Credit and Collection

5P’s

People- Personal attributes and character of borrower, determines if g

​ ood people​ and honors
financial commitments (​ will pay). If not adequate, he/she would be considered “inutile”

Purpose-​ how the borrower is going to use the funds.​Sound credit judgement must be
made by lender through FULLY KNOWING plan (​where and what​) will the loan be used.

Payment- info of where the loam will be used to s

​ ource ways of repayment and structure
loan schedules​ (based on cash flows of borrower)

Perspective- Overview of Credit Transaction- l​ oss, risk and gain

Protection- loan collateral and other sources of l​ oan repayment​ in case of failure to pay
(default)

5C’s

Character- integrity;​ judgement based on past record​ such as faithfulness to obligation and
honesty. (Habits, Attitudes and Activities)

Capacity-measured on managerial ability of borrow, based on how good can use f​ unds​ to
fullest potential

Capital- resources owned by borrower​ (properties, assets, investments)

Collateral- s
​ afety net​ for repayment of loans. Used by banks as a mechanism to repay

Conditions- affects ability of borrower to r​ epay loans​, plays a​ vital role​ in the success of
firms

Other relevant C’s in Credit

Consanguinity- easier to get a loan application if have b

​ lood relations​ with directors, officers,
stockholders and related interest

Collusion/ Connivance- unethical practice, where c

​ onnection between borrower and
employee/officer w​ ould make an easier for approval of loan application

Connection- f​ riend or any people known ​will influence evaluation of approving loan
application
Commitment- Borrower’s Equity in Business,​ Higher Equity the better ​(responsible business
leadership)

Cautious- Lenders should be aware of risks, they must ensure fair credit judgement.

Curiosity- Appetite for Data Gathering,​ always​ have more than enough credit info on borrower

Collegiate/ Consultive- Approving or Rejecting loans in a​ fair and equitable manner. ​Based
on records in business and credit evaluation, must be able to​ take responsibility ​and render
judgement​ for loans

Commemorate- Based on data gathered by credit investigators and evaluators, line of credit
must be p
​ roportionate ​to outstanding need of borrower.

C’s in Communication-
● Clear- easy to understand
● Concise- not too long or short, must have important parts
● Complete- all info about credit info
● Correct- updated, current and reliable info

Coordination- units of the bank should c

​ reate comprehensive credit report​, this will approve
or disapprove loans

Cumulative- Must have credit data fully​ updated​ always,and collected

Customary- T
​ raditional Method;​ of obtaining credit info

Current- “​ knowledge is power”​; Stored knowledge must be rationalized, if not it becomes

obsolete and irrelevant

Cross Reference- Credit Investigator should have the data for client. Common practice among
banks to a
​ nalyzing the credit standing​ of loan applications. Electronic Data System-
LOANDEX

Competence and Capability- Credit department personnel should be​ qualified for their roles​,
internalize goals, policies and objectives.

Constructiveness- Credit man’s Positive approach on credit and collections. Find a way for
credit to be granted and avoid getting reputation ​of disapproving loan applications
Creativity- A
​ daptation​ to Changing times and conditions to credit environment. Q
​ UESTIONS
AND ANSWERS

Conscientiousness- Credit man should prove as c

​ atalyst (improve conditions),​ promote
coordination and cooperation

Consistency- Credit Decisions should be​ firm and aligned to company goals and
objectives

Certitude and Celerity- Certainty and Accuracy, Swiftness and speed; u

​ rgency in decisions

Contact- G​ OOD CONTACTS NEEDED​; good public relations in and outside business
relations.

Cost-Consciousness- Minimize Cost and Maximize Profits

Confidence- Build a relationship on​ trust and confidence​. Must have confidential info on
debtor for credit evaluations. Debtor should trust credit man that evaluation is fair.

Considerateness- Credit Decisions affects e

​ motion,​ some policies are made to relax and
accommodate loan applications

Common Sense- “Think outside the box,”​ decisions​ to use in making credit judgement.

Major Functions of Credit

Cashless Transactions- Promotes transportation and safety, reduces expenses by use of

precious metals and paper.

Exchange and Remittances- m ​ aximizes scope and ease of payment of funds​. Wealth can
be transferred to facilities, for economic use

Continued Business Operation and Expansion- credit system helps with production in
demand; Entrepreneurs and financial institutions earn credit to start and develop business.
Credit is used to continue operations.
-business maintenance and development

Foreign Trade Support- Commercial credit allows to transact activities for value acquired from
Bills of Exchange and Letters of Credit.​ Payments and Collections administer simple ways
in doing so. Credit facilities accommodate increasing need of business partners.

Consumer Benefits- Credit facilities and instruments allow people and businesses procure
durable goods in charge of account in​ installment basis.
Government Sector-Government supposedly provides​ social and economic goods​.
Sustainability for growth and development. Regulations are made, policies and procedures,
prices may be stabilized for the country.

Classifications of Credit

Type of User:

Consumer Credit- used to​ finance or refinance purchase of commodities​ for own good
Commercial (Bank Credit)- used by firms to f​ inance business operations or expansions

Purpose:
Investment Credit- fixed assets (​ Buildings, Land, Equipment)

Agricultural Credit- farm improvements, transportation of farm products, seeds, fertilizers and
pesticides (​ anything that helps/ involves farm)

Export Credit- Letters of Credit for International Trade

Import Letter of Credit- currency for importer
Export Letter of Credit-currency for exporter

Real Estate Loan- house and lot, home construction and improvement (​ anything houses)

Industrial Credit- logging, fishing, mining, and quarry

(extraction of resources)
According to Maturity:

Short Term- within 1

​ year
Intermediate Term- 1​ -5 years
Long Term- b​ eyond 5​ years

Form of Credit:

Cash form of Credit

Merchandise Form of Credit
Nature of Credit

● Credit is the ability to pay something in value in​ promise​ to pay back money on
DEMAND or in the future
● Obligation created (​ Debtor and Creditor) ​- pay and collect

Elements:

Ability to obtain a thing in value- in form of c ​ ash or merchandise form​ (retail)

Promise to pay- acknowledged in w ​ riting​ by parties
Definite sum of Money- Exact Amount (​ Principal and Interest)
Payable on demand or future time-​ Future date​ (loan maturity) or on d ​ emand ​(when credit
demands)

Characteristics of Credit:
● Bipartite (Debtor and Creditor)- in writing to specify terms agreed
● Elasticity- loan limit, can increase depending on capacity and set value of collateral
● Trust and Faith
● Futurity- maturity, obligation is at future time

Foundations of Credit

1. Confidence (Trust)
2. Proper(Legal) Facilities
● Credit Information - d​ ata​ of the debtor about his c
​ apacity to pay
● Credit Document - w ​ ritten​ agreement a ​ greed by both partie​s
3. Stability of Monetary Standard (Purchasing Power) - m ​ ore stable​ value of money,
higher chance of approving credit
4. Government Assistance - regulations
5. Credit Risk - p
​ ossibility ​that debtors are u​ nable to fulfill the promised payments