised value
approval loan committee. Beyond such ceiling, approval is lodged as the
Recommended loan value
exclusive
giitive of the board.
t08
 ., cerorr8‹corLrcTloN " “ CRrDFRCO

Briefly noted, in the formulation of a loan policy, the officers are guided To ascertain the effectiveness of such a policy, it is essential that a
b two primordial considerations: First, the protection of the depositors' funds. review 1s effects upon the organization be made as well as its impact upon the
Second the production of a fair return for its lending and investment activities. The bank's tomers in the light of existing business conditions. Only then can it be
activiti of the credit department contribute a major portion of a bank's income. In determined ether the policy is sound and judiciously necessary or not.
fact, the represent one of the major areas of top management concern and
attention.
E CREDIT FILE
Setting a Standard for Control Purposes
• So important is the credit file to any firm extending credit that it
It goes without gainsaying that no policy achieves maximum effectivenes behooves On it to adopt a system of gathering and putting every
unless it is accompanied by a periodic check-up to insure its proper implementatio
information about st‹›iners and applicants into a folder which is filed in
and ascertain its weak spots, if any. In fact, by having an established loan policy
proper order. Hence, the m credit file.
a program is made possible against which actual performance or practices c
be evaluated for purposes of determiriing variations, if any, and the necess As credit information is received by the credit man, he goes over it carefully
application of remedial action. As already indicated earlier, a sound loan poli
make sure it is as complete as possible. Then he puts it into the credit folder
should be made flexible to provide for alternative courses of action and thus enjo
(a gc envelope) bearing the customer's name and address. Necessarily, one folder
the advantage of the policy serving as a guideline rather than as a strait jacket.
is si¡;ned to each customer or applicant for credit.
The loan policy should be stated in clear and unmistakable terms so that i
In this mariner, through the course of time, there is accumulated eventually
implementation by the officers of thé bank charged with such function will be easy.
ciiinplete credit history of each customer, to which immediate reference may be
Moreover, such bank charged with such function will be éasy. Moreover, such lo
nde at any time when the need arises. Arranging the folders in alphabetical order
policy should provide specific guidelines for particular types of categories of ba
Jtiys the advañtage of providing easv location.
credits, such as the following:
Experienced credit managers also keep a card record on which are noted
1. Agricultural credits
c different kinds of information. Two distinct advantages are obtained from
2. Commercial loans
this etliod. One, a card record cc ld be examined quickly without taking the time
3. Industrial loans
to go rough the papers in the folder. Second, in the event that some records are
4. Real estate loans
found lssing from the folder for whatever reason or reasons, the company will not
5. Consumer or personal loans
be left the dark, since it has another means which could help serve its purpose.
Term loans

Dissemination of Loan Policy It is important that credit files be kept up to date. In some banks, the
sponsibility for constant revision of such file as needed by circumstances falls
"“ “ The importance of effective communication to the success of any pon the credit department. Others place it under the charge of the loaning officer.
undertaking has been stressed time and again. Its validity is not in any way
diminished regardless of whether the organization is small or considerably huge. Regardless of where the responsibility falls, it is good policy to revise
Without it, the organization would be engulfed in an ocean gap that would act as a such lcs not more than once a year unless unusual circumstances prevail. Since
monkey wrench that will ruin the entire machinery of the business organization. credit lcs tend to get big and bulky, it is necessary that those with inactive
status be a nsferred to other folders.
In the particular case of commercialbanks, its policies should be disseminated
thoroughly and well understood by all who are concerned with their implementation. A major problem common among credit-granting institutions pertains to
Since a loan policy is but one facet of the over-all policy of the bank, it follows that eeping track of credit folders when they are removed from the credit file —
an internal information drive should be launched from time to time, it's the occasion especially ti when time is of the essence and there is immediate need for a
demands, with the objective of inculcating upon all those concerned the need, particular credit older.
as well as the importance, of giving meaning the substance to such policy through
its effective implementation.

' CIO Ill

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CREDlT&COLLECMOI4

A very practical method, if not to say the best method, to solve such proble gpe of Credit Policy
and thus serve the interest of that company is by inserting a board the same size
the credit folder in its place with the following information: name of the folder, da After adopting a credit policy, the business enterpiise must decide just What
well as its credit
it was removed from the file, and the person who has the folder. ils credit terms and what credit period it Will adopt as
limits.
Maintenance of credit files with utmost confidentiality should be the By credit terms is meant the terms or conditions under which the the
ove riding concern of the officials charged with this responsibility. Because creditIS onted. It includes the time, when payments must be made and
discounts, 1f
of th confidential nature of the information contained in the credit files, folders y, that will be allowed for prompt payment. In other words, credit
can ortl be withdrawn upon prior authority granted by the responsible official. terms pertain
the period when credit obligations will demain subsisting; for
instance, pay ment nil be made one week after delivery, or 30 days as the case may
Credit files give historical account of transactions and are generally observe be in accordance ltla company policy. In many instances thougL, this is not
subdivided into a number of sections. For instance, the first section is used to strictly enforced thus
statements. As may thus be logical to expect, the latest financial statement of th stilting in considerable delay in payment of credit obltg£lÙO£lS.
company is found with the bank's comparative statement form. The second sectio
contains a compilation of rep.orts on interviews conducted by the loaning officer o e customer
By credit period is meant the length of time within which th
the bank and his staff. Correspondence and other related matters with banks an is payment
pected to remit in part or in ftill. If this period expires before such
business firms are contained in tire third section. The fourth section contains an u hal
to date file record of borrowers as well as prospective ones. In the case of the forme een made, the account becomes delinquent.
also their latest balance is included. The fifth section contains reports from credi
agencies whose services and assistance have been sought by the bank. If a long term of payment is allowed, a greater number of prospects can
be
pealed to, but more capital will be required and tied up for quite sometimes.
On e other hand, if a short term of credit is made, the number of customers is
CREDIT POLICIES OF COt4l*IERClAL HOUSES reduced,
t less capital is needed.

Some credit-granting companies impose a limit with respect to the amottnt

T value that a customer can obtain from the firm. This is known as credit limit.
tirer words, a seller places upon a customer's credit standing an indicated limlt
To say that a credit department is essential in every organization sofai as it relates to his own firm. Expressed in another way, it indicates the sellef s
engage in the grant of credit is to elaborate on the obvious. On the part of small ‹4gment of the amount of debt that a customer can incur and pay his firm.
concerns, credit department may exist merely as a section. Or it may seem not to
exist at all.
any rate, even in the absence of any, credit functions are discharged by a responsibl As a sound practice, the credit limit of every customer is recorded in the
each time
official in the organization. In fact, in the particular case of sari-sari store which e‹4ger card. This eliminates the necessity of reviewing the customer's file
se
goods on credit, owing to its size and the close contact between the owner and his n order of goods is placed (or a loan is sought). In the particular case a loan,
of
customers, the existence of a credit department appears superfluous. However, th may be
owner himself performs the credit investigation and evaluation of his customers. any important considerations exert profound bearing on the amount that
ranted by the creditor company.
Credit policies may vary from one business enterprise to another. One unwise
relates to the type of customers who are to be.granted credit. One firm may be fO£ Doubtlessly as conditions are constantly changing, it would be
guy company selling goods on credit to establish too definite limits as to the
primarily interested in increasing the volume of sales. It therefore grants credit to all amount
pl credit Whfch will otdinarily be extended to a customer. The capacity
applicants and runs the risk of some losses. Others take extraordinary precautions Inä ke will, by and large, be
tO money and promptness in paying one's obligations
in granting credit that could reduce their sales volume. signifiC t
fnctors in decidîng the matter. Obviously, the customer who can sell the
goods whit tre shipped to him, and can prompGy make payment therefore, is a very
It could be stated categorically that there is no simple yardstick or criterion safe credft
that could be used to guide the business enterprises in the formulation of their isk.
respective credit policies. Be that as it may, certain fundamental principles
could prove helpful when taken into account and applied accordingly. Their At this point, it shoiild be pointed out that the problem of mercantile
observance operates as an instrument of control. credtt 1s somewhat different from that of bank credit. ThiS is so, since under
mercantile Credit, each transaction may be self-liquidating.
1f2

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 CgEDlT & COLLECTION y' <

On the other hand, loans obtained from a bank are liquidated out of When it becomes absolutely necessar y, the
the services of collection agencies must
case may be.
composite or series of individual transactions. Thus, bank loans generally cover be sought or legal services enlisted as
longer period of time than those of mercantile credit.
he Problem of Credit Extension
Purpose and Advantages of Credit Limits
Few merchants ever.escape the problem involving the extension of credit
increase profitable
As aptly pointed out by Theodore N. Beckman and Ronald S. Foster ’ customers. As previously pointed out, some use credit to due
“Credits and Collections”, although limits are sometimes used as absolute maxi nlcs. Others, however, incur losses due to unwise credit extensions. Thus,
in granting extension of the credit
of credit, nevertheless their general use is in the nature of danger signals, just like siition and extreme care should be exercised
th warnings posted at approaches to railroad crossings. ei rod to customers. The longer the credit period is, the gTeatei is the incidence or
vlinquencies. The credit extension problem is by far one of the most difficult phases
By and large, the prirrcipal purpose of credit limits is to serve as guides :,t confront many a businessman.
t credit management and control. In fact, through its use, before the determination
o credit limits, there is a need for careful investigation and comprehensive
analys‘ of the elements composing a given risk. In a nutshell, then, this is RANTING CREDIT
conducive t
.improved credit granting. granting credit to the individual is one thing and to a
!' From the foregoing, it appears quite evident that credit limits operate Aptly observed,
usiness firm is entirely a different matter. SinCH, like most anything, credit could
as overall device for the control of credit extensions. More specifically, credit limits it behooves upon everyone whO extends credit to
ai iliter be misused or abused,
in reducing the cost, of credit management and in enhancing its efficiency. Limi exercise proper care and caution andthethereby beeconomy
nation's able to prevent their ill edects not
as a whole.
also work to the advantage of debtori. It serve as a check against reckless tjt4ly to the parties concerned but to
buyin spree which if unchecked could ruin the lives of debtors and as such
suffer th disgrace of being labelled as poor debtors. Careless and unjustified granting of credit nor merely serves to fan the strong
could well afford to pay. In
desire to buy goods in amounts one does not need
Principles of Controlled Credit to blame for their wrong doings, however
{net, while delinquent debtors are largely
the creditors are not entirely without fault. At times, they are the culprits for making
The following fundamental credit principles could serve as the cornerston ¢redit both easy and quite cheap.
of a controlled credit policy. They are: The procedure by which a credit manager handles an order from an old
1. Only after a thorough investigation of the credit worthiness of the custome However, it may be asked: What is his
enstome of the firm appears quite clear.
seeking credit may credit be granted.
whose first order involves purchases on
}arocedure with respect to a new customer
2. Each new customer should be made acquainted with the terms and conditions credit?
as promulgated and implemented by the business firm with respect to terms of considerations immediately come into the picture all
, of which
Three major first relates to the size of the order. Not infrequently a number
payment; discounts, if any; credit period; and credit limit. merit attention. The
txt business firms may be willing to take certain risk, that is readily allow a Small fifst
It is necessary that the first reminder be sent immediately, i.e., the next day
3. a(ter and complete credit checking than they will in the case

bills become past due. t›rder without a thorough

may be due to non-payment
tit large order. However, small lossescould of obligations by
turn out to be a staggering sum. It must
4. Continued use of the credit privilege should be suspended in respect to slow ‹debtors when accumulated together
paying customers. Such privilege may be given back to them only after they r xeicise caution and providence.
have paid their existing indebtedness. and his references.
The second refers to the identity of the applicant for credit of the applicant
business firm should be sure of the reptttation and integrity
Decisions and actions should be characterized by firmness but short of being
The which accompany the order. The seller must have some

rude and arrogant. os well as the references

strong and intelligent basis for granting the ip
relationsh with Perhaps,
credit. a sound basis is — the
the new customer.
experiences of other firms in their
114
 , CREDI&COLIECMON ,

If a prospectivecustomer is unable or does

references requested of him, such a circumstannot provide the necessary
trad cecould be valid reason to Maximizing sales. For a firm not only to continue its operations but
deny grant of credit which must be clearly understood moreover havé a strong toothold in the business, it must be able to maximize its
as a privilege conferred and
aneve
right, sales. More and more sales assure the company with increasing volume of
business and the continuous flow of income and consequent receipt of profits.
Accordingly, credit management is charged with that important task: help
The third is the customer'srating appears in the
agencies. This is not always possible especially so when register of some mercantil increase the volume of sales while minimizing losses. Increased sales and profits
the customer is new in th are the by-products of a better understanding and skillful handling of all credit
business and therefore has not yet established a namé
or reputation for himself. functions.
If the applicant is an individual, the credit
Of e mploymentof the applicant and the length manager can look into the stabili
o/ time he has been residing ’
When a business firm sells on credit, the important role of credit
his present residence. Frequent change of management becomes altogether very apparent. The level of
residence .could be a cue as to the tru
character of the prospective debtor. When coupled management required for the administration of credit in any business firm is
with other factors the request to determined in no small degree by the concept of the function prevailing there.
purchase on credit may be turned down.
In some instances, credit is viewed narrowly as a simple function of approving
Wholesale and Retail Credit credit transactions and making the corresponding collections. Relatively
little real management activity may be involved there. But as the concept
broadens, the credit phase of the business embraces sales and Nuance
policy and other top management
Essentially, a big difference lies strategy and, consequently, becomes a management responsibility of a much
between wholesale and retail credit
Wholesale customers usually buy for resale to
others while retail customers buy to higher order and of substantial magnitude.
their own consumption.
Viewed correctly, one test for an effective credit management hinge
olesale customers are able to realize income among others, on the attainment of the first objective stated above.
from the resale of their
purchases Which will serve as major source in the settlement of their obligations. Controlling the amount of receivables. The basis of effective control is a plan
Retail customers, on the other hand, must pay for
Which generally consists only of salaries or wages. their purchases
Inasmuch out of their incom
as retail for control based upon some realistic set of standards. As pointed out in”Credit
Customers buy
tor Weir own consurrlption and not for resale, it follows Management Handbook”, a publication of the National Association of Credit
therefore that the credi Men (USA) , the best statement of the purpose of control is the simple definition:
manager should exercise ,effort and caution to protect his store
upon by unscrupulouscustomers. This is the very reason from being imposed
why the credit “To assure performance in accordance with plans.” The price of performance is
manager generally prefers to conduct a personal interview of the applicant for credit everlasting follow-through. One of the skills of leadership is the art of
be able to obtain the necessary and valuable getting desirable responses and results for individuals and groups in conformity
so as to' information about him as, for
his honesty and straightforwardnessin answering ques with the established goals and objectives. Hence, a necessary qualification of a
instance, tions and others credit manager is the ability to review and appraise the operations of his
be one gauge whether he is worthy of credit or not.
which could department and the performance of his staff in terms of desired results.
If the applicant is a married woman, it Also, to maintain conditions which encourage his staff to produce results to
she has a job of her own from which she expects must be ascertained from her whether
to pay her purchases on credit. If thebest of their abilities. Toward the achievement of these ends, it is necessary to
not, whether such purchases carry with it the
Moreover,.inquiring into the position that the husband and
sanction approval of her husband.
holds in the Company where
develop, interpret and maintain effective controls and standards which will
assist all concerned to: (1) project desired results more accurately, (2) identify
and forecast major trends
he is connected with, as well as
the length of service he has that effect significant credit activities; (3) determine the need for changes in
rendered WOuld prove quite helpful. S£Lid company, policies and/or practices; (4) detect credit problems, insofar as possible, in time
to take corrective action before they become critical; and conserve time and
The Principal Objectives of Credit Management effort on the part of all concerned.

pointed out in earlier discussions, credit riot only ve

a scarce resource. This fact underscoresiSthe need for A primary problem of establishing effective controls in the credit
moreover Hence, credit management becomes very compelling ry important department is to deterinine what is significant. Hence, the need for periodic
credit
but management is not unlike the management of any ma indeed. this Aptly said,and
judicious appraisal. This is particularly so since the economic climate in which business
wise use. jor business function
which seeks the attainment of its laudable objectives, such as: operates is fluid and complex. It is almost in a state of change or subject to
change.
CREDIT & COLLECTION *' -
UtEDIT & CONN ,

c. Controlling costs of credit and collection. Every company incurs expenses in the In a number of cases, the liberal treatment accorded them *y grantors of
extension of credit and in the collection of accounts receivables. These expenses credit have worked against their interest because of its undue infjtience on over
include (1) bad debt losses; (2) wages and salaries of employees charged with
expansion of business. Credit limits work as bars to over expansio n of business.
credit and collection functions; (3) cost of funds tied up in receivables; (4) cost o Hence, their importance and necessity.
fees and dues for credit information; (5) charges incurred for outside assistance in
making collections; (6) rent or space occupied by credit and collection personnel. types of Credit Limit
And, of course, depreciation of credit and collection equipment and fixtures.
In studying credit management, two types of credit limits may be noted:
Control of credit and collection expenses does not necessarily, however, tJuantitative credit limit and temporal credit limits. Both have their i'fipOrtance in
mean minimizing expenses. Rather, it refers to cost per unit, that is, decreased granting credit.
cost per unit of work, which results from improved planning, direction an
supervision. By quantitative credit limits is meant the maximum amount of credit which
may be permitted to remain outstanding on account. The amount is determined by
The collection Juan's job is to keep his ear close enough to the groun o proper analysis of the C's of credit which is not be exceeded.
to detect every indication of lapses from satisfactory standards and to a
accordingly. On the other hand, instead of imposing a maximum ceiling on the amoimt of
credit which a d9btor may be able to obtain and use, temporal credit limits impose
There are a number of expenses that are unavoidable in credit an certain requiremerrts which is a borrower or prospective debtor must comply
collection work. One pertains to the cost of traveling. Some credit men before he could be granted credit. This temporal credit which does 9Ot indicate the
howeve do not do enough traveling for one reason or another. Where such is maximum amount that an individual or business firm can obtain from the creditor-
the cas they deny themselves of opportunities of gathering useful information granting company as long as the debtor is able to fully comply y}tjt conditions set.”
that com guide themselves and their company in respect to their credit work.
Credit me who spend considerable time in the field are able to establish in
most instance contacts with prospective clients that could prove beneficial.
GOUND CREDIT ANAGEf4ENT
One other expenses that is unavoidable in credit and collection wor
pertains to legal fees. Legal services are needed principally in connection wi Sound credit management principles revolve around three E'^, SUCh aS:
collections and protection of accounts receivable.
A. Estimation
Importance of Credit Limits
1. All available sources of credit information must be tapped and utilized so
It carmot be stressed too strongly, that one pressing problem which taxe that a proper estimation of the credit risk can be obtained.
the minds of credit managers is not only the decision when to extend credit but
complementary problem of how much credit must be extended. Inasmuch the ve 2. For individuals who buy for consumption, character and their ability to pay
nature of credit gives rise to corresponding risk, it follows that utmost care an sere as important bases of credit; for business concerns, it is the net worth
prudenye be exercised in order to determine the proper credit limits that must b and condition of the business as well as reputation for paying their bills.
imposed by prospective creditors as a tool of protection not only on his part but als
for the benefit of economic society as well. 3. All credit information gathered and received must be kept in strict confidence.
Only those who are authorized must have access to it.
Imposing credit limits could be a service to buyers on credit since it coul
prevent them from falling hopelessly into huge debts that they may not be able to B. Enforcement
pa regardless of the means they employ to weed themselves out of such a
precariou predicament. In other words, the creditors may be doing them a favor 1. Granting credit is but one phase of the credit function, collection is another.
which at th moment they do not realize. As one businessmen sadly remarked, it is Collection of accounts should start from the moment they become due. There
oftentime the liberalit) with which companies grant credit that pushed them into should be no room for vacillation insofar as collection is concerned.
economi difficulties if not ruin. c.‹
 CAEDIT&COLLECLOH

2. The task and responsibility of every collection department is to get the 120
money due the company. If the money can be collected without offendin
the customer, doubtless, this should be done.

3. Collection records must be kept and maintained and should indicate

wh notices were sent; dates when calls were made by collectors; payments
mad balances due; and action taken, if any.

C. Evaluation

1. Sound credit management principles dictate that results must be evaluate

against company policies and procedures.

2. If a situation should arise in the future which preclude good-payin

customers to discharge their obligations on time, policies and
procedure may be modified without losing sight of company goals and
objectives.

3. Records must be periodically reviewed and kept up to date.

CREDIT FRAUDS

If only all individuals are honest, then no credit manager would develo
wrinkles or grow gray hairs prematurely. But that is perhaps wishful thinkin
While it is true that most credit manager's relations are those with business fir
and individuals who operate above board, nevertheless, there are a few who do no

These dishonest firms and individuals are known by various names

employ various tricks. Some of them become successful in their “line of trade” w
others fall by the wayside and become apprehended even in their first try. So
of them appear decent enough. Some of them in fact are married to men who
at in the top rung of the organization to which they belong just as others are
wiv of prominent government officials. They appear’ in expensive clothes and
ride ’
swanky automobiles and, as such, create thé impression or their respectability
well as decency. Others are just plain Miss, and Mrs So and So. The men in the
sa group are not different. They appear honest and reliable.

Some of these crooks operate alone because of the belief that it is mu

difficult to cover the tracks of one man and thus escape apprehension. Others,
the other hand, operate in a ring — a big time syndicate — who victimize busine
firms involving large sums of money. As to so-called business establishments — th
operate through “fly-by-night” schemes. After obtaining the loot (goods sold)
credit), they disappear into thin air until they make their re-appearance — trying
victimize another business firm. And this goes on and on, until the law catches the
for crime does not pay.
 CHAPTER 7

N Se tio Soe

Discuss credit management and its importance.

, Differentiate credit investigation and appraisal.