Module One

MODULE ONE
CREDIT AND COLLECTION: AN OVERVIEW
After this lesson, the reader must be able to:
1. Explain the different core credit and collection concepts.
2. Explain credit management philosophies.
INTRODUCTION TO CREDIT & COLLECTION
“Making money is a hobby that will complement any hobbies you have beautifully.”
-Scott Alexander
THE NEED OF MONEY
Money was originated in man’s rational effort to meet the necessity of finding some medium of
exchange.
Money is responsible for increasing production and thus adds to the creation of wealth and also
accelerating consumption with the concomitant rise in the standard of living of the people.
“Money is barren. It does not breed.”-Aristotle DOCTRINES OF CREDIT
“DAMNUM EMERGENS”: the suffering loss by the lender, where a delay occurred in the repayment of a
loan, the lender was entitled to exact a conventional penalty.
“LUCRUM CESSANS”: to have lost the chance of gain through lending money also became a justification
for the receiving of interest.
THE GROWING NEED AND DEMAND OF MONEY
a) The decline in the spiritual power of the church and the eventual recognition of the institution of
private property.
b) The demise of barter as a method of exchange in progressive countries of the world.
c) “JUSTUM PRETIUM”: the doctrine of the just price
THE BIRTH OF CREDIT
a) Latin. “CREDERE” – means “to trust”
b) Credit is akin a two-way street. For every debtor, there is a creditor and vice versa.
c) Credit is essentially a transfer of goods, services or funds giving rise to obligations that must be
discharged in the future.
OTHER DEFINITIONS OF CREDIT
a) IN BANKING: Credit is an entry in the books of a bank showing its obligation to a customer.
b) IN BOOKKEEPING: Credit is an entry showing that the person named has a right to demand something
but not necessarily money.
c) IN COMMERCE: Credit pertains to an exchange transaction.
d) Credit is the ability to obtain goods or services or even money against a promise to pay for them at a
later date.
e) Credit is a document which serves to evidence the existence of a business transaction anchored on
trust.
THE USE OF CREDIT
-blood of the business”
the business firm which sells goods on credit confers benefit to its customers just as it helps the
continued operation of its business.
ADVANTAGES OF CREDIT
a) Credit facilitates and contributes to the increase in wealth by making funds available for productive
purposes.
b) Credit saves time and expense by providing a safer and more convenient means of completing
transactions.
c) Credit helps extend the purchasing power of every member of the business community –from
producer to the ultimate consumer.
d) Credit enables immediate consumption of goods thereby providing for an increase in material well-
being.
e) Credit helps expand economic opportunity through education, job training and job creation.
f) Credit spreads progress to various sectors of the economy.
g) Credit makes possible the birth of new industries.
DISADVANTAGES OF CREDIT
a) Credit at times, encourages speculation.
b) Credit also tends to contribute to extravagance and carelessness on the part of people who obtain it.
c) Because of credit, many entrepreneurs resort over-expansion.
THE COST OF USING CREDIT
The price of credit depends upon the cost of providing it.
KINDS OF COSTS
a) Interest
b) Operating Expense
c) Risk
HOW CREDIT AFFECTS PRICES
the same way as increases and decreases

in the supply of money.
d credit with which to buy

product and services.
If the amount of money decreases, the goods will drop in price. If the amount of money increases the
good will rise in price.
FOUNDATIONS OF CREDITS
ter and in the ability as well as

willingness of their debtors to accept, honor and settle their obligations.
The money standard must be stable.
The government must stand ready to assist the creditor in enforcing payment of loan extended to the
debtor.
CLASSES AND KINDS OF CREDIT
Personal Credit:
- A credit which a person possesses as an individual, and which is founded on the opinion entertained of
his character and business standing.
- is used by individuals to buy consumer goods intended to provide immediate satisfaction to their
wants and need.
-they are also called as CONSUMER CREDIT.
KINDS OF CONSUMER CREDIT
- Charge account is one kind of personal or consumer credit
- It is the oldest form of sales or purchase credit.
- Other names are “Open-book credit, open charge account or 30-day credit.
- It is a very convenient way of shopping.
- It eliminates the inconvenience as well as the danger of carrying too much money.
- Charges accounts enable customers to buy goods only at the time they want them.
- Charges account enables consumers to obtain goods even before they have the money
- Charges accounts provide a valuable means of reference in many business transaction.
- Charge account are undoubtedly a convenience, and therein lies their grave danger.
- To identify credit customers- Tangible evidence of their charge account
- Color photograph encompassed in the credit card
- They are marked as valid until a stated date
- The most common type of consumer credit today is installment sales or purchase credit.
- Individual term as "Buying on time"
- PRECAUTIONS IN BUYING ON INSTALLMENT: Truth on the Lending
Act is purposely enacted in order to protect a prospective buyer in installment with respect to the
amount that he must pay.
- Never allow yourself to be rushed or pressured into signing a contract until you became conversant
with all the facts.
- Always insist for an extra copy of the contract.
- Never sign any contract before all the blank spaces are filled in.
- Read very carefully what you sign. Read again after signing.
- "An authority on consumer credit, has pointed out the important differences between buying for cash
and buying on time." - Dr. Niefeld
- "Whether you buy for cash or on time, you buy from your saving. If you buy fir cash, you have saved
the money before the purchase. If you buy on time, you save the money after the purchase. If you use
installment credit, you settle a debt after it is incurred. If you buy with cash, you, in a sense, were
forehanded enough to provide for the debt before it was incurred." – Dr. Niefield
INSTALLMENT CREDIT AND CHARGE ACCOUNT, COMPARED
INSTALLMENT CREDIT CHARGE ACCOUNT
1. Installment credit is largely confined to durable consumer goods.
1. Purchases on charge account consist of non-durable consumer items.
2. The title to goods purchased on the installment plan does not pass to the buyers until the last
installment payment has been made.
2. On the other hand, title passes immediately to the customer covering goods bought on charge
account.
3 In the event that the customer fails to meet his payments on the installment plan, the seller may take
possession or "repossession" of the goods.
4. Goods on the installment plan are paid for by means of a series of equal payments.
5. Customers who buy on the installment plan always have to pay a "carrying charge" which actually
includes interest.
6. Goods brought on installment basis generally, on account of the considerable amount involved, are
covered by a written contract of sale, which is not so in the case of charge account.
* Revolving credit plans manifest themselves under a variety of names.
- Most lenders ask a borrower to sign a promissory note.
- The borrower who sign the note is the maker
- A person with a good credit standing may be able to borrow on his signature alone is called signature
or character loan.
- Anyone who sign a note in addition to the borrower to the borrower is called a signer.
- A co-signer is responsible for paying the debt should the borrower fail to do so.
- Anything used as security for a loan is called collateral

- A loan backed by security is called a secured loan.
- Endorser this person becomes responsible for the payment of the loan if the borrower fails to pay.
- Implied - basis of charge account.
- Expressed - promissory note trade acceptance.
- With the mass of people as the main target, through the media of television, radio and newspapers,
messages urging people to BUY NOW and PAY
LATER under the "easy payments and "no money down" schemes have become common place.
- This has lured some of our poor to buy goods with collection being made on a number of bases--daily,
weekly, twice a month or once a month.
Mercantile Credit:
- is equally known as COMMERCIAL CREDIT
- Sometimes, it is also called TRADE CREDIT
- It is granted by manufacturers, wholesalers, and jobbers as an incident of sale.
- Unlike consumer credit which is intended to facilitate the process of consumption, this kind of credit is
designated to INCREASE THE VOLUME OF SALES
- By its very nature, MERCANTILE CREDIT represents an advance to the dealer to be paid in whole or in
part from the funds derived from the sal
CREDIT
- Mercantile Credit: is used in financing producers and dealers rather than in financing the ultimate
consumers; is essential to the manufacturer, the jobber, the wholesaler, and the retailer.
- Retail Credit: used by a consumer to finance purchases which he cannot pay for, until some later date;
confined to persons who are suffering from financial difficulties and thus are not in a position to pay
cash at the time of purchase.
ent form of savings, for it leaves invested funds undisturbed
- Charge Accounts: such accounts eliminate the necessity of securing cash in advance and carrying
around cash when they desire to do shopping.
a. The company may be in financial difficulties and that it is in urgent need for more money
b. The company may wish to expand its business to a greater extent than its line of credit permits
c. A new business may find this the most expedient method of obtaining credit
d. An old, established business may borrow in this way in its desire to discount its current purchases
“NON-NOTIFICATION” PLAN “NOTIFICATION” PLAN the borrower collects his own accounts as usual,
turning the check or other remittance over to the credit company debtors are notified of the
assignment, and payment is made direct to the finance corporation
- is known as that has been introduced in this country through the Philippine
National Bank
- The new lending program for the vendors is made available as additional source of capital of the
market vendors
- The loan may be availed of only by legitimate market vendors and stallholders
- To qualify, he must have a license to operate a market stall, belong to a market vendors' association
and be a market vendor stallholder for at least six months immediately before the filing of the
application
- could be a highly influential factor in determining the volume of sales of the firm
- are usually standardized within a line of business and the nature of competition for many lines
-Bank Credit:
- comprises the aggregate of all the funds advanced in various ways by banks to other members of the
community
eed for a short period to help out the borrower with

his temporary working capital needs.
al purpose is to finance the plating, improvement, and harvesting of

agricultural products
vailed of by manufacturers and public utility firms in the

Philippines
nance the acquisition or improvement of real estate, either

urban or rural
oses. This loan may be used to meet serious

personal obligations, such as those arising from illness, or to buy appliances.
ing Credit Advances: are loans to exporters to finance the processing of export goods prior to
their being shipped to the foreign buyer
half of an importer if, on due date, the importer is

unable to pay for the goods or raw materials he imported.
Investment Credit:
-it consists of advances that have been made to a business enterprise to enable it to purchase or
construct the necessary plant and equipment
- is obtained through the issuance of relatively long-term obligations in the form of promises to pay at a
future time in exchange for the money which is borrowed
- These obligations take the FORM OF BONDS & PROMISSORY NOTES
- Required for 3 Purposes:
1) In order to meet the needs of business enterprises for fixed and working capital
2) To meet the needs of national, provincial, and local governments that wish to undertake projects
requiring an expenditure in excess of their current revenue
3) For the purchase and improvement of real estate
Agricultural Credit:
- Bank on Wheels: it is the important innovation in the banking system in this country; which helps to
implement the Masagana ‘99 program.
1) Financing of the rice and corn production expenses
2) Education of the target farmers in the effective use of more productive rice and corn planting
methods
- Supervised Credit:
 a term now in common use in agricultural production
- Integrated Agricultural
Financing Programs
rate the small farmers from too much dependence on

a single project and orient them to multiple/diversified farming, more than one hundred rural banks
Export Credits:
- is obliged to assume certain credit risks
- Credit Risks: generally characterize all sorts of transactions for which cash is not paid on goods
delivered to the buyer.
MODULE TWO
SOURCES OF CREDIT
1. Identify the different sources of credit
John Stuart Mill, in his Principles of Political Economy, throwing important light on the subject of credit
light on the subject of credit said, among others, the following:
“…though credit though credit is but a transfer of capital from hand to hand, it is generally and naturally,
a transfer to hands more competent to employ the capital more effectively in production.
If there was no such thing as credit, as if from general insecurity or want of confidence, it were scantily
practiced, many persons who possess more or less capital, but who from their occupations, or from
want of the necessary skill and knowledge, cannot personally supervise its employment, would derive
no benefit from it: their funds would either be idle, or would be, perhaps, wasted and annihilated in
unskilled attempts to make them yield a profit. All this capital is now lent at interest, and made available
for production."
Continuing further, he said:
“Capital... forms a large portion of the productive resources of any commercial country; and is naturally
attracted to those producers or traders who, being in the greatest business, have the means of
employing it to most advantage; because such are both the most desirous to obtain it, and able to give
the best security. Although, therefore, the productive funds of the country are not increased by credit,
they are called into a more complete state or productive activity. As the confidence on which credit is
grounded extends itself, means are developed by which even the smallest portions of capital, the sums
which each person keeps by him to meet contingencies, are made available for productive uses."
Such statements serve to draw our attention and serve to emphasize the fact that saving and
investment are done by different groups of people. Purchasing power must be transferred from those
who have less need to those who need it more those who are engaged in productive activities and, as
such, are charged with a responsibility of the highest order, that is, the wise use of such scarce resource.
Credit which is made available through the savings of the various sectors of the economy, in essence,
helps its allocation to its best uses. However, for a credit economy to thrive and attain healthy growth
and development, it is necessary that, not only should adequate safeguards be instituted for the wise
and proper use of credit, but equally import ant is that it should be made available at the time a need
for it arises, in amounts needed, and of course, at a cost considered reasonable and fair to the user.
Financial Intermediaries
While lenders and borrowers may be brought together through credit instruments and credit markets,
in many instances credit transactions are consummated through credit institutions which serve as
intermediaries between lenders and borrowers in these markets. Credit institutions, in general, perform
the following functions: (1) to pool the savings of the lending customers, (2) to invest these funds
financially on the basis of careful investigation and analysis of credit, (3) to diversify risk to a degree
unattainable for individual investors, (4) to transform short term into long term funds through an
expedient and careful staggering of maturity dates, and (5) to perform insurance and trust e functions.
However, not all credit institutions perform all the above-enumerated functions. Savings banks and
commercial banks, for instance, are often limited by legal restrict- ions from buying industrial stock.
The following are among the most important sources of credit in this country.
Financial Institutions
The number of financial institutions is numerous just as they are varied in kinds and in scope ranging
from pawnshops to such credit institutions as investment houses.
Financing Companies.
As defined under the "Financing Company Act" (Republic Act No: 5980), financing companies are
corporations or partnerships, (except those regulated by the Central Bank of the Philippines, the
Insurance Commissioner and the Cooperatives Administration Office, now the Bureau of
Cooperatives and Community Development), which are primarily organized for the purpose of extending
credit facilities to consumers and to industrial, commercial, or agricultural enterprises, either by
discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts,
leases, chattel mortgages, or other evidences of indebtedness, or by leasing motor vehicles, heavy
equipment and industrial machinery, business and office machines and equipment, appliances and other
movable property.
"Credit" shall mean any loan, mortgage, and deed of trust, advance, or discount, any conditional sales
contract, any contract to sell, or sale or contract of sale of property or service, either for present or
future delivery, under which, part or all of the price IS payable subsequent to the making of such sale or
contract; any rental-purchase contract; any option, demand, lien, pledge, or other claim against, or for
the delivery of, property or money, any purchase, or other acquisition out of the foregoing, and any
transaction or series of transactions having a similar purpose or effect.
Assignment of Credit
In the case of assignments of credit or the buying of instalment papers, accounts receivable, and other
evidences of indebtedness by financing companies, the purchase discount, exclusive of interest and
other charges, shall be limited to fourteen percent (14%) of the value of the credit assigned or the value
of the installment papers, accounts receivable and other evidences of indebtedness purchased based on
a period of twelve (12) months or less, and to one and one-sixth percent (1-1/6%) for each additional
month or fraction therefore in excess of twelve months, regardless of the terms and conditions of the
assignment or purchase.
In the case of assignment of credit or the buying of installment papers, accounts receivable and other
evidences of indebtedness pertaining to appliances, furniture, and office equipment, the purchase
discount, exclusive of interest charges, shall be limited to eighteen percent (18%) of the value of
maturity of the credit assigned or receivable purchased, based on a period of twelve months or less, and
to one and one-half per cent (1-1/2%) for each additional month or fraction thereof in excess of twelve
months, regardless of the terms and conditions of the assignment or purchase. In the case of factoring
accounts receivable or other evidences of indebtedness, the discounting rate that can be charged,
exclusive of interest and other charges, shall not exceed two per cent (2%) of the value of the credit
assigned or receivable purchased for every thirty days, regardless of the terms and conditions of the
factoring companies.
Philippine Finance Companies.
In response to the needs of business and industry in particular and of some individuals in general, a
number of corporations have been organized in this country aimed purposely to provide a wide
complement of corporate financing services, such as: machinery and equipment financing and leasing;
accounts receivable and inventory financing; land development and real estate financing; commercial,
industrial, and agricultural loans; motor vehicle financing sales and installment financing; small and
medium business financing, import- export financing; money market placements and many others.
Financing companies usually rely on stockholders' funds and cash generated from their money market
activities. In general, finance companies are authorized to finance consumer durables under installment
payment plans. They usually extend short-term credits to manufacturers and merchants for inventory
and similar others. In an effort to regulate the activities of these corporations in such a way that their
operations will be placed on a high plane worthy of trust and respect, a number of them have grouped
themselves into an association which shall superintend their ranks in keeping with a code of ethics
which they have formulated, known as the Philippine Association of Finance Companies.
Investment Houses
Investment houses, invariably termed as investment banks, are concerned chiefly with the transfer of
capital from those that have more funds than they actually could use to those who need them for
utilization in long-term projects or activities. Investment banking is a recent addition to the financing
network. It belongs to the non-bank sector of the system and gathers funds for its lending operations
from sources other than deposits. Not being a bank in the real sense of the term, it is not allowed to
collect deposits. The establishment and operation of investment houses in this country are governed by
Presidential Decree No. 129, as amended by Presidential Decree No. 590, otherwise known as the
Investment Houses Law. Investment houses shall be organized in the form of stock corporation and shall
have a minimum paid-in capital of twenty million (P20, 000,000) pesos. They shall coordinate their credit
policies with the general credit policies of the Monetary
Board of the Central Bank of the Philippines.
Investment houses shall be subject to such regulations of the Central Bank or non-bank financial
intermediaries as may be promulgated pursuant to Section 2-B of Republic Act No. 337 (General
Banking Act), as amended. The regulations may include, but not limited to (a) minimum size of fund
acceptance and receipts, (b) methods of marketing and distribution, (c) terms of placement and
maturities, and (d) uses of funds as may be modified by the Monetary Board insofar as they apply to
investment houses.
The Monetary Board may, at its discretion, determine whether investment houses may be permitted to
perform quasi-banking functions as defined in Section 2-D, subsection (b) of Republic Act No.
337, as amended. Whenever, the Monetary Board authorizes an investment house to engage in quasi-
banking functions, the Board may subject investment houses to further regulations, which may include,
but not necessarily be limited to: (a) liquidity reserve requirements (b) capital-to-risk assets ratios; (c)
interest rate ceilings; and (d) such other constraints as the Board may deem necessary.
Investment Houses in the Philippines.
The emergence of investment houses (investment banking) in the financial system ushered in a new era
in capital resources intermediation. Investment houses added new dimensions to the already growing
sophistication of capital mobilization. The appearance of investment houses or quasi-banks in the funds
market indicates that the country is indeed on the march to progress. As may be gleaned from previous
discussions, they are what are termed as money middlemen since they act as middlemen between
individuals' or institutions with money to invest and people or institutions who need funds to put up a
business enterprise or to expand an existing industry.
Investment houses do this by underwriting, investing in loans and equity, engaging in money market
operations, and issuing its own promissory notes. In addition, investment houses develop industrial
projects, industry studies, and offer advisory services. Through its varied functions, investment houses
convert available savings from investments and facilitate the flow of needed capital. The generated
funds are directed to corporate expansion and growth and consequently to productive projects
contributory to economic development.
Underwriting.
Through its underwriting services, a role given solely to investment houses, the sale and distribution of
government securities are guaranteed.
Underwriting by an investment house may either be on a "best-effort" or "firm" basis. On a best effort
basis, an investment house sells corporate securities up to a volume that is actually sold publicly. After a
certain period of time, securities that remain unsold are returned to the issuing company and the
investment house pays the commission for selling the shares of stocks. On a firm basis however, the
issuing company is assured that all shares it is offering for sale will be bought.
This is because the investment house guarantees the share of the total number of stocks being offered
and for which it has contracted to sel. If any of the shares offered for sale are not bought, the
investment house will have to buy them.
Money Market
To enhance its fund resources, investment houses engage in money market operations. It acts as dealer
or broker who may directly buy short-term financial notes or securities for the account of a client or act
as an intermediary between the buyer and seller of money market instruments.
Through this service, an investment house performs a very important money market function: it
establishes a purchase price and an offering price. This assures a buyer that he is buying money market
instrument at the lowest price obtainable and the seller that he is selling at the best price available.
Local investment banking activities started in 1960 with the establishment of the House of
Investment following the enactment of the Investment Company Act in 1963. The Private
Development Corporation of the Philippines (PDCP) was subsequently put up followed by the
establishment of Ban- com Development Corporation (BDC) and the CCP Securities Corporation, now the
Ayala Investment and Development Corporation (AIDC).
Commercial Banking
The establishment of the "Obras Pias" during the period of Spanish rule is not without significance.
It could be rightly considered as the precursor of the banking system of this country. Obras Pias were
the first credit institutions which were organized in this country as early as the latter part of the 16th
century. Pious Catholics, obsessed with the desire to gain indulgence by way of doing charitable work,
furnished the capital of the Obras Pias.
The year 1851 marked an important event in our economic history since it was in that year that the first
commercial bank was established - the "Banco Español-Filipino" which has evolved to the present Bank
of the Philippine Islands. This was followed by the establishment of the Chartered
Bank of India, Australia and China in 1873 and the Hongkong Shanghai Banking Corporation in
1875.
Since then, more commercial banks were established in this country. However, the operations of many
of them were temporarily suspended during the Japanese occupation, but revitalized when liberation
came. Post-war banking in this country was highlighted by the creation of the
Rehabilitation Finance Corporation which absorbed the government-owned Agriculture and
Industrial Bank and provided financial aid in rehabilitating the country and in broadening the economic
structure.
Commercial Banking Corporation
In line with the provision of the General Banking Act, a commercial banking corporation shall be any
corporation which accepts or creates demand deposits subject to withdrawal by check.
A commercial banking corporation, in addition to the general powers incident to a corporation, shall
have all such powers as shall be necessary to carry on the business of commercial banking, by accepting
drafts and issuing letters of credit, by discounting and negotiating promissory notes, drafts, bills of
exchange, and other evidences of debts; by receiving deposits; by buying and selling foreign exchange
and gold or silver bullion, and by lending money against personal security or against securities consisting
of personal property or first mortgages on improved real estate and the insured improvements thereon.
No loan on the security of real estate shall have a maturity in excess of fifteen years, except loans for
home building or home development which may have maturities up to twenty years. Loans on real
estate security of over one year maturity for real estate, personal, and commercial purposes, or for the
refinancing of similar loans, shall not exceed fifty per cent (50%) of the total savings and time deposits of
the bank. Aptly observed, commercial banks are institutions which extend credit out of funds which they
own, borrow, or create. The most characteristic feature of commercial banks, which distinguishes them
from other private credit institutions, is their ability to create money. Commercial banks hold the
checking accounts of their customers. These accounts are payable on demand and subject to transfer by
check. Since demand deposits are money, the commercial banks can create money by creating claims
(demand deposits) against themselves in favor of borrowers or of sellers of securities.
Other credit institutions, aside from the government owned, cannot create money because they do not
hold checking accounts. Savings banks, for instance, depend on their investment operations almost
entirely on the savings of their depositors. When they lend or invest, they do not add to total purchasing
power because the purchasing power of their lending customers is temporarily reduced. In other words,
savings banks act as intermediaries only, but not as supplier of additional money. Commercial banks act
in both capacities.
Total Liabilities
Except when the Monetary Board may otherwise prescribe, the total liabilities of any person, company,
corporation or firm, to a commercial banking corporation, for money borrowed, excluding (a) loans
secured by obligations of the Central Bank of the Philippine Government, (b) loans fully guaranteed by
the government as to the payment of principal and interest, (c) loans to the extent covered by hold-out
on, or assignment of, deposits maintained in the lending bank and held in the Philippines, (d) loans and
acceptances under letter of credit to the extent covered by marginal deposits, and (e) other loans or
credits which the Monetary Board may, from time to time, specify as non-risk assets, shall at no time
exceed fifteen per cent (15%) of the unimpaired capital and surplus of such bank. The total liabilities of
any borrower may amount to a further fifteen percent (15%) of the unimpaired capital and surplus of
such banking corporation provided the additional liabilities are adequately secured by shipping
documents, warehouse receipts or other similar documents transferring or securing title covering
readily marketable, non-perishable staples which staples must be fully covered by insurance, and must
have a market value equal to at least one hundred and twenty-five per cent (125%) of such additional
liabilities.
Line of Credit
Not infrequently, businessmen, in anticipation of a need for funds in the future, may apply with their
banks for a line of credit. With the approval of such a re quest, businessmen can know in advance how
much they can borrow, should the need arise from a particular bank with the support of a collateral. As
a policy, the bank will approve a line of credit only to the amount it feels it can safely ex tend to the
applicant on the basis of its knowledge of the firm's business and strength, such as: the size of the
company, its past and anticipated earnings, current and anticipated business conditions and other
important related factors in the grant of credit.
A line of credit may thus be described merely as an "advance commitment by the bank to lend up to a
certain indicated maximum." While the line is open, the company must keep the bank informed of its
operations and financial conditions and must continue to maintain its deposit account there.
Also, to keep the line open, it is necessary that the company must use some of it, for it is logical that it
can ill afford to maintain unused loan commitments indefinitely. A company engaged in the
manufacture of shoes which has a line of credit of P300, 000 may actually borrow only of P100,
000 or less, if that is all that it needs, although it knows that its request for an additional amount will be
honored at any time in the future as long as conditions do not undergo any drastic change.
Thus, if the financial position of the company deteriorates, the amount may either be reduced sharply or
cancelled by the bank. Clearly then, a line of credit is not a contractual obligation on the part of the bank
that it should honor at all times and by all means. At best, it represents merely a moral commitment on
the part of the bank based on certain assumed conditions.
As a general practice, the bank requires all loans made under the line of credit to be repaid off within
the period of one year and, moreover, the borrower must remain free of debt for at least 30 days.
Viewed from the part of the businessmen, a line of credit serves as some sort of reserve which helps
strengthen their financial standing.
Loan Agreements
It is quite a common practice among big business concerns to enter into formal loan agreements with
their banks.
The agreement consists of a stipulation of the maximum amount which the business entity can borrow,
the interest rate that will be imposed on all loans that are made under the agreement as well as the
requirements which the borrowing entity must meet. Such agreement binds the bank to grant loans to
the borrowing entity at any time during the life of the agreement contingent on the ability of the
borrower to meet the conditions stipulated in the agreement.
The loan needs of some business entities are so uncertain, not to say at the same time very irregular,
that the use of line of credit is deemed impractical. Hence, the need for loan agreements. As in a line-of-
credit customer, the business firm must maintain a deposit balance with its bank. Loan agreements may
provide for (a) revolving credit, (b) a term loan, or (c) a stand-by commitment.
Under revolving credit, a business enterprise may finance its current needs by borrowing from the bank
on a short-term basis, up to a certain specified maximum amount. The borrower is privileged to borrow,
repay and borrow again during the specified period, generally from two to five years.
For purposes of illustration, let us assume that the bank has approved a request for a revolving credit by
a manufacturing concern covering a period of three years in the amount of P750, 000.00.
The said manufacturing concern could obtain loans from the bank for as many times it may deem
necessary during the period of three years provided that the total amount of the loans does not exceed
P750, 000.00. If the interest imposed by the bank in accordance with the loan agreement is
10% then, all loans would be made subject to the said rate.
Term loans are granted by commercial banks to finance the acquisition of facilities, such as machinery
and equipment by manufacturers; for the purchase of furnishings of hotels, restaurants, theaters, and
others; and also for office equipment of professionals. Such loans are intended for working capital
purposes and not for permanent capital. The conditions of the term loans are enumerated in a formal
agreement between the bank and the borrower with a maturity of usually not less than two (2) but not
more than ten (10) years with the obligations repayable in installments.
There is a school of thought which expresses the belief that the term loan is actually a more realistic
arrangement compared to the older practice of granting short-term loans which are renewed from time
to time per understanding between the bank and the borrowers.
In the practical case of a stand-by commitment, the corporation is conferred the right of securing a term
loan under certain specified terms for current needs or for some other purposes within the time agreed
upon.
Savings and Mortgage Banking
The growth and development of savings banking in this country is quite phenomenal. From the
establishment in. 1882 of the first savings bank, the Monte de Piedad (originally called the Monte de
Piedad y Caja de Ahorros de Manila), there has been observed a mushrooming in the number of such
banks which continue to serve as an effective arm of the financial system by helping to accumulate the
deposits of average wage-earners and channeling them in productive activities which, in part, explains
the increasing pace in the country's economic development.
Savings and Mortgage Bank, defined savings and mortgage bank shall be any corporation organized for
the purpose of accumulating the savings of depositors and investing them, together with its capital, in
bonds or in loans se cured by bonds, real estate mortgages, and other forms of security, or in loans for
personal finance and long-term financing for home building and home development.
Loans and Investments.
The loans and investments of savings and mortgage banks shall be limited to the following:
a. Loans with the security of their own savings deposit obligation or of mortgage and chattel mortgage
bonds which they have issued, or with the security of savings deposit obligations of other banks doing
business in the Philippines: Provided, That clean loans for personal and household finance may be
granted, which shall not exceed the borrower's deposit in the bank plus his four months’ salary or
regular income in the case of permanent employee or wage earner, subject to such regulations as the
Monetary Board may prescribe:
b. Medium-term loans of the following types:
(1) Loans for the encouragement of cattle, carabao, and other livestock breeding, with maturities up to
three years. Such loans shall be repaid in regular installments and shall have as principal security a lien
on the animals, the bank being empowered, however, to require, in addition, real estate and other
securities to its satisfaction: Provided, however,
That the livestock need not secure the loan if the borrower constitutes a lien or mortgage on real estate
property seventy per cent (70%) of the appraised value of which equals or exceeds the amount of the
loan granted. The amount of any such loan shall not exceed fifty percent (50%) of the commercial value
of the animals at the time the loan is made, but similar additional loan up to fifty per cent (50%) may be
made as the value of the stock increased.
(2) Equipment loans, with maturities up to five years, for the acquisition of fertilizers and any
instruments, machinery and other movable equipment, used in the production, processing,
transformation, handling or transportation of agricultural and industrial products. Such loans shall
constitute a first lien on the assets acquired with the proceeds of the loan, the bank being empowered,
however, to require as additional security a lien or mortgage on other properties of the debtor:
Provided, That the lien on the equipment or the assets acquired out of the proceeds of the loan need
not be constituted if the borrower executes a mortgage on real estate property seventy percent (70% )
of the appraised value of which equals or exceeds the amount of the loan granted. c. Mortgage loans,
with maturities up to ten years, for the conservation, enlargement, improvement of productive
properties, or the acquisition of machinery, or other fixed installations. Such loans shall be secured by a
first mortgage.
d. Real estate mortgage loans with maturities of not more than twenty years, for the following purposes
only:
(1) For the construction, acquisition, expansion or improvement of rural and urban properties;
(2) For the refinancing of similar loans and mort gages; and
(3) For such other purposes as may be authorized by the Monetary Board.
e. High-grade bonds and other evidences of indebted- e. ness, and loans against such obligations;
f. Drafts, bills of exchange, acceptances, or notes arising out of current commercial transactions which
are endorsed or accepted by any solvent bank operating in the
Philippines. The aggregate investments in this class shall not exceed ten per cent (10%) of the total
assets of the bank.
g. Collateral trust bonds or notes, or obligations by such bonds or notes, secured by a first mortgage or
by a participating interest in a first mortgage on improved urban or rural real estate in cities and
municipalities of the Philippines, provided that such bonds and notes shall not exceed fifteen percent
(15%) of the net worth of the bank, the total equity investment of the bank in any single enterprise shall
remain a minority holding in that enterprise, except where the enterprise is not a financial intermediary,
and the equity investment in other banks, if allowed by the Monetary Board, shall be subject to the
same limitations imposed on similar investment of commercial banks and shall be deducted from the
investing bank's net worth for the purposes of computing the prescribed ratio of net worth to risk-
assets. Equity investments shall not be permitted in non-related activities.
Any savings and mortgage bank, existing or doing business on the date of the approval of the Act
(General Banking Act was approved on July 24, 1948) and engaged in the business of lending money
against the pledge of jewelry, precious stones, and articles of similar nature, may continue to engage in
such business. The beneficiary of this provision of law is the Monte de Piedad which has been lending
money to its customers against jewelry that may be pledged with the bank which, briefly stated, is an
acquired right and as such cannot be diminished or removed without adversely affecting the rights of
said bank.
Rural Banks rural bank (the term "rural" meaning ""open country") is just another name for agricultural
bank.
As conceived and established under the Rural Bank's Act (Rep. Act No. 720, as amended), a rural bank is
designed to provide the credit needs of borrowers in the rural areas within their easy reach and access
and at reasonable terms.
The birth of rural banks marked an important development in our banking system. In fact, its
establishment and operation carry with it far-reaching significance. Be it recalled that during earlier
years, the very few banks in this country struck awe, if not apprehension, in the hearts of many of those
unfamiliar with their true functions. Those with credit needs were forced to go either to the provincial
capital where a bank existed, usually a branch of the Philippine National Bank, which rendered the task
quite difficult such that many were forced to approach the nearest money lender who charged usurious
rates of interest.
Briefly observed then, the establishment and operation of rural banks served two-fold objectives:
First, they provide the answer to the credit needs of borrowers in rural areas. Second, they help
minimize if not totally prevent said borrowers from becoming victims of usurious money lenders.
And a third objective, which is not quite apparent, may be cited: To provide the people of the rural
communities, with the means of facilitating and improving their productive activities and, moreover, to
encourage cooperatives.
Financial Assistance
In order to insure balanced economic growth and expansion in the rural areas, rural banks subject to the
limits and conditions imposed by the Monetary Board may devote a portion of their loanable funds to
meeting the normal credit needs of small business enterprises and of essential rural enterprises or
industries. Thus, rural banks are found engaged in the grant of medium and long term loans primarily
intended for the purpose of meeting the normal credit needs of any small farmer or farm family owning
or cultivating in the aggregate not more than fifty hec- tares of land dedicated to agricultural production
as well as the normal credit needs of cooperatives and small merchants.
Loans may be granted by rural banks on the security of lands without Torrens title where the owner of
private property can show five years or more of peaceful, continuous and uninterrupted possession in
the concept of an owner; or of portions of land estates or other lands administered by the Bureau of
Lands that are covered by sales contracts and the purchasers have paid at least five years installment
thereon, without the necessity of prior approval and consent by the Director of Lands; or of portions of
other estates under the administration of the Land Authority or other government agency which are
likewise covered by sales contracts and the purchasers have paid at least five (5) years installment there
on, without the necessity of prior approval and consent of the Land Authority or corresponding
governmental agency; or of homesteads or free patent lands pending in the issuance of titles but
already approved.
Apart from such financial assistance, the rural banks also extend technical assistance to small business
enterprises or farm operators on the proper utilization of credit for production and marketing in
coordination with supervisory and other involved government agencies.
Rural Banks in Economic Development
The rural banking system has involved itself in the task of accelerating the tempo of economic
development through its efficient and effective role in providing adequate and timely credit support to
the government programs, like the agrarian reform, food production, cooperative movement, cottage
and small-scale industries development through its integrated approach.
The rural banking system is also playing other roles in the country's economic development. Under its
program, it aims to achieve the maximum utilization of wealth through dispersal from the urban to rural
areas and maintain agro- industrial development of the country and continuing economic expansion in
the countryside.
Other Sources
Equally important and of recent origin, as a source of credit, are private development banks.
In line with the declared policy of Congress to promote and expand the economy of the country
pursuant to the socio-economic program of the Government, as well as to expand industrial and
economic growth, private development banks were conceived and their existence made a reality under
Republic Act No. 4093.
Organized as a stock corporation with a paid-up capital of not less than P4, 000,000.00 for class
A, P2, 000,000.00 for class B, and P1, 000,000.00 for class C, 75% of its loanable funds shall be invested
in medium and long term loans for economic development purposes. In no instance, however, shall a
private development bank invest more than 25% of the loanable funds in short term loans for
miscellaneous purposes. Thus, as could be observed, the structure of the loans of the private
development banks suggest that the system, unlike savings, commercial and rural banks, are essentially
engaged in development financing where the periods of re payment are much longer. It is probably for
this reason that the Development Bank of the Philippines was given authority to match the capital of
private development banks on a one to-one basis. To augment and supplement the capital of any
private development bank, the Development Bank of the Philippines shall be permitted to extend to the
private development banks a loan or loans from time to time repayable in ten years with interest at the
rate that may be agreed upon against security which may be offered by the private development bank
or any stockholders of the private development bank. The Veterans Bank, on the other hand, in
accordance with its charter, is authorized to grant loans for the establishment, rehabilitation, expansion
or development of any agricultural, commercial, or industrial enterprise, or personal services including
public utilities, as well as make loans on, or to discount notes and/or receipts secured by, harvested
stored crops. However, no loans on the security of such harvested and stored crops shall exceed 80% of
the market value thereof on the date of the loans. The crops so mortgaged shall be insured by the
mortgagor for the benefit of the
Veterans Bank for their entire market value at the discretion of the Board of Directors. In the event that
the value of the crops given as security diminish, the mortgagor shall furnish the Veterans
Bank with additional security or refund such part of the loan as the Bank may deem necessary.
Such loans are for short term maturity, that is, they shall not exceed one year, subject to extension, in
the discretion of the Board of Directors.
The Veterans Bank is also empowered to grant loans to agriculturists in instalments, on standing crops
of the natural products of the Philippines such as palay, copra, sugar, tobacco, corn, abaca, and maguey
of not exceeding 70% of the estimated value of such crops. Before granting such loans, the Veterans
Bank may require additional security in the nature of mortgage on landed estate duly registered in the
name of the debtor, or chattel mortgage including those upon live-stock, machineries and agricultural
implements or personal bonds with sufficient surety or sureties satisfactory to the bank. Moreover, the
bank is authorized to make advances or discount paper for agricultural, manufacturing, industrial or
commercial purposes.
The aggregate amount of loans for any single industry shall at no time exceed 20% of the Bank's lending
capacity.
Land Bank
As provided under Section 74 of Republic Act No. 3844, the Land Bank of the Philippines, better known
as the Land Bank for short, is intended to finance the acquisition by the Government of landed estates
for division and resale to small landholders as well as the purchase of the landholdings by the
agricultural lessee from the landowner.
The Land Bank, whose powers and functions are to be exercised and directed by the Board of
Trustees, subject to the approval of the Monetary Board of the Central Bank, may issue bonds,
debentures, and other evidences of indebtedness at such terms, rates and conditions as the Bank may
determine up to an aggregate amount not exceeding, at any one time, five times its unimpaired capital
and surplus. Such bonds and other obligations shall be secured by the assets of the Bank and shall be
fully tax-exempt both as to principal and income. Said income shall be paid to the bondholder every six
months from the date of issue. These bonds and other obligations shall be fully negotiable and
unconditionally guaranteed by the Government of the Republic of the Philippines and shall be
redeemable at the option of the Bank at or prior to maturity, which in no case shall exceed 25 years.
These negotiable instruments of indebtedness shall be mortgage able in accordance with established
banking procedures and practices to government institutions at not to exceed 60% of their face value to
enable the holders of such bonds to make use of them in investments in productive enterprises.
The bonds issued by the Land Bank may be used by the holders thereof and shall be accepted in the
amount of their face value for any of the following purposes:
1. Payment for agricultural lands or other real properties purchased from the Government;
2. Payment for the purchase of shares of stock of all or substantially all of the assets of
government owned or controlled corporations;
3. Surety or performance bonds in all cases the Government may require or accept real property as
bonds; and
4. Payment of reparation goods.
Contrary to what the average student would like to believe, the Land Bank does not only help finance
the acquisition of farm lands by tenants from their landlords under the Agrarian Reform
Program of the government but moreover it is likewise engaged in another worthy undertaking helping
implement the "Study Now, Pay Later Plan" instituted by Presidential Decree No. 932, otherwise known
as the Educational Assistance Act of 1976.
Sales Finance Companies

The sales finance company is a private corporate venture in the financing of distribution through the
purchase of vendors' installment sales contracts. Although its most familiar activity is in the financing of
automobile purchases by consumers, much of its business volume is in financing the purchase of
automobiles by dealers from the manufacturers. As may be observed, sales finance companies do not
confine themselves to the transportation industry but at the same time furnish capital to vendors of all
types of goods sold on installment. In more recent times, they have also somewhat diversified their
business by making consumer cash loans.
Aptly pointed out, the sales finance company is a general business corporation financed by private
capital. It is granted no special prerogative or privilege by the state. It merely exercises the general
business right of buying notes contracts, leases, chattel mortgages, and other evidences of indebtedness
arising out of one or more of the steps of distribution and sale of durable commodities. Apart from
engaging in automobile transactions, sales finance companies do have a substantial volume of business
in their commodities, such as refrigerators, income-producing machinery, household and personal
goods, home improvements and other utilitarian articles.
With respect to their business which relates to automobile transactions, among the practices adopted
by sales finance companies for their protection are:
a. The finance companies, during the life of the transaction retain legal title to the merchandise which
is the underlying security of the note, conditional sales contract, or chattel mortgage.
b. The finance companies' investment in the purchase of such paper is planned so that the amount of
money due from a dealer or consumer at any given time will be less than the resale value of the
merchandise if repossession of the chattel should become necessary.
c. The finance companies place fire, theft, and collision insurance under standard policies protecting the
equity of parties at interest, and the cost is included in the service charge of the finance companies.
Factoring
Factors perform the financial service known as factoring, which consists of the purchase of accounts
receivable outright without recourse to the seller for credit losses. The factor notifies the customer of
the assignment of the accounts receivable and collects in its own name. Factoring is being used by an
increasing number of firms in more lines of business. Factors extend their services to such varied
industries as textiles, coal, glass, lumber, paper, petroleum products, electronics, and plastics.
The factor’s commission is based on the averaged size of the invoices, the company’s sales volume, and
the amount of credit investigation required.
OTHER SOURCES OF CREDIT
− Individual money lender who may lend his surplus to those in need so that it will bring some income to
him; no collateral is required on the part of borrowers to secure the loan of whatever sum money.
− The money lender may be constrained to collect a very high rate of interest over and above the legal
one in order to protect his personal interest and thus become what is known as “loan-shark” The
unlicensed money-lender, who is often referred to as a
“loan-shark”, does a thriving business in the grant of loans at very exorbitant rates of
Store
− Easily the biggest source of merchandise credit in the Philippines is the retail store, more particularly
known as the “sari-sari” store. This becomes evident when one takes into account the number of such
sari-sari stores in every barangay of our communities.
These stores cater to the everyday needs of the consumers, which explain their large numbers. Such
stores are run by Filipinos and aliens alike, although after May 15, 1954, in accordance with the
provisions of the Retail Trade Nationalization Law, no alien is permitted to engage in this type of
business.
− The present-day pawnshops owe their origin from the Montes Pietatis which were established by
Franciscans (Friar Minor as they were invariably called then) in Italy.
The terms mons referred to any form of capital accumulation and pietatis from the Latin “pietas”
meaning pious. As such, montes pietatis consisted of charitable funds from which loans came from,
which were exempted from interest, but secured by pledges.
Such loans were granted to the poor.
− (According to Lien Sheng Yang, a Harvard professor of Chinese history, pawnshop is the “oldest credit
institution in China.” In the Philippines, pawn broking is also one of the oldest credit institutions and is
believed to have been introduced by the Spanish friars when we were under the Crown of Spain. It may
be interesting to point out, in this connection, that the oldest saving bank, the Monte de Piedad, was
granted the privilege of lending money against pledge of jewelry.)
− Commercial banks are engaged in the grant of loans not only to businessmen, but also to individuals
for personal purposes. Generally speaking, in the case of personal loans, borrowers are required to
furnish the bank with the written guarantee of two or more responsible persons that the contract will
be faithfully performed. These guarantors of the credit of the borrower are called “co-makers”. Legally,
they can be held for principal and interest due, in the event that the borrower for whom they acted as
guarantors fails to discharge his obligations incurred with the bank. As a common banking practice, a
charge of 6 to 12% of the entire loan is deducted in advance to represent the interest.
− The commercial paper house is a financial institution that brings together the buyer and seller of
short-term commercial paper, that is, the lending institution and the borrowing business enterprise. The
commercial paper includes notes, bankers’ acceptances, trade acceptances, and foreign exchange bills.
A commercial paper house also buys issues outright at a discount and resell the notes at a slightly higher
price to investors. Most of the paper bought by a commercial paper house takes the form of unsecured
single -
− Since savings banks accumulate the small savings of depositors, such accumulated funds are in turn
invested in bonds or in loans secured by bonds, real estate mortgages, and other forms of security. In its
broadest meaning, the term savings banks include mortgage banks as well as savings and loan
associations. Savings and loan associations are established on the principle of cooperation.
− In the rural areas of the Philippines, rural banks provide the chief source of credit especially for those
engaged in agriculture who need these facilities badly. Such type of banks were unknown in this country
prior to the enactment of RA 720, known as the
Rural Banks Act.
− The growth and development of these banks attest to the pressing need of the people in the rural
areas for loanable funds. Undoubtedly, the existence of rural banks in the towns and communities has
greatly minimized the existence of usurious practices of some money lenders, which has victimized our
poor people who cannot avail themselves of the credit facilities which may be offered by commercial
and savings banks because of certain requirements imposed by them.
− Like those of rural banks, development banks from an important part of our banking system extending
the necessary fund for purposes of hastening development. They have been largely responsible for the
birth and development of certain industries that are now quite common on the Philippine scene.
− Investment banks, at times termed as investment houses, bridge the gap between those who have idle
funds not knowing where to invest them and those in dire need of such funds. As sources of credits,
they help raise the needed funds that are not easily procurable elsewhere for use because of the
sizeable amounts involved and the length of time for their use.
− The funds provided by investment banks are important not only to entrepreneurs, but to government
as well, which requires huge expenditures to support the various economic projects that are part of its
program.
− Another source of credit are savings and loan association which may be described as “that corporation
engaged in the business of accumulating savings of their members as stockholders, and using such
accumulations, together with their capital in the case of stock corporations, for loans and / or
investments in the securities of productive enterprises or in securities of the Government, or any of its
political subdivisions,
− As an industry, it shares with government the universal goal of achieving a strong and healthy financial
system. Given a conducive regulatory environment, finance companies can effectively mobilize
resources needed for productive investments. They have developed into a major source of funds for
consumer, sales and commercial financing. Finance companies may be divided into three categories:
1. The installment sales finance companies-discount consumer installment notes arising through the sale
of merchandise
2. The consumer finance companies-engaged in lending cash directly to the consumer
3. Commercial finance companies-which through various types of loans serve business and industry
Credit Unions
Credit unions are corporate organizations which lend savings of members to some of the members of
the group. However, in order that credit unions can be successfully operated, they should consist of
closely knit, cohesive, natural groups of employees with low labor turnover.
Advantages
1. Low cost of operation, ordinarily, the office space for such purpose is donated by the management
2. Losses are very small in view of the fact that there exists an intimate relationship among all the
members of the credit union
3. Rates charged for interest by credit unions are very much lower than those charged on similar loans
by commercial lenders
4. Member-borrowers also become entitled to the receipt of patronage dividends when the same is
distributed by the credit union
− The business of insurance companies is to enter into insurance contracts with those who wish to
provide for such contingencies as death or fire. They receive premiums and pay out money on the
occurrence of the particular contingencies covered by the contracts.
Insurance companies cannot, therefore, be regarded as financial institutions per se, like banks. They are,
however, important participants in the money and capital markets, because they must accumulate
insurance premiums to build up funds to meet policy claims, and they must meanwhile employ these
funds in loans and investments. Thus, their financial functions are a necessary consequence of their
proper business of insurance.
- Government Service Insurance System
- Social Security System
- Industrial Guarantee Loan Fund / Agricultural Guarantee Loan Fund
-Ibig Fund - Kabuhayan at

Kaunlaran) - established as a priority program under EO
715 on August 6, 1981 is intended to involve the whole citizenry and calls for the mobilization of the
people to direct their creative energies and resources toward productive participation in development.
MODULE 3
THE CREDIT PROCESS
1. Apply the Cs of Credit: Character, Capacity to pay, Condition, Capital and Collateral in credit
processing and;
2. Familiarize with the various credit documents and agreements
The Customers- Credit Collection
Manage your finances
Accounting for revenue and expenses can help keep your business running smoothly. Make sure you
maintain proper bookkeeping and have a basic knowledge of business finances.
Start with a balance sheet
The balance sheet is the foundation of managing your finances. It operates as a snapshot of your
business financials. It helps you keep track of your capital and provide a cash flow projection for future
years.
A balance sheet will help your account for costs like employees and supplies. It will also help you track
assets, liabilities, and equity. You can get insights by separating and analyzing segments of your
business, like comparing online sales to face-to-face sales.
Cost-benefit analysis (CBA)
Looking closely at money-in and money-out helps maintain a sustainable balance between profit and
loss. From development and operations to recurring and nonrecurring costs, it’s important to categorize
expenses in your balance sheet. Then, you can use a cost-benefit analysis to weigh the strengths and
weaknesses of a business decision, and put potential recurring benefits and cost reductions in context.
A CBA is a technique for making non-critical choices in a relatively quick and easy way. It simply involves
adding money in benefits and money in costs over a specified time period, before subtracting costs from
benefits to determine success in terms of dollars. This can come in handy with hiring another employee
or an independent contractor.
For example, let’s say you’re deciding whether to add outdoor seating for your sausage themed
restaurant, Haute Dog. You estimate outdoor seating would add $5,000 in extra profit from sales each
year. But, the outdoor seating permit costs $1,000 each year, and you’d also have to spend
$2,000 to buy outdoor tables and chairs. Your cost-benefit analysis shows that you should add outdoor
seating, because the new benefits ($5,000 in new sales) outweigh the new costs ($3,000 in permitting
and equipment expenses).
Pick a method of accounting
Businesses often use either the accrual or cash methods of recording purchases. The accrual method
puts transactions on the books immediately upon completing the sale. The cash method only records
this once payment has been received. For example, if you make a sale in January and receive the $200
payment in February, an accrual method would allow you to record that on January’s books, while the
cash method would require that payment to land on February’s books.
Method Pros Cons
Accrual -Creates immediate snapshot.
-Can reduce tax burden.
-More complex to manage.
- Potentially deceiving figures.
Cash -Shows cash flow clearly.
-Easier to understand
- Limits predictive value
-Less long-term clarity
Generally Accepted Accounting Principle (GAAP)
There are many strategies for preparing financial statements for a small business. Generally accepted
accounting principles, known as GAAP or “Gap,” provides a common a way to standardize financial
reporting using the accrual method. Private companies aren’t required to follow GAAP. The Financial
Accounting Standards Board (FASB) maintains GAAP in the United
States.
Get accounting help
You might want to get help with your accounting. Consider hiring a certified public accountant
(CPA), bookkeeper, or using an online service.
A CPA will typically cost more than online services, but can normally offer more tailored service for your
specific business needs. A bookkeeper can provide basic day-to-day functions at a lower cost, but won’t
possess the formal accounting education of a CPA.
Ensure that someone can manage the following:
o Accounts receivable
o Accounts payable
o Available cash
o Bank reconciliationo Payroll

Manage business credit
Establishing and managing business credit can help your company secure financing when you need it,
and with better terms. Business credit can be crucial for negotiating supply agreements and protecting
against business identity theft.
These five steps can lay the groundwork to sound financial planning.
1. Determine whether you have business credit on file with Dun & Bradstreet
2. Establish a business credit history by using lines of credit associated with your business
3. Pay bills on time and understand other factors that influence your credit rating
4. Keep your credit files current and monitor for ratings changes
5. Know your customers' and vendors' credit standing
Knowing your customers’ credit standing gives you a window into consumer patterns, and that can
affect your marketing and sales strategy. You may not need to conduct credit checks, but there are
credit evaluation tools available for small business. Customer behavior also impacts your business’s cash
flow, which affects planning for future supplies, hiring employees, and expanding your business.
The 5cs of a good and bad credit
5cs of a good credit
Being an analyst requires the following different roles:
BASIC RULES
A borrower is always optimistic
The credit analyst must defend the Bank, but not the borrower
Verify, verify, always verify...
THE SCIENCE vs. THE ART
The science consists in:
Considering the facts

Analyzing the information in order to know the “real story”
Preparing the financial analysis
The art consists in:
Issuing credit judgments based on incomplete data
trust
IN ALL CASES, WE REPRESENT THE BANK, NOT THE BORROWER
WHAT IS THE MAIN RISK IN TERMS OF GRANTING CREDIT?
The main risk is that the borrower is not able to repay and that its guarantees do not fully cover the
unpaid amounts. However, it is interesting to take the risk if you think that it is profitable for your bank
and your analysis concludes that it is a good opportunity to build a partnership with the client
Before making the decision, be sure not to have forgotten to analyze all the aspects.
Use a checklist called FIVE Cs
WHICH BUSINESS PRESENTS THE MOST RISKS?
Printing shop invests in printers already in operation for 5 years creates high-quality graphic
presentations for advertising companies, etc. in Kinshasa
Water-bottling plant invests in bottling equipment operational for 2 years sells nationwide
Tailor invests in 4 sewing machines in activity for 3 months
Lubumbashi local market
THE 5Cs
The 2 main Cs:
Character - the person and the family
Capacity/Cash-flow - technical, economic and financial feasibility and past history of the activity
The 3 secondary Cs:
Capital - funds invested in the business plan
Collateral/Guarantees
Conditions - the loan terms (amount, rate, and repayment terms
) MEANING OF THE 5 Cs
CHARACTER: does the borrower WANT to repay?
CAPACITY: CAN the borrower repay?

COLLATERAL or GUARANTEE: are there SUFFICIENT secondary repayment sources?
CAPITAL: up to what level does the borrower PARTICIPATE in the risk of the business?
CONDITIONS: what is the company’s ENVIRONMENT?
CHARACTER
- Honesty and integrity
- Family situation
- Skills for managing an economic activity
- Family assets (net worth)
- Reputation in the community
- Openness and conformity with the market and the community
- Ability and habit of repaying previous credits
QUESTIONS ABOUT CHARACTER
Evaluation of the moral and financial responsibility of the individual requesting a loan may be made by
considering questions such as:
a. Are the individual and his family worthy of trust - demonstration of trust, but also honesty,
responsibility and work habits?
b. How did the individual and his family arrive at their current economic situation?
c. How did he resolve difficult situations in the past?
d. What do the people and the leaders around him say about him/them?
QUESTIONS ABOUT CHARACTER
Evaluation of the moral and financial responsibility of the individual requesting a loan may be made by
considering questions such as:
a. What do the suppliers and the buyers say about him/them?
b. How do (does) his (their) habitual style of life and his (their) habitual expenses compare with his
(their) income level?
c. How are the family relationships and family considerations that might affect the activity and the loan?
CAPACITY
a. What does the business plan indicate about the revenue generation and the profitability of the
industrial and commercial activity?
b. Can the individual/business produce enough money to honor the loan repayments with interest,
including a safety margin?
c. When will the loan be repaid?
d. What are the family needs?
e. What are the consequences of seasonal fluctuations and production variations?
f. How does the entrepreneur/farmer fare compared with others in the same sector or the same
activity?
g. Is there a successor?
MANAGERIAL CAPACITY
Management questions include:
a. How does he manage his business, farm or structure compared with others?
b. How does he manage his money and his expenses?
c. How have their assets/net worth increased or decreased over time and trends?
d. How do they manage, do they have relationships with people?
HUMAN AND WORK CAPACITY
a. What are the age and the health of the person in question?
b. How does the family cooperate?
c. How does the individual cooperate with other farmers in the community?
d. Is labor available when necessary?
e. How does work capacity influence the economic feasibility of the activity? (This is particularly
important when a specific competence or person is required)
TECHNICAL CAPACITY
Technical capacity is closely connected with the analysis of feasibility and must be analyzed with other
parameters:
- Equipment
- Services/maintenance
- Externalization
- Land
- Storage
LOAN HISTORY
a. Has the client had loans in the past?
b. How were they repaid?

c. How were they managed?
d. Were they late in repayment and, if so, what were the reasons?
e. What is the evaluation of their previous credit managers?
f. Does the client have savings?
g. What is the level of savings compared with the loan?
h. What is the savings history?
CAPITAL
a. How are the assets invested in the business (activity)?
b. What is their value?
c. What is the quality of the assets (are they well maintained)?
d. What are the family contributions to the business (activity)?
COLLATERAL
a. The secondary sources for repayment of the loan:
b. Are they personal guarantees from trustworthy individuals?
c. Are the business’ assets and the personal guarantees enough to cover the repayment of the loan if
necessary?
But PLEASE NOTE – the guarantee is not a primary source of repayment
CONDITIONS
a. Is there an adequate and stable market to support the business?
b. Are the terms of the loan (duration, interest rate, etc.) well defined in relation to the capacity for
repayment?
c. What are the price and production risks?
d. What are the general trends of the sector market?
e. Additional risks such as illness, etc.
CONCLUSION
The 5Cs = 5 factors for analyzing the loan risk
“The art” is much more than knowing how to calculate! It’s the sense of smell, the intuition and the
emotional intelligence!
Proper risk management depends on knowing what, when and how to apply the analysis indicators and
also how to analyze the borrower’s social and personal factors.
5cs of a bad credit
Meaning of 5Cs
COMPLACENCY: “I don’t need to watch this creditor, they always paid on time.”
CARELESSNESS: being sloppy and unorganized among loan files of the clients.
COMMUNICATION: first breakdown between the clients and the lending officer.
CONTINGENCIES: lenders have one of the hardest job as they need to be correct 99.5% of the time.
COMPETITION: it causes lender to strange things.
COMPLACENCY
It stems from the attitude, “I don’t need to watch this borrower; they have always paid on time.”
This blinds lenders from seeing the need to monitor the company which may end up with a nasty
surprise when the default comes.
Complacency can come from an overreliance on past performance of the company, guarantors, or the
economy.
Some may also look at the net worth of the sponsors of the credit and think there is no need to monitor
the credit.
CARELESSNESS
One of the most popular forms of carelessness is sloppy, unorganized loan files with inadequate
documentation. In some cases, collateral is not properly perfected, resulting in the lender’s collateral
position being compromised.
Sometimes, loan officers will fail to document conversations with borrowers and then are caught
reconstructing the file at the last minute as the bank is taking the customer to court to recover the loan.
Or they may leave items out of loan documents that should have been in there to protect the lender.
COMMUNICATION
Communication breakdown may be a simple problem, or it can bring down an entire institution. The first
breakdown may be between the officer and the borrower.
This can lead to a startled lender, when a seemingly good credit all of the sudden is incapable of making
payments. It is important to have good relationships with the borrower that fosters communication
between your borrower and you as the officer.
Remember, you should have a commanding and current knowledge of your borrower.
CONTIGENCIES
Lenders have one of the hardest jobs as they need to be correct 99.5% of the time. Once your losses
begin to creep up over that ½% level, it could begin to impair your capital. Truly, commercial lending has
one of the smallest margins of error of any profession. Imagine what would happen in baseball if you
had to get a hit that often to be successful!
Lending is risk analysis. We are to look at every bad thing that could occur and then decide on how likely
any of those things can happen. A lack of attention to a downside risk can hurt the ability of the loan to
get repaid if the economy slows down, occupancy drops or company revenues fall. This is why it is
important to stress test the credit at underwriting in applying breakeven analysis, increase the loan
interest rate, raise the cap rate, and also reduce company revenues to see how the credit will perform.
COMPETITION
Competition causes lenders to do strange things. Too often, credit decisions are based upon what the
institution down the street is doing rather than concentrating on the merits and risks of the loan in front
of them.
Unfortunately, this often leads to loosening credit standards down to the lowest common denominator.
When the losses begin to roll in, at least you will have company with other lenders who are in the same
boat.
A competitive euphoria is a sickness that may cause the institution to lower the price or seek a reduced
covenant or collateral position just to get the deal. Oftentimes, the results of these closings are touted
as the credit union having a stronger market share than its peers. But higher market share with poor
credits is not a way to build your shop.
Credit Agreement
What Is a Credit Agreement?
A credit agreement is a legally-binding contract documenting the terms of a loan agreement; it is made
between a person or party borrowing money and a lender. The credit agreement outlines all of the
terms associated with the loan. Credits agreements are created for both retail and institutional loans.
Credit agreements are often required before the lender can use the funds provided by the borrower.
A credit agreement is a legally-binding contract documenting the terms of a loan agreement; it is made
between a person or party borrowing money and a lender.
ment is part of the process for securing many different types of loans, including
mortgages, credit cards, auto loans, and others.
can use the funds provided by the lender.
How Credit Agreements Work
Retail customer credit agreements will vary by the type of credit being issued to the customer.
Customers can apply for credit cards, personal loans, mortgage loans, and revolving credit accounts.
Each type of credit product has its own industry credit agreement standards. In many cases, the terms of
a credit agreement for a retail lending product will be provided to the borrower in their credit
application. Therefore, the credit application can also serve as the credit agreement. Lenders provide
full disclosure of all of the loan’s terms in a credit agreement. Important lending terms included in the
credit agreement include the annual interest rate, how the interest is applied to outstanding balances,
any fees associated with the account, the duration of the loan, the payment terms, and any
consequences for late payments.
Revolving credit accounts typically have a more simplified application and credit agreement process
than non-revolving loans. Non-revolving loans–such as personal loans and mortgage loans–often require
a more extensive credit application. These types of loans typically have a more formal credit agreement
process. This process may require the credit agreement to be signed and agreed upon by both the
lender and the customer in the final phase of the transaction process; the contract is considered
effectual only after both parties have signed it.
Institutional credit deals also include both revolving and non-revolving credit options. However, they are
much more complicated than retail agreements. They may also include the issuance of bonds or a loan
syndicate, which is when multiple lenders invest in a structured lending product.
Institutional credit agreements typically involve a lead underwriter. The underwriter negotiates all of the
terms of the lending deal. Deal terms will include the interest rate, payment terms, length of credit, and
any penalties for late payments. Underwriters also facilitate the involvement of multiple parties on the
loan, as well as any structured tranches which may individually have their own terms.
Institutional credit agreements must be agreed to and signed by all parties involved. In many cases,
these credit agreements must also be filed with and approved by the Securities and
Exchange Commission (SEC).
Example of a Credit Agreement
Sarah takes out a car loan for $45,000 with her local bank. She agrees to a 60-month loan term at an
interest rate of 5.27%. The credit agreement says that she must pay $855 on the 15th of every month
for the next five years. The credit agreement says that Sarah will pay $6,287 in interest over the life of
her loan, and it also lists all the other fees pertaining to the loan (as well as the consequences of a
breach of the credit agreement on the part of the borrower).
After Sarah has read the credit agreement thoroughly, she agrees to all the terms outlined in the
agreement by signing it. The lender also signs the credit agreement; after the signing of the agreement
by both parties, it becomes legally binding.
Credit Insurance Defined
What is Credit Insurance?
Credit insurance is a type of insurance policy purchased by a borrower that pays off one or more existing
debts in the event of a death, disability, or in rare cases, unemployment.
Credit insurance is marketed most often as a credit card feature, with the monthly cost charging a low
percentage of the card's unpaid balance. How Does Credit Insurance Work?
Credit insurance can be a financial lifesaver in the event of certain catastrophes. However, many credit
insurance policies are overpriced relative to their benefits, as well as loaded with fine print that can
make it hard to collect.
there are three kinds of credit insurance—disability, life, and unemployment—available to credit card
customers.
Credit insurance is an optional feature of a credit card, and you don't have to purchase it.
it may be wise to consider if the other insurance you have in place is sufficient enough without
purchasing credit insurance.
ugh economic times.
If you feel that credit insurance would bring you peace of mind, be sure to read the fine print and
compare your quote against a standard term life insurance policy.
Three Types of Credit Insurance
There are three types of credit insurance, each paying its benefit in different ways:
Credit Life Insurance
This type of life insurance pays off all outstanding loans and debts if you die.
Credit Disability Insurance
Also called accident and health insurance, this type of credit insurance pays a monthly benefit directly to
a lender equal to the loan’s minimum monthly payment if you become disabled.
***Important***
For some credit card holders, credit insurance may be a costly feature in comparison to its benefits.
You must be disabled for a certain amount of time before a benefit is paid. In some situations, the
benefit is retroactive to the first day of disability. In other cases, a benefit may begin only after a waiting
period is satisfied. Common waiting periods for credit disability insurance are 14 days and
30 days.
Credit Unemployment Insurance
With this type of insurance, if you become involuntarily unemployed, this insurance pays a monthly
benefit directly to the lender equal to a loan’s minimum monthly payment.
You must remain unemployed for a certain number of days before a benefit is paid. In some cases, the
benefit is retroactive to the first day of unemployment. In other cases, the benefit begins only after the
waiting period is satisfied. The common waiting period for credit unemployment insurance is 30 days.
8 Questions to Consider Before Purchasing Credit Insurance
1. Do you have other insurance or assets that would cover debt obligations in the event ofmy death,
disability, or unemployment?
2. Would it be better to buy a life insurance policy or a disability insurance policy? Credit insurance may
cost more than other more traditional insurance options.
3. If you purchase single premium coverage, will the premium be financed as part of the loan? If so, how
much will the loan payment increase due to the cost of the credit insurance?
4. Will the credit insurance cover the full term of the loan and the entire balance?
5. How long is the waiting period for the monthly benefit to be paid?
6. What isn't covered by the policy?
7. Can the insurance company or lender cancel the insurance?
8. Can policy terms or premiums be changed without consent?
MODULE 4
Credit Management
1. Know the importance of Credit Management
2. Understand the Credit Department
3. Learn the Credit Investigation
4. Identify the Sound Credit Management
5. Learn how to Deal with Credit Fraud
The function of credit may be briefly summarized in the following words: To find profits in the field of
business activity which lies between the area of safe risks and those definitely poor.
For this very reason, the boundless effort of every business organization to increase its profits by doing
and carrying all the business it can on sound footing has given birth to the science of credit
management.
Importance of Credit Management
There is hardly any business concern today which is not engaged in the grant of credit of one type or
another. However, briefly pointed out, granting credit is one thing and collection another. Thus, there is
a need for a system which will insure close collaboration between the grant of credit and its collection.
While it is true that selling goods and rendition of services only to customers who have shown and
demonstrated their willingness and ability to pay on the basis of their past records would doubtlessly
reduce the incidence of risks, nevertheless, such policy will evidently result in a reduction in sales
volume and ultimately work adversely against the interest of the firm.
On the other hand, precipitous and indiscriminate granting of credit to all types of customers, while
increasing sales volume, could undermine a firm and usher its collapse. Hence, the need as well as the
importance of a sound' and efficient credit management.
The Credit Man in the Business World

For quite some time, the credit man was looked upon no differently from a glorified clerk or bookkeeper
whose job consisted mainly of keeping records of the financial transactions of the firm's customers.
That, of course, is now à thing of the past. Today, there is recognition of the important contribution of
the credit man to the successful operation of the company. So important is he that his words generally
carry much weight. It is he who makes recommendations based upon investigations, studies and
analyses, whether credit should be granted or denied. Failure. On his part to discharge properly the task
and responsibility reposed upon him by virtue of his position in the company could adversely affect the
business world in general. Lack of judicious care in the grant of credit will not only trigger losses for the
business concern but, at the same time, result in a diminution of credit to those who are deserving and
are actually entitled to it. Undue laxity, while increasing the volume of business, could mean one thing:
bad debts cluttering the books of accounts of the company which are difficult, if not impossible, to
collect.
On the other hand, the overzealousness of the credit man to prevent losses for the company and thus
become overly strict with respect to the grant of credit could generate the loss of customers and thus,
consequent reduction in the volume of business.
Thus, it is perhaps correct to say that a credit man must be a student of trade and business equipped
with a thorough understanding of the prevailing economic conditions and their implications. He must
have a keen foresight into future conditions that affect business in one way or the other the ‘words of
Beebe and Morton, in their book "Credits and Collections", the credit man “has within his power to drive
old customers away just as he could likewise help educate the stubborn customers as to earn their
everlasting goodwill."
Efficiency of the Credit Man in His Work
It is exceedingly difficult to lay down specific criteria for judging the effectiveness of the credit man in
the performance of his task.
For while it may be true that bad debts are held to the minimum, however, such cannot be a safe gauge
if at the same time it has resulted in' small volume of business. Thus, it is important as well as necessary,
in the case of a retailing or wholesaling establishments to know how many orders were refused as well
as how many were accepted.
It goes without saying that it is far easier to refuse orders than to select reasonable risks or to handle
doubtful customers in such a manner that they will be future boosters for the company. Clearly, then,
different cases must be treated in different ways.
The Credit Department
The credit department does not grant or extend credits.
Its task and responsibility revolve around the gathering of all credit information about the applicant and
assembling them in such a 'way that they could be of help in properly guiding the loan officers in their
assessment and analysis for purposes of establishing correct credit rating. In a number of instances, one
·overriding factor which the credit department must give weighty consideration is, not only with respect
to the degree of profitability to be derived from the credit operation, but also its influence as a booster
in the sale of other goods of the company.
As may be observed, many large establishments which sell goods and/or services on credit maintain
credit departments which attempt to evaluate the paying capacity of pre sent and potential customers
on the basis of information gathered and analyzed. Credit and sales departments must cooperate closely
with each other. A sales executive who does not support the efforts and policies of the credit
department can do much harm to his company. The same holds true for a credit executive who is not
sales-oriented. The effective use of credit and the proper application of credit management help
develop business operate on a sound basis.
In the particular case of banks, the credit department collects and files every available bit of information
concerning, people or firms, that borrow money. In a detailed manner, its main work consists of
investigating, assembling, analyzing, and recording credit information for the guidance of the loan
officers of the bank. The officers use the information in processing loan applications and moreover by
and large in reaching decisions with respect to actions it will choose to take.
The functions of a credit department of a bank may be briefly stated as consisting of a systematic and
judicious collection of data respecting the financial responsibility, character, antecedents, and business
qualifications and abilities of the bank's customers, the classification of the data on each customer in
chronological order, and their systematic preservation for future reference and comparison. Thus,
needless to point out an orderly and well-arranged credit file will immediately disclose at a glance the
entire career and present business standing of any customer.
Not infrequently, the credit departments of banks furnish a valuable if not indispensable service for
customers and friends of the bank by making credit information available for them under proper
circumstances. This courtesy is often of value to non-borrowing customers, to other banks, and also to
business concerns.
The Credit Manager
The credit manager, paradoxical as it may seem, is a man who occupies a very important position in the
structure of a credit economy and yet is little known and least talked about outside the world in which
he lives. Upon his decision rests the success or failure of a credit granting organization.
In small concerns, he is the credit investigator, credit appraiser, credit supervisor, and credit manager (if
not a loaning officer at the same time) all rolled into one.
A real good and capable credit manager, in a very correct sense, owes his position to himself. For, while
he was appointed by someone at the top of the organization to his position, such is due in large measure
to his proven ability as demonstrated in every position he has held before in the past.
Moreover, his appointment is a tribute to the organization he represents for having chosen the right
man for the right position.
In a big concern, he is the head of a staff of trained, experienced and capable men charged with credit
work. Such men are known as credit investigators, credit appraisers, and credit supervisors.
A good credit manager is progressive in his ideas and thinking. Moreover, he should be devoid of
prejudices against and biases in favor of any man or organization. Otherwise his thoughts and views will
be colored by them. He should be over and above everything else, morally upright and intellectually
honest, and must have a complete knowledge of the facts surrounding every application for credit, if he
is to discharge his responsibilities well. Credit Investigation and Appraisal
At this point, let us focus our attention on what a typical bank credit department' does with respect to
credit investigation work. Like that of any financial institution engaged in the grant of loans or extension
of credits, sound bank management dictates that a thorough and careful' credit investigation of clients
and appraisal of security (ies) as collateral be conducted before any accommodations are made. This
task is generally performed by the Credit Investigation and
Appraisal Section of the Credit Department. Doubtlessly, the quality of information gathered is largely
dependent on
The ability and resourcefulness of the credit investigators and appraisers.
Credit Investigation
This task is performed by the Bank’s Credit investigator who has, as his main objective, the verification
as well as evaluation of the applicant's character, credit standing and integrity, through the process of
data-gathering of all essential facts. Generally speaking, the elaborateness of a credit investigation as a
practical matter depends upon its cost relative to the magnitude of the principal and interest 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 of credit risks which necessarily cannot be any
better than the facts assembled.
The request for Credit Investigation Report (CIS) may come from any officers/departments of the bank
for any of the following purposes:
a. On clients seeking loan accommodations or Credit line with the Loans Administration
Department through Marketing Management Department;
b. On clients applying with the International Banking Department to secure availment in the form of
Letters of Credit, Import/Export Bills, Trust Receipts, and other forms of accommodations;
c. On clients opening current/savings accounts with the Cash Administration for the first time (which, of
course, is no longer common nowadays in view of the competitive nature of the banking business);d. On
clients transferring business with the Treasury Department through the money desk;
e. On co-makers and guarantors for credit;
f. On old clients for updating client information;
g. On insurance companies requesting accreditation or offering to act as surety;
h. On beneficiaries named in the Letter of Credit;
i. On prospective buyers of assets acquired by them. On prospective suppliers of office equipment and
supplies and contractors of services; and
k. Others, subject of special cases.

Upon receipt of a request for Credit Investigation Report and supporting papers, an investigator is
assigned to handle the case and to conduct a proper study of the applicant's background. The assigned
credit investigator initially checks the subject with the bank's credit files and prepares a tickler where he
notes down initials which he thinks will require some degree of emphasis during the conduct of his
investigation. Within a specified period of time, usually three days, the credit investigator is expected to
come out with a Credit Investigation Report.
The Scope of Credit Investigation.
The scope of credit investigation depends, to a large degree, upon the following factors:
1. Purposes and types of investigation. Whether the investigation is a routine matter or a special case
and the purpose is general or specific.
2. Company credit policy. Whether the policy is a conservative or liberal one, and whether it requires a
comprehensive investigation of cases, or a representative sampling would suffice.
3. Client classification. Whether the client is new or an established one; a-past-due account or a valued
one.
4. Amount involved. Whether the amount involved is big or small. If it is a small one, chances are a
limited type of investigation will suffice. If it involves a fairly large sum, investigation may be rigid and
thorough relative to the risks involved. And, of course, with respect to the amount of income to be
derived measure of profitability.
5. Time and resource constraint. The scope depends on such factors (time and resource constraint) since
the report must be finished on the date it is needed by the requesting officer/department of the bank
and also, on the availability of the credit investigator who will conduct the investigation.
Generally, the scope of credit investigation covers and includes the following:
I. Company's background/history
This covers the complete business record, such as the date of incorporation, the type of business
organization, record of registration with the proper authorities, the names of incorporators, and the
summary of operating records. In the case of an individual, his personal background, business, identity,
and membership in organizations will be necessary together with bank and trade references.
The investigator also takes into account the requirements common in the following types of business
organization:
a. Single proprietorship. He sees to it that the owner has the capacity to enter into a lawful contract.
If the owner is a married woman, she must possess the legal right to transact business as required under
the Civil Code of the Philippines.
b. Partnership. The first fact to be ascertained is whether it is a general or a limited partnership.
This.is important and essential since under a general partnership, all the members are general partners,
As such, they are liable to the whole extent of their separate properties, either subsidiary and pro rata,
or solidarity, for partnership debts. In a limited partnership, one or more members, aside from the
general partners, are limited partners who as such shall not be bound by the obligations of the
partnership.
Secondly, whether the contract of partnership is registered or not with the Securities and Exchange
Commission. However, registration with the Securities and Exchange, Commission is not a pre requisite
for the acquisition of juridical personality of a partnership since the juridical personality begins from the
moment of the perfection of the contract.
The credit investigator should also take into account and consider the following characteristics of a
partnership, such as:
1. There must be a contract;
2. The partners must have legal capacity to enter into the contract;
3. There must be mutual contribution of money, property or industry for a common fund;
4. The purpose must be to obtain pecuniary profits and to share the same;
5. The purpose for which the partnership is formed must be lawful; and
6. Moreover, the Articles of Co-partnership must not be kept secret.
Other important matters that must be looked into are those relating to the contribution of each partner,
in what form (property, money or industry), citizenship of partners, agreement with respect to division
of profits and losses, term, and designation of officers, etc.
c. Corporation. The reader need not be reminded that a corporation is the most complicated form of
business organization and moreover is classifiable into various types. However, the most common
classes are: public and private corporations, sub-divided into stock and non-stock, and as to place of
incorporation, sub-divided into domestic and foreign.
The legal existence of a corporation begins from the date of the issuance of the certificate of its
incorporation by the Securities and Exchange Commission. Important matters which a credit investigator
should carefully consider in the Articles of Incorporation are the following:
1. Name of the corporation. This is essential in as much as its name helps to establish its identity and
distinguishes it from the others. The Securities and Exchange Commission in its recent ruling prohibits
the use of the words '“Maharlika “State” etc.
2. Its purposes, objectives, nature and powers. Although a corporation may be formed for as many
lawful purposes as the incorporators may desire, nevertheless, the corporation law and other pertinent
special laws, expressly or impliedly, prohibit certain corporations from having more than one purpose.
They are corporations “formed” for the purpose of engaging in the business of transportation by land or
water, or of maintaining a telephone, telegraph, or wireless communication system" and corporations
for which special provisions are established by' law, such as railroad companies, building and loan
associations, religious corporations, trust corporations, colleges and other institutions of learning.
Banking corporations and insurance companies are governed by the General Banking Act (Republic Act
No. 337) and the Insurance
Act, respectively.
3. The location or place of business.'
4. The term of duration of corporate existence. Such term is not to exceed 50 years. While a term may
be decreased, however, it cannot be increased by subsequent amendments of the articles of
incorporation.
5. The names and residences of the incorporators. This determines whether the statutory requirements
that the majority of the incorporators must be residents of the Philippines has been fully met and
complied with.
6. Names of incorporating officers.
7. The capital stock and the number of shares into which it is divided.
8. The names and citizenship of the stockholders and the amount or number of shares they have
actually subscribed to and the amount paid on subscriptions. In cases where capital is divided into par
value shares, at least 20% of the capital stock should be subscribed. Where the entire capital stock is
divided into no-par value shares the 20% requirement shall be computed on the basis of number of
shares.
As to corporations granted franchises for operations of public utilities, mining and agricultural
corporations and other corporations organized for the disposition, exploitation, development or
utilization of the natural resources of the country, at least 60% of the capital stock of such corporations
must be owned by citizens of the Philippines.
9. The acknowledgment of the duly executed Articles of Incorporation before a notary public.
The company's history also covers the complete record of the men who comprise the operating
management of the business, their respective ages, whether they are married or not, and if they have
children, the number, sex, and age of the children. It also includes information on their educational
attainment, their previous employment, if any, and their particular experience in their respective lines of
business.
II. Financial Conditions
Herein is represented in summary form a breakdown of the financial statement of the company
reflecting its latest financial condition and the results of operation for the past three or five years.
Aside from the balance sheets and income statements, it may include schedules, explanations or
extraordinary items, breakdown of merchandise and receivables and full explanations of all
intercompany loans and merchandise transactions.
III. Dealings with Government lending agencies, etc.
a. With lending agencies of the government. The credit investigator concentrates on the size and degree
of fluctuations on borrowings as well as the nature of the security 'pledged to secure the loan. In case of
long-term loans, the yearly, semi-annual, quarterly or monthly installment payments to maturity must
also be ascertained, (including arrearages, if any).
b. A multitude of facts that could be obtained from merchandise suppliers. They may be very useful in
matters pertaining to incidence of credit, amount owing, amount past due, if any; terms and payment
performance of the subject of inquiry.
c. Other banking institutions. The investigator should focus his inquiries on such matters as the
following:
1. Nature of the credit accommodation granted.
2. Whether borrowings are on secured or on clean basis.
3. If secured, whether the security consists of real estate mortgage, shares of stock, warehouse receipts,
chattels, assigned receivables, discounted notes receivables, assignment of claims under a government
contract or some other form of security.
IV. Bank's experience with the subject
Has there been any previous relationship established in the past?
V. Court Cases
From the Credit Management Association of the Philippines data on court cases could be gathered
information about the subject's involvement in, not only collection and other civil cases, but also
criminal cases as well if any. It is important as well as necessary to point out the fact that when a close
study is being made, it is essential to check with trade competitors on the subject (if it is a business
concern). In such "competitive checking", the following information must be sought:
a. The importance of the subject in its particular line of business, the general reputation, the ability of
the management and the quality of the products and/or services being offered.
b. The general outlook as to the conditions in the subject's line of business and whether the operating
methods used are considered sound.
c. Whether the subject resorts to unfair method of competition.
d. Names of other concerns to whom the subject maybe known.
The Credit Work
The efficient performance of the credit work revolves around the presence and cooperation of a staff of
trained, experienced and capable personnel whose task and responsibilities are delineated by the kind
of positions they hold in the department,' such as credit supervisor, credit analyst, credit appraiser, and
credit investigator.
The job description of each is presented in summary form in the following paragraphs.
A. Supervisor.
1. handles the over-all supervision of his section or department.
2. Receives request for Credit Investigation Report/Appraisal Report and assigns them to senior credit
investigators/appraisers for completion and submission on a certain date.
3. Reviews, edits and makes necessary corrections on the Credit Investigation Report/Appraisal
Report submitted by senior credit investigators/appraisers.
4. Answers credit inquiries from banks, trade firms, bank clients and other financial institutions.
5. Implements procedures and ascertains that all matters as well as inquiries of importance are given
top priority.
6. Undertakes to maintain or improve existing relations with other banking institutions and other
sources of credit information.
7. Supervises the preparation of monthly reports on output.
8. performs other related functions from time to time, such as:
a. trains the new associates of the Section and counsels and guides them in the performance of their
jobs.
b. prepares a list of assignments for each analyst. This includes gathering of all data required.
c. recommends to the department head promotions or merit increase of staff within the Section.
d. Recommends to the department head, acquisition of financial books, journals, magazines, and
periodicals relevant to the improvement of analysis preparation.
B. Senior Credit Analyst.
a. Assumes responsibility of the supervisor in his/her absence.
b. Concentrates on evaluation of Cash Flow Projections based on the projected Income Statement and
Balance Sheet and Feasibility Studies of various companies.
c. Conducts an intensive research on the business prospects of industries for a more effective financial
and credit evaluation of Cash Flow Projections and feasibility study reports, submitted to the bank.
d. Works continuously on the revision of present and future credit rating sheets of credit evaluation
reports to cope up with the changing economic/financial situations.
e. Assists supervisor in discharging his/her duty in time of heavy work load.
C. Junior Credit Analyst.
a. Assists senior credit analyst.
b. Studies financial statements and other documents submitted by the client and prepare the following
reports:
1. Credit Analysis and Rating. An evaluation of the financial status of the client/company, industry
standing, availability of collaterals for evaluating credit worthiness of the client and/or to pinpoint other
bank services which can be offered.
2. Financial Analysis. An analysis of the post operating rating performance of the client and may include
a projection of future performance.
3. Cash Flow Evaluation. An analysis and projection of cash generation capacity and future cash
requirement of the client.
4: Project Evaluation. A complete stud" of the technical, financial, marketing, and management aspects
of a client's project proposal, including effects of the project on the economy as a whole.
D. Senior Appraiser.
1. Receives and assigns requests for Appraisal Report to appraiser(s).2. Edits Appraisal Reports prepared
by appraiser(s).
3. Assists the appraiser(s) in carrying out their functions.
4. Conducts inquiries/surveys on the current market value of real and other properties acceptable to the
bank as collateral.
5. Performs such other functions as may be found necessary from time to time.
E. Appraiser.
1. Conducts ocular inspection of properties offered as collaterals.
2. Sketches the vicinity and location of the property under appraisal.
3. Verifies the authenticity of original/transfer certificates of titles with the Register of Deeds.
4. Summarizes in a report form findings on the ocular inspection made on the properties offered as
collateral.
5. Entertains inquiries/checking’s of appraisers of other banks.
6. Conducts inquiries/surveys on the prevailing market values of real and other properties acceptable to
the bank as collaterals.
7. Performs other functions that may be assigned from time to time.
F. Senior Credit Investigator.
1. Receives and assigns requests for CIR to credit investigator and sets date of completion.
2. Initially reviews and edits CIR prepared by credit investigator.
3. Entertains credit inquiries from other banks and commercial houses.
4. Occasionally assists credit investigators in carrying out their functions.
5. Assists in the development of efficient and comprehensive credit files.
6. Gathers information concerning other banks' credit procedures.
7. Performs such other functions as may be assigned from time to time.
G. Credit Investigator.
1. Conducts checking’s and evaluation of applicants for credit accommodations as well as of existing
clients.
2. Interviews co-makers and employers of applicants/clients to verify data gathered.3. Undertakes bank,
trade, government and court checking’s regarding credit dealings of the applicant/s.
4. Prepares Credit Investigation Report, memos, letters, and other correspondence.
5. Assists collection group in locating the whereabouts of clients with past-due obligations and real
estate properties registered in their names.
6. Conducts special investigations, surveys as per requests of other department heads.
7. Performs other functions as may be assigned to him from time to time.
Necessity for Close Supervision. The necessity for a considerable amount of supervision on the part of
the credit manager over his staff is quite apparent. Credit men operate during much of the working time
away from the home office removed from, definite and direct executive control.
However, one method which could make the credit men do their job, as expected of them, is to give
them a “deadline" for the case they have under investigation and study. Psychologists suggest three
important appeals for use in attacking the problem of supervision, such as:
a. Pride in accomplishment.
b. Monetary reward for a difficult job done, like collection of a bill that is about to be written off, and
c. Commendation and praises. This may be done through letters of commendation if not through the
awarding of plaque or certificate of merit.
Bank Appraisal Report. Generally speaking, a bank appraisal report contains, among others, the
following information:
1. Subject of appraisal
a. Name of registered owner
b. Location of the property
2. Land identity
a. TCT number
b. Technical description
c. Lot number
d. Block number
e. Land area3. Description of land
a. Shape
b. Frontage
4. Neighborhood data
a. Commercial
b.. Semi-commercial
c. Residential
d. Industrial
e. Raw land
f. Others
5. Public utilities
a. Electricity, water, telephone, gas, etc.
b. Kind of transportation facilities available
6. Improvements
a. Full description of improvements
7. Valuation
a. Market and appraisal values of land
b. Net value of improvements
c. Total appraised value
d. Recommended loan value
8. Encumbrances
a. Names of mortgages and amount
b. Others that might be annotated in the Original or Transfer Certificate of Title.
Credit Policy In most instances, a bank's credit policy evolves from an unwritten set of standards,
sometimes very nebulous, to more specific criteria covering the conditions under which loans are made
Where a bank is small, such policies are seldom found in writing. However, the policy although not
expressed is given meaning and substance through practice and implementation. As the bank grows in
size and more bank personnel are involved in extending credit to customers, it becomes very essential
that appropriate guidelines and standards should be established in as objective. A manner as possible
and expressed in clear and unmistakable terms.
A policy has been described as a "decision in advance. “Owing to the fact that the entire range of loan
function of a commercial bank is basically interwoven with the decision- making process, it follows that
any pre-made decision can but result in the elimination of flexibility and could work against the interests
of the bank. A sound credit policy with sufficient degree of flexibility could help contribute to the,
successful operation of commercial banks insofar as loan functions are concerned.
How Bank Loan Policy is formulated
Any loan policy that may be formulated by a bank reflects but one phase of the over-all policy program
of the institution. Such a policy must obtain the stamp of imprimatur of the board of di rectors.
As is generally observed, as a common practice among banking institutions, the actual preparation of
policy statements is usually carried out by the president or senior loan and credit officer, depending in
large measure upon the size of the bank and the staff available.
A statement of loan policy, among others, includes reference to types of loans and the basis upon which
loan applications may be considered. Such, however, are circumscribed by the provisions of the General
Banking Act which governs the operations of commercial banks.
Also, the kinds of securities that are considered acceptable by the credit-granting institution are also the
subject of loan policy. And, so with amounts involved. In fact, when a certain amount involved in a loan
application does not exceed a certain ceiling imposed by the board of directors, it is subject to the
approval of the loan committee. Beyond such ceiling, approval is lodged as the exclusive prerogative of
the board.
Briefly noted, in the formulation of a loan policy, the officers are guided by two primordial
considerations: First, the protection of the depositors' funds. Second, the production of a fair return for
its lending and investment activi-ties. The activities of the credit department contribute a major portion
of a bank's income. In fact, they represent one of the major areas of top management concern and
attention.
Setting a Standard for Control Purposes It goes without gainsaying that no policy achieves maximum
effectiveness unless it is accompanied by a periodic check-up to insure its proper implementation and
ascertain its weak spots, if any. In fact, by having an established loan policy, a program is made possible
against which actual performance or practices can be evaluated for purposes of determining variations,
if any, and the necessary application of remedial action. As already indicated earlier, a sound loan policy
should be made flexible to provide for alternative courses of action and thus enjoy the advantage of the
policy serving as a guideline rather than as a strait jacket.
The loan policy should be stated in clear and unmistakable terms so that its implementation by the
officers of the bank charged with such function will be easy. Moreover, such loan policy should provide
specific guidelines for particular types of categories of bank credits, such as the following:
1. Agricultural credits
2. Commercial loans
·3. Industrial loans
4. Real estate loans
5. Consumer or personal loans
6. Term loans.
Dissemination of Loan Policy

The importance of effective communication to the success of any 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. Without it, the organization would be engulfed in an ocean gap that would act as a
monkey wrench that will ruin the entire machinery of the business organization.
In the particular case of commercial banks, its policies should be disseminated thoroughly and well
understood by all who are concerned with their implementation. Since a loan policy is but one facet of
the over-all policy of the bank, it follows that an internal information drive should be launched from
time to time, as the occasion demands, with the objective of inculcating upon all those concerned the
need, as well as the importance, of giving meaning the substance to such policy through its effective
implementation.
To ascertain the effectiveness of such a policy, it is essential that a review of its effects upon the
organization be made as well as its impact upon the bank's customers in the light of existing business
conditions. Only then can it be determined whether the policy is sound and judiciously necessary or not.
The Credit FileSo important is the credit file to any firm extending credit that it behooves upon it to
adopt a system of gathering and putting every information about customers and applicants into a folder
which is filed in proper order. Hence, the term credit file.
As credit information is received by the credit man, he goes over it carefully to make sure it is as
complete as possible. Then he puts it into the credit folder (a large envelope) bearing the customer's
name and address. Necessarily, one folder is assigned to each customer or applicant for credit.
In this manner, through the course of time, there is accumulated eventually a complete credit history of
each customer, to which immediate reference may be made at any time when the need arises.
Arranging the folders in alphabetical order enjoys the advantage of providing easy location.
Experienced credit managers also keep a card record on which are noted the different kinds of
information. Two distinct advantages are obtained from this method. One, a card record could be
examined quickly without taking the time to go through the papers in the folder. Second, in the event
that some records are found missing from the folder for whatever reason or reasons, the company will
not be left in the dark, since it has another means which could help serve its purpose.
It is important that credit files be kept up to date. In some banks, the responsibility for constant revision
of such file as needed by circumstances falls upon the credit department. Others place it under the
charge of the loaning officer. Regardless of where the responsibility falls, it is a good policy to revise
such files not more than once a year unless unusual circumstances prevail, Since credit files tend to get
big and bulky, it is necessary that those with inactive status be transferred to other folders.
A major problem common among credit-granting institutions pertains to keeping track of credit folders
when they are removed from the credit file-especially so when time is of the essence and there is
immediate need for a particular credit folder.
A very practical method, if not to say the best method, to solve such problem and thus serve the interest
of the company is by inserting a board the same size as the credit folder in its place with the following
information: name of the folder, date it was removed from the file, and the person who has the folder.
Maintenance of credit files with utmost confidentiality should be the over-riding concern of the officials
charged with this responsibility. Because of the confidential nature of the information contained in the
credit files, folders can only be withdrawn upon prior authority granted by the responsible official.
Credit files give historical account of transactions and are generally observed subdivided into a number
of sections. For instance, the first section is used for statements. As may thus be logical to expect, the
latest financial statement of the company is found with the bank's comparative statement form. The
second section contains a compilation of reports on interviews conducted by the loaning officer of the
bank and his staff. Correspondence and other related matters with banks and business firms are
contained in the third section.
The fourth section contains an up to date file record of borrowers as well as prospective ones. In the
case of the former, also their latest balance is included. The fifth section contains reports from credit
agencies whose services and assistance have been sought by the bank.
Credit Policies of Commercial Houses
To say that a credit department is essential in every organization engaged in the grant of credit is to
elaborate on the obvious. On the part of small concerns, a credit department may exist merely as a
section. Or it may seem not to exist at all. At any rate, even in the absence of any, credit functions are
discharged by a responsible official in the organization. In fact, in the particular case of sari-sari store
which sells goods on credit, owing to its size and the close contact between the owner and his
customers, the existence of a credit department appears superfluous. However, the owner himself
performs the credit investigation and evaluation of his customers.
Credit policies may vary from one business enterprise to another. One relates to the type of customers
who are to be granted credit. One firm may be primarily interested in increasing the volume of sales. It
therefore grants credit to all applicants and runs the risk of some losses. Others take extraordinary.
Precautions in granting credit that could reduce their sales volume.
It could be stated categorically that there is no single yardstick or criterion that could be used to guide
the business enterprises in the formulation of their respective credit policies. Be that' as it may, certain
fundamental principles could prove helpful when taken into account and applied accordingly: Their
observance operates as an instrument of control.
Scope of Credit Policy. After adopting a credit policy, the business enterprise must decide just what its
credit terms are and what credit period it will adopt as well as its credit limits.
By credit terms is meant the terms or conditions under which the credit is granted. It includes the time
when payments must be made and the discounts, if any, that will be allowed for prompt payment. In
other words, credit terms pertain to the period when credit obligations will remain subsisting; for
instance, payment shall be made one week after delivery, or 30 days as the case may be in accordance
with company policy. In many instances though, this is not strictly enforced thus resulting in
considerable delay in payment of credit obligations.
By credit period is meant, the length of time within which the customer is expected to remit in part or in
full. If this period expires before such payment has been made, the account becomes delinquent.
If a long term of payment is allowed, a greater number of prospects can be appealed to, but more
capital will be required and tied up for quite some time. On the other hand, if a short term of credit is
made, the number of customers is reduced, but less capital is needed. Some credit-granting companies
impose a limit with respect to, the amount or value that a customer can obtain from the firm. This is
known as credit limit. In other words, a seller places upon a customer's credit standing an indicated limit
insofar as it relates to his own firm. Expressed in another way, it indicates the seller's judgment of the
amount of debt that a customer can incur and pay his firm.
As a sound practice, the credit limit of every customer is recorded in the ledger card. This eliminates the
necessity of reviewing the customer's file each time an order of goods is placed (or a loan is sought). In
the particular case of a loan, many important considerations exert profound bearing on the amount that
may be granted by the creditor company.
Doubtlessly as conditions are constantly changing, it would be unwise for any company selling goods on
credit to establish too definite limits as to the amount of credit which will ordinarily be extended to a
customer. The capacity to make money and promptness in paying one’s obligations will, by and large, be
significant factors in deciding the matter. Obviously, the customer who can sell the goods which are
shipped to him, and can promptly make payment therefore, is a very safe credit risk.
At this point, it should be pointed out that the problem of mercantile credit is somewhat different from
that of bank credit. This is so, since under mercantile credit, each transaction maybe self-liquidating. On
the other hand, loans obtained from a bank are liquidated out of a composite or series of individual
transactions thus, bank loans generally cover a longer period of time than those of mercantile credit.
Purpose and Advantages of Credit Limits.
As aptly pointed out by Theodore N. Beckman and Ronald S. Foster in "Credits and Collections,"
although limits are sometimes used as absolute maxima of Credit, nevertheless their general use is in
the nature of danger signals, just like the warnings, posted at approaches to railroad crossings.
By and large, the principal purpose of credit limits is to serve as guides to credit management and
control. In fact, through its use, before the determination of credit limits, there is the need for careful
investigation and comprehensive analysis of the elements composing a given risk. In a nut shell, then,
this is conducive to improved credit granting.
From the foregoing, it appears quite evident that credit limits operate as an overall device for the
control of credit extensions. More specifically, credit limits aid in reducing the, cost, of credit
management and in enhancing its efficiency. Limits also work to the advantage of debtors. It serve as a
check against reckless buying spree which if unchecked could ruin the lives of debtors and as such suffer
the disgrace of being labelled as poor debtors.
Principles of Controlled Credit
The following fundamental credit principles could serve as the cornerstone of controlled credit policy.
They are:
1. Only after a thorough investigation of the credit worthiness of the customer seeking credit may credit
be granted.
2. Each new customer should be made acquainted with the terms and conditions as promulgated and
implemented by the business firm with respect to terms of payment; discounts, if any; credit period; and
credit limit.
3. It is necessary that the first reminder be sent immediately, i.e., the next day after bills become past
due.
4. Continued use of the credit privilege should be suspended in respect to slow paying customers.
Such privilege may be given back to them only after they have paid their existing indebtedness.
5. Decisions and actions should be characterized by firmness but short of being rude and arrogant.
6. When it becomes absolutely necessary, the services of collection agencies must be sought or legal
services enlisted as the case may be.
The Problem of Credit Extension
Few merchants ever escape the problem involving the extension of credit to customers. As previously
pointed out, some use credit to increase profitable sales. Others, however, incur losses due to unwise
credit extension. Thus, due caution and extreme care should be exercised: in granting extension of the
credit period to customers. The longer the credit period is, the greater is the incidence of delinquencies.
The credit extension problem is by far one of the most difficult phases that confront many a
businessman.
Granting Credit
Aptly observed, granting credit to the individual is one thing and to a business firm is entirely a different
matter.
Since, like most anything, credit could either be miss-used or abused, it behooves upon everyone who
extends credit to exercise proper care and caution and thereby be able to prevent their ill effects not
only to the parties concerned but to the nation's economy as a whole.
Careless and unjustified granting of credit merely serves to fan the strong desire to buy goods in
amounts one does not need nor could well afford to pay. In fact, while delinquent debtors are largely to
blame for their wrong doings, however the creditors are not entirely without fault. At times, they are
the culprits for making credit both easy and quite cheap. The procedure by which a credit manager
handles an order from an old customer of the firm appears quite clear. However, it may be asked: What
is his procedure with respect to a new customer whose first order involves purchases on credit?
Three major considerations immediately come into the picture all of which merit attention. Thefirst
relates to the size of the order. Not infrequently, a number of business firms may be willing to take
certain risk, that is readily allow a small first order without a thorough and complete credit checking
than they will in the case of large order. However small losses may be due to nonpayment of obligations
by debtors when accumulated together could turn out to be a staggering sum. It must exercise caution
and providence.
The second refers to the identity of the applicant for credit and his references. The business firm should
be sure of the reputation and integrity of the applicant as well as the references which accompany the
order. The seller must have some strong and intelligent basis for granting the credit.
Perhaps, a sound basis is the experience of other firms in their relationship with the new customer.
A first order from a new customer must necessarily be accompanied by the names and addresses of
other concerns who have sold him on open account. Usually, the name of at least one bank is both
necessary and desirable.
If a prospective customer is unable or does not provide the necessary trade references requested of
him, such a circumstance could be valid reason to deny the grant of credit which must be clearly
understood as a privilege conferred and never a right.
Third is the customer's rating appears in the register of some mercantile agencies. This is not always
possible especially so when the customer is new in the business and therefore has not yet established a
name or reputation for himself. If the applicant is an individual, the credit manager can look into the
stability of employment of the applicant and the length `of time he has been residing in his present
residence. Frequent change of residence could be a clue as to the true character of the prospective
debtor. When coupled with other factors the request for purchase on credit may be turned down.
Wholesale and Retail Credit
Essentially, a big difference lies between wholesale and retail credit. Wholesale customers usually buy
for resale to others while retail customers buy for their own consumption.
Wholesale customers are able to realize income from the resale of their purchases which will serve as
major source in the settlement of their obligations. Retail customers, on the other hand; must pay for
their purchases out of their income which generally consists only of salaries or wages. In
as much As retail customers buy for their own consumption and not for resale, it follows therefore that
the credit manager should exercise effort and caution to protect his store from being imposed upon by
unscrupulous customers. This is the very reason why the credit manager generally prefers to conduct
personal interview of the applicant for credit so as, to be able to obtain the necessary and valuable
information about him as, for instance, his honesty' and straightforwardness in answering questions and
others which could be one gauge whether he is worthy of credit or not.
If the applicant is a married woman, it must be ascertained from her whether she has a job øf her own
from which she expects to pay her purchases on credit. If not, whether such purchases carry with it the
sanction and approval of her husband. Moreover, inquiring into the position that the husband holds in
the company where he is connected with, as well as the length of service he has rendered in said
company, would prove quite helpful.
The Principal Objectives of Credit Management
As pointed out in earlier discussions, credit is not only very important but moreover a scarce resource.
This fact underscores the need for this judicious and wise use. Hence, credit management becomes very
compelling indeed. Aptly said, credit management is not unlike the management of any major business
function which seeks the attainment of its laudable objectives, such as;
1. Maximizing sales. For a firm not only to continue its operations but moreover have a strong
Too hold in the business, it must be able to maximize its 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 increase the volume
of sales. While minimizing losses. Increased sales and profits are the byproducts of a better
understanding and skillful handling of all credit functions.
When a business firm sells on credit, the important role of credit management becomes altogether very
apparent. The level of management required for the administration of credit in any business firm is
determined in no small degree by the concept of the function prevailing there. In some instances, credit
is viewed narrowly as a simple function of approving 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 finance policy and other top
management strategy and, consequently, becomes a management responsibility of a much higher order
and of substantial magnitude.
Viewed correctly, one test for an effective credit management hinge among others, on the attainment
of the first objective stated above.
b. Controlling the amount of receivables. The basis of effective control is a plan for control based upon
some realistic set of standards. As pointed out in “Credit Management Handbook", a publication of the
National Association of Credit Men (USA), the best statement of the purpose of control is the simple
definition: “To assure performance in accordance with plans. "The price of performance is everlasting
follow-through. One of the skills of leadership is the art of getting desirable responses: and results for
individuals and groups in' conformity with the established goals and objectives. Hence, a necessary
qualification of a credit manager is the ability to review and appraise the operations of his department
and the performance of his staff in terms of desired results. Also, to maintain conditions which
encourage his staff to produce results to the best of their abilities. Toward the achievement, of these
ends, it is necessary to 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 that
effect significant credit activities; (3) determine the need for changes in 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 effort on the part of all concerned.2
A primary problem of establishing effective controls in the credit department is to determine what is
significant. Hence, the need for periodic appraisal. This is particularly so since the economic climate in
which business operates is fluid and complex. It is almost in a state of change or subject to change.
c. Controlling costs of credit and collection. Every company incurs expenses in the extension of credit
and in the collection of accounts receivables. These expenses include（1) bad debt losses;
(2) wages and salaries of employees charged with credit and collection functions; (3) cost of funds tied
up in receivables; (4) cost of 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 And of
course, depreciation of credit and collection equipment and fixtures.
Control of credit and collection expenses does not necessarily, however, mean minimizing expenses.
Rather, it refers to cost per unit that is decreased cost per unit of work which results from improved
planning, direction and supervision.
The collection man's job is to keep his ear close enough to the ground to detect every indication of
lapses from satisfactory standards and to act accordingly.
There are a number of expenses that are unavoidable in credit and collection work. One pertains to the
cost of traveling. Some credit men however do not do enough traveling for one reason or another.
Where such is the case they deny themselves of opportunities of gathering useful information that could
guide themselves and their company in respect to their credit work. Credit men who spend consider-
able time in the field are able to establish in most instances contacts with prospective clients that could
prove beneficial.
One other expenses that is unavoidable in credit and collection work pertains to legal fees. Legal
services are needed principally in connection with collections and protection of accounts receivable.
Importance of Credit Limits
It cannot be stressed too strongly, that one pressing problem which taxes the minds of credit managers
is not only the decision when to extend credit but a complementary problem of how much credit must
be extended. Inasmuch the very nature of credit gives rise to a Corresponding risk, it follows that utmost
care and prudence be exercised in order to determine the proper credit limits that must be imposed by
prospective creditors as a tool of protection not only on his part but also for the benefit of economic
society as well.
Imposing credit limits could be a service to buyers on credit since it could prevent them from falling
hopelessly into huge debts that they may not be able to pay regardless of the means they employ to
weed themselves out of such a" precarious predicament. In other words, the creditors may be doing
them a favor which at the moment they do not realize. As one businessmen sadly remarked, it is
oftentimes the liberality with which companies grant credit that pushed them into economic difficulties
if not ruin.
In a number of cases, the liberal treatment accorded them by grantors of credit have worked against
their interest because of its undue influence on over expansion of business. Credit limits work as bars to
over expansion of business. Hence, their importance and necessity.
Types of Credit Limits
In studying credit management, two types of credit limits may be noted: quantitative credit limits and
temporal credit limits. Both have their importance in granting credit information that could guide
themselves and their company in respect to their credit work. Credit men who spend considerable time
in the field are able to establish in most instances contacts with prospective clients that could prove
beneficial.
One other expenses that is unavoidable in credit and collection work pertains to legal fees. Legal
services are needed principally in connection with collections and protection of accounts receivable.
Importance of Credit Limits

It cannot be stressed too strongly that one pressing problem which taxes the minds of credit managers
is not only the decision when to extend credit but a complementary problem of how much credit must
be extended. Inasmuch the very nature of credit gives rise to a corresponding risk it follows that utmost
care and prudence be exercised in order to determine the proper credit limits that must be imposed by
prospective creditors as a tool of protection not only on his part but also for the benefit of economic
society as well.
Imposing credit limits could be a service to buyers on credit since it could prevent them from falling
hopelessly into huge debts that they may not be able to pay regardless of the means they employ to
weed themselves out of such a precarious predicament. In other words, the creditors may be doing
them a favor which at the moment they do not realize. As one businessmen sadly remarked, it is
oftentimes the liberality with which companies grant credit that pushed them into economic difficulties
if not ruin. In a number of cases, the liberal treatment accorded them by grantors of credit have worked
against their interest because of its undue influence on over expansion of business. Credit limits work as
bars to over expansion of business. Hence, their importance and necessity. Types of Credit Limits
In studying credit management, two types of credit limits may be noted: quantitative credit limits and
temporal credit limits. Both have their importance in granting credit.
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 a proper analysis of the C's. of credit which is not
be exceeded.
On the other hand, instead of imposing a maximum ceiling on the amount of credit which a debtor may
be able to obtain and use, temporal credit limits impose certain requirements which a borrower or
prospective debtor must comply before he could be granted credit. This temporal credit limits may be
defined as simply that type of credit which does not indicate the maximum amount that an individual or
business firm can obtain from the creditor-granting company as long as the debtor is able to fully
comply with conditions set.”
Sound Credit Management
Sound credit management principles revolve around three E's such as:
1. Estimation.
a. All available sources of credit information must be tapped and utilized so that a proper estimation of
the credit risk can be obtained.
b. For individuals who buy for consumption character and their ability to pay serve as important bases of
credit; for business concerns, it is the net worth and condition of the business as well as reputation for
paying their bills.
c. All credit information gathered and received must be kept in strict confidence. Only those who are
authorized must have access to it.
2 .Enforcement.
a. Granting credit is but one phase of the credit function, collection is another. Collection of accounts
should start from the moment they become due. There be should be no room for vacillation insofar as
collection is concerned.
b. The task and responsibility of every collection department is to get the money due the company.
If the money can be collected without offending the customer, or doubtless, this should be done.
c. Collection records must be kept and maintained and should indicate when notices were sent; dates
when calls were made by lie collectors; payments made; balances due; and action taken, if any.
3. Evaluation.
a. Sound credit management principles dictate that results must be evaluated against company policies
and procedures.
b. If a situation should arise in the future which preclude good-paying customers to discharge their
obligations on time, policies, and procedures may be modified without losing sight of company goals
and objectives.
c. Records must be periodically reviewed and kept up to date.
Credit Frauds
If only all individuals are honest, then no credit manager would develop' wrinkles or grow gray hairs
prematurely. But that is perhaps wishful thinking. While it is true that most credit manager's relations
are those with business firms and individuals who operate above board, nevertheless, there are a few
who do not.
These dishonest firms and individuals are known by various names and employ various tricks.
Some of them become successful in their “line of trade” while others fall by the wayside and become
apprehended even in their first try.
Some of them appear decent enough. Some of them in fact are married to men who are in the top rung
of the organization to which they belong just as others are wives of prominent government officials.
They appear in expensive clothes and ride in swanky automobiles and, as such, create the impression of
their respectability as well as decency. Others are just plain Miss and Mrs. So and So. The men in the
same group are not different. They appear honest and reliable.
Some of these crooks operate alone because of the belief that it is much difficult to cover the tracks of
one man and thus escape apprehension. Others, on the other hand, operate in a ring - a big time
syndicate who victimize business firms involving large sums of money. As to so-called business
establishments - they operate through “fly-by-night" schemes. After obtaining the loot (goods sold on
credit), they disappear into thin air until they make their reappearance-trying to victimize another
business firm. And this goes on and on, until the law catches them, for crime does not pay.
MODULE 5
Credit System
1. Define the Characteristic of Credit Customers
2. Determine the Collection Consideration for Corporate and Individual Clients
3. Discuss the Phases of Credit and Collection
Customer
A customer is an entity that buys goods or services from third parties. Accumulating a profitable and
recurring group of customers is the primary goal of a business, since this group generates revenue for
the business.
A company that wants to remain profitable will closely follow the satisfaction levels of its customers and
change its practices to match their requirements, so that they are willing to continue placing orders.
Otherwise, a company must continually expend funds to locate new customers, which is an expensive
proposition.
What is the Customer Master File?
The customer master file is used to maintain information in the accounting database that is unique to
each customer. Examples of the information contained within the file are as follows:
tact name and phone number
-via settings
e flag
The information contained within this file is used to automatically populate fields in new transactions,
such as customer sales order
What is a Credit Limit?
A credit limit is the maximum amount of credit offered to a customer. For example, a supplier grants a
credit limit of $5,000 to a customer. The customer makes $3,000 of purchases on credit, which reduces
the available credit limit to $2,000. At this point, the customer can make additional purchases on credit
of $2,000, but must pay down some of the outstanding balance in order to make a larger purchase on
credit.
The credit limit is used to limit the amount of loss that a business will sustain if a customer does not pay.
The amount of a credit limit is established by the credit department. The amount of the credit limit is
based on a number of factors, such as:
cial position, as described in its financial statements.
when a customer wants to place an unusually large order, where they want the credit limit to be
increased in order to record a large sale. While doing so can enhance reported revenues, it also
increases the risk of incurring a large bad debt loss.
Master the 5 C’s of Credit
The five C's — or characteristics — of credit are character, cash flow, capital, conditions and collateral.
While a “C” average may feel middle-of-the-road on an academic scale, nailing the five C’s of credit is
the key to getting business funding from banks and other financial institutions.
The five C’s, or characteristics, of credit — character, capacity, capital, conditions and collateral are a
framework used by many traditional lenders to evaluate potential small-business borrowers.
Five C's of credit
1. Character
2. Capacity/Cash flow
3. Capital
4. Conditions
5. Collateral
There aren’t any strict guidelines for how lenders weigh these attributes — different lenders may place
more value on one over another.
For example, online lenders may be more willing to consider a borrower’s personal credit score on a
loan application, while banks may care more about collateral and money you have invested in the
business. The key to small-business success is focusing on things you can control, says Brad Farris, a
business growth advisor with Anchor Advisors in Chicago. “The five C’s are one of those things that just
are — banks believe in them, so we have to deal with it,” he says.
We’ve rounded up the five characteristics and some tips for putting your best foot forward.
1. Character
What it is: A lender’s opinion of a borrower’s general trustworthiness, credibility and personality.
Why it matters: Banks want to lend to people who are responsible and keep commitments.
How it’s assessed: From your work experience, credit history, credentials, references, reputation and
interaction with lenders.
How to master it: "Character is something you can control and promote, but only if you have a bank that
cares about relationships,” Farris says.
If you use a local or community bank, build a relationship. Farris recommends sharing good news about
your business with your banker and finding ways to promote the bank. “Make yourself someone they
want to lend to,” he says.
2. Capacity/Cash flow
What it is: Your ability to repay the loan.
Why it matters: Lenders want to be assured that your business generates enough cash flow to repay the
loan in full.
How it’s assessed: From financial metrics and benchmarks (debt and liquidity ratios, cash flow
statements), credit score, borrowing and repayment history.
How to master it: Some online lenders may be more open to helping you finance immediate cash flow
gaps. If you’re focusing on local banks, pay down debt before you apply. Also, calculate your cash flow to
understand your starting point before heading to the bank.
3. Capital
What it is: The amount of money invested by the business owner or management team.
Why it matters: Banks are more willing to lend to owners who have invested some of their own money
into the venture. It shows you have some “skin in the game.”
How it’s assessed: From the amount of money the borrower or management team has invested in the
business.
How to master it: Nearly 60% of small-business owners use personal savings to start their business,
according to the Small Business Administration. Keep a record that shows your investment in the
business.
There are other ways, however, to acquire startup funding if you don’t want to take on all the risk
yourself.
4. Conditions
What it is: The condition of your business — whether it is growing or faltering — as well as what you’ll
use the funds for. It also considers the state of the economy, industry trends and how these factors
might affect your ability to repay the loan. Why it matters: To ensure that loans are repaid, banks want
to lend to businesses operating under favorable conditions. They aim to identify risks and protect
themselves accordingly.
How it’s assessed: From a review of the competitive landscape, supplier and customer relationships, and
macroeconomic and industry-specific issues.
How to master it: You can’t control the economy, but you can plan ahead. Although it might seem
counterintuitive, apply for a business line of credit when your business is strong.
"Banks will always be happiest to loan you money when you don’t need it," Farris says. If conditions
worsen, they may reduce the credit line or take it away, he adds, but at least you have some cushion for
a while if things go south.
5. Collateral
What it is: Assets that are used to guarantee or secure a loan.
Why it matters: Collateral is a backup source if the borrower cannot repay a loan.
How it’s assessed: From hard assets such as real estate and equipment; working capital, such as
accounts receivable and inventory; and a borrower’s home that also can be counted as collateral.
How to master it: Picking the right business structure can help protect your personal assets from being
seized by a lender if you’re sued or if a lender is trying to collect. Forming a legal entity helps mitigate
that risk.
The Credit Bureau
Credit Information Corporation (CIC)
The Credit Information Corporation (CIC) is a government-owned and controlled corporation providing
credit information system in the Philippines. It was created in 2008 by the Credit Information System Act
(CISA) to construct a centralized, comprehensive credit information system for the collection and
dissemination of accurate and fair information relevant to, or arising from, credit and credit-related
activities of all entities participating in the financial system. This credit information is to be collected
from various sources such as banks, financial institutions, insurance companies, financing companies,
credit cooperatives, as well as utility companies and other businesses that extend loans. The CIC
compiles this credit information to help creditors evaluate the ability of borrowers to pay.
The credit information system is intended to straightforwardly address the need for dependable credit
information of borrowers and is supposed to significantly improve the overall availability
of credit especially to micro, small and medium-scale enterprises; to make credit more cost effective;
and to reduce the dependence on collateral to secure credit facilities. An efficient credit information
system is also supposed to enable financial institutions to reduce their over-all credit risk, contributing
to a healthier and more stable financial system.
By law, the credit information should be provided at the least cost to all participants and the CIC should
ensure the protection of consumer rights and the existence of fair competition in the industry at all
times.
The Six Stages of Credit and Collections
Accounts receivable management should be looked at like a strategy and a process, not just an
accounting function or as the result of doing business. Like any other process or strategy, there are a
number of steps that need to be taken for the best result. Be methodical in your accounts receivable
management and go through the following 6 steps to ensure timely collection, healthy cash flow, and
positive customer relationships.
Notify Your Customer
Notify your customer of their debt. In other words, send them an invoice. Be sure your invoice is sent
promptly and includes all of the information the customer needs to quickly make a payment.
This would include order information, amount due, due date, agreed upon terms, and where/how they
can pay.
Confirm
Confirm that the invoice was successfully delivered. Did your customer receive the invoice? Do they
have any questions? A brief follow-up call a few days after sending the invoice can help speed up
payment and serve as a customer service call. If there is a problem with the invoice, your customer is
likely to just put it aside and deal with it later. If you call to follow-up, you can answer their questions
right away and help them submit the payment sooner.
Remind Your Customers
Many customers may need a reminder or two before they get around to sending payment. A majority of
people want and mean to pay the invoice, but they forget, are having cash flow problems, lost the
invoice, etc. A friendly call, letter, or email may be all they need. Be sure to remind them a long BEFORE
the due date. Remember, there are many different types of communications, and timing is everything-
this white paper has everything you need to know, suggestions, communication templates, and call
scripts to help you do make the most out of each and every customer communication.
Inquire
Inquire about a late payment. If your customer has still not submitted payment after the due date,
something may be wrong. If it is a new customer or one who is usually a problem, you may want to
escalate this and avoid the risk of taking on bad-debt. If it is a customer who has been around for a long
time or is generally quick to pay, there may be an unusual circumstance you can help them with. Either
way, in this stage you should get in contact with them, remain friendly and professional, find out why
they still have not paid you, and together figure out how you can get this problem fixed.
Increase the Pressure
If you find that your invoice was received, the information was correct, there are no special
circumstances, the product or service was provided, and your customer is still not paying, it’s time to get
a little more forceful with your collections efforts. Becoming a little more firm in your communications is
necessary at this point- be firm, not harsh or threatening. The goal is still to collect the money and breed
goodwill between you and your clients.
Escalate the Account
There are occasions when it’s necessary to escalate an account to management for higher-level
discussions. At this point, the chances of you ever getting paid are pretty slim, and it may be time to
start thinking of turning things over to a collection agency. Before doing so, have your management
level employee contact the customer, review with them all of the steps your company has taken to
collection this debt, and give them a final chance and a deadline, if they do not pay by XXX this will be
turned over to a collections agency.
To be effective in your overall credit collections efforts you need to take each and every one of these
steps for each and every one of your invoices- and that is where things can get a little overwhelming.
If you have hundreds or thousands of customers, all with multiple orders and invoices, it’s hard to find
the time to take all of the above steps to help speed up collections while also managing invoice disputes
and other critical tasks. Accounts receivable automation can take away much of the time consuming
parts of the tasks above, like the invoice generation and delivery, sending reminder letters, tracking
aging, running reports, and much more.
Accounts receivable management software puts your accounts receivable and credit collections on auto-
pilot with built-in workflow to help your credit collection employees identify who to call, when, and why,
with all the information they need at their fingertips to resolve disputes and to flat out get paid faster.
Integrated document management and automation makes it easy to communicate effectively with
customers, documenting what you’ve done with insights to measure the results.
Collection Consideration for corporate and individual clients
Establishing appropriate credit policies and collection procedures is vital to the success of any small
business. You must decide what types of credit to offer, or even if offering credit is right for your
business.
Credit and collections are for many small employers what changing diapers is for many parents:
although everyone agrees it's essential, no one really wants to do it (but they're sure glad they did after
the fact).
As a result, many small business owners put off creating a credit and collection policy until they
absolutely have no other choice. As their customer base builds, and more and more customers want to
pay by credit, they realize that they need to open up a credit card account or offer credit terms.
Or they ignore those few customers who don't pay their bills, until the few grow into many, and
suddenly they realize that they need to spend time collecting overdue accounts. The problem with this
approach is that small businesses that don't plan ahead frequently end up spending a lot more of their
time fixing the trouble than they would have taken if they had spent a little more time thinking about
their credit policy beforehand. And, in countless cases, a poorly planned credit policy has ruined what
was otherwise a thriving business.
To better serve your business and your customers, we'll guide you through the process of setting up a
credit and collection policy. No one wants to spend all of their time collecting debts (unless, of course,
you're in the debt collection business). Your time is much more productively spent doing what you do
best—running your business. But if you just spend a little bit of time thinking about your credit policy
early on, you can save yourself time and money down the road. The success of your business may
depend upon it.
Understanding Your Credit Options
Many people will tell you that, as a business owner in today's economy, you don't have any choice but
to offer credit to your customers. They'll tell you that credit is as essential to business success as oxygen
is to breathing. Well, they're mostly right. But it's not an absolute rule for every business, particularly for
smaller businesses with fairly small customer bases.
Don't fall into the trap of thinking that you should offer credit just because everyone else does. As you'll
see as you go through this discussion, trying to collect from those who don't pay you can be extremely
time-consuming, costly, and frustrating.
Should You Offer Credit to Your Customers?
Your decision on whether to extend credit to your customers won't involve a lot of complex analysis. It'll
be based mostly on good common sense.
If the benefits of offering credit, such as increased sales, outweigh the costs of offering it, such as the
risks and costs of non-payment, you should offer it. If not, you shouldn't. Just don't forget that if you
extend credit freely and don't get paid, it won't matter how much new business you generate.
Abiding by the Guiding Principles
In deciding on a credit policy, you should be guided by the following principle: If you can demand cash
up front, and your customers are willing to give it to you that should be your policy. If that's not
possible, follow this principle:
Get as much of your payments up front and in cash as possible. In other words, extend credit only if
business conditions demand it.
Be sure to consider the factors that will come into play in determining the likelihood that you'll have to
offer credit. And you'll need to figure out which types of credit are best for you, if conditions will
demand it for your business, as they do for most others (particularly those that sell mostly to other
businesses).There are several from which to choose: credit cards, checks, and a wide variety of credit
terms
(payable in 30 days; half in cash up front, the other half on delivery; 10 percent down, the remainder
within 60 days; etc.).
Factors to Consider When Deciding Whether to Extend Credit

As mentioned before, extending credits isn't for everyone but it is smart for many small businesses.
Here's a look at some of the factors that should play a role in your decision whether to offer credit to
your customers, and under what terms and conditions.
Following Your Industry
If the custom in your industry is to provide credit, you may have no choice but to offer it. If you own a
fast food restaurant, you probably can get away with requiring full payment in cash. But if you're a
consultant or a lawyer, you may lose business if you don't extend credit. An angle you should consider is
whether you can gain an advantage over your competitors by offering credit where the industry custom
is not to offer it. Can you make more money by letting your customers buy a hamburger with a Visa
card? If you can, perhaps you should.
If the type of business you're in is one where credit plays an essential role, you also may have no choice
but to offer credit. For example, if you sell your goods through the mail, you'll probably have to extend
credit to your customers.
Knowing Your Customers
Consider these examples of knowing your customers to determine a credit policy:
The more dependent you are on repeat customers, the more likely it is that you'll extend credit to them.
If your business is catering, you may be more likely to extend credit than if your business is in the
tourism sector.
The better you know your customers, the more likely it is that you'll extend credit to them. If your
business is consulting, you're more likely to offer credit than if your business is palm reading.
The bigger your customers are and the more buying power they have, the more likely it is that they'll
dictate to you whether you offer credit. If your business is selling goods to IBM, you're more likely to
offer whatever means of payment IBM wants than if your business is selling lemonade to the neighbors.
Also, the wealthier your customers are, the more likely it is that you'll extend credit to them.
Considering Your Location
The more economically depressed the area surrounding your business is, the less likely it is that you'll
extend credit to your customers (assuming you sell goods and services to people in the community). If
your business is selling shoes in a poor area of town, you're less likely to extend credit than if you sell
shoes in a wealthy area.
Measuring Your Transaction Size
The larger your typical transaction is, the more likely it is that you'll have to extend credit. If you sell
your own oil paintings at art fairs, your customers will probably expect to be able to pay by credit card.
On the other hand, if you sell ice cream cones at art fairs, your customers should expect to pay in cash.
Assessing Your Financial Condition

The stronger your financial condition and the better your cash flow, the more likely it is that you'll
extend credit. If your cash flow is poor, and you cannot afford to carry much credit, then you'll be less
likely to extend credit than if your financial condition were stronger.
Various Methods of Extending Credit to Customers
When we picture extending credit to a customer, we typically think of the situation where the customer
receives a bill in the mail after receiving the goods or services. But credit comes in many varieties. In
fact, any time you don't collect full payment from your customer in cash up front, you've extended
credit.
Example
If you give your accountant a check when you pick up your income tax return, your accountant has
extended credit to you because the work was finished before you paid for it. The period for which credit
is being extended is from the time of payment until the check clears and the funds are deposited to his
or her account.
Here's a look at the types of credit available to you, in ascending order of risk.
Extending Credit through Credit Cards
If you decide to accept credit cards, you'll first have to decide which ones you want to accept: Visa,
MasterCard, Discover, American Express or any of the others (like Diners Club). The charge you'll pay to
the credit card company per applicable transaction will vary, depending upon the volume of your sales
and the size of your transactions.
The average fee usually runs between 2.5 percent and 5.5 percent of your credit card sales, although
American Express runs a bit higher. Accepting credit cards is the least risky of the credit options because
most of the risk falls on the credit card company. You'll want to learn more about accepting credit cards
before committing to this form of credit.
Extending Credit through Checks
Although checks are usually considered to be cash rather than credit, they do involve risk on your part.
Whenever you accept a check at the time the goods or services are delivered, you've extended credit
because you're bearing the risk that the check will bounce—and if you accept checks after service is
rendered, you bear the risk of ever receiving payment.
If you accept checks, you'll have to decide which types of checks you'll accept (for example, will you
accept multi-party checks?), and you'll have to decide which types of identification you'll require. For
more on the precautions you should take when accepting checks, see credit information on individuals.
Extending Credit through Credit Terms
In some cases, you may want to offer credit terms to your customers. Most often that will occur if you
sell your goods and services to other businesses, but sometimes you'll want to extend terms to
individual customers (just as your credit card company does to you). This is the riskiest option because
you're forced to rely completely on the creditworthiness of your customers.
In most cases when you extend credit terms to your customers, you'll want to have them sign a sales
contract, so you'll have to decide what the credit terms will be in the contract. You have any number of
choices, such as COD, net 30 days, net 10 days, etc. To be binding, the credit terms must be in writing
and the document must be signed by the customer.
In many situations, the credit terms will not be formal and don't need to be in writing. The example
above, involving the accountant, is one such situation.
Loan Management System for Banking and Financial Services
Loan management systems help automate the entire loan lifecycle. Depending on requirements, these
programs can assist in part or whole. The software can help with processing customer information,
create new loans, and more. They can also provide lenders with accurate statements and reports.
Moreover, they can manage interest rates and provide the tools for collection automation.
These automated loan management/lending systems outshine legacy systems in many ways. Being a
digitized system, it also caters to the newer generation of customers. It also reduces manual errors and
risks.
Features of a loan management system
Digital and cloud-based lending solutions are scalable. They can help you manage the loan lifecycle.
Alternatively, you can also use the software for a single task such as tracking repayments.
They can also be complete systems that can validate loan applications and determine eligibility.
Here are some of the remarkable features of a loan management system.
Loan Origination
Loan origination is the process where a borrower applies for a loan, and the lender processes it.
Lending CRM can help evaluate the risk or make a decision.
Loan origination functionalities of a lending CRM can help lookup the credit history of an individual or an
organization. They can also suggest what loans are suitable for the client. The loan origination system
can analyze the application and provide insights to service the loan. A digital solution will take a few
seconds to do the tasks, whereas a manual workflow may take days.
Loan Servicing
The loan servicing feature will help you manage loans. Every loan is different: they have different
interest rates, payment dates, and more. You can track all these loans and ensure that you receive
payments on time. It allows you to calculate interests, fees, and more. A loan management solution can
also assist you in automatically collecting funds via wire transfers, credit cards, and more.
(More on the types of loans that loan management software can handle in the subsequent section.)
Debt collection
Collecting back the payment is essential for lending businesses. A digital lending platform can notify you
when accounts become delinquent. You can also get notified when the borrower pays back or when a
repayment is due. The collection system can even calculate late fees for you.
Debt collection software keeps everyone in the team on the same page. You can track all the
communication your employees are having with your clients. It becomes much easier to look up a
debtor’s payment history and make modifications or arrange new terms of payment.
Reporting and Analytics
An essential feature of loan management software is the reporting module. You can get comprehensive
reports on the cash flow. You can create reports based on interactions with a single individual or
business. Or you can look at how profitable offerings are for you. Reporting allows you to visualize and
understand in which direction your business is moving.
MODULE 6
Credit Risk
1. Discuss the uses of credit risk to credit operations
2. Compare and contrast the different credit scoring schema
A credit risk is risk of default on a debt that may arise from a borrower failing to make required
payments. In the first resort, the risk is that of the lender and includes lost principal and interest,
disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an
efficient market, higher levels of credit risk will be associated with higher borrowing costs.
Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels
based on assessments by market participants.
Losses can arise in a number of circumstances, for example:
loan.
-secured fixed or floating charge debt.
ness does not pay an employee's earned wages when due.
when due.
turn funds to a depositor.

To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower,
may require the borrower to take out appropriate insurance, such as mortgage insurance, or seek
security over some assets of the borrower or a guarantee from a third party. The lender can also take
out insurance against the risk or on-sell the debt to another company. In general, the higher the risk, the
higher will be the interest rate that the debtor will be asked to pay on the debt.
Credit risk mainly arises when borrowers are unable or unwilling to pay.
A credit risk can be of the following types:
– The risk of loss arising from a debtor being unlikely to pay its loan obligations in
full or the debtor is more than 90 days past due on any material credit obligation; default risk may
impact all credit-sensitive transactions, including loans, securities and derivatives.
– The risk associated with any single exposure or group of exposures with the
potential to produce large enough losses to threaten a bank's core operations. It may arise in the form
of single-na – The risk of loss arising from a
sovereign state freezing foreign currency payments (transfer/conversion risk) or when it defaults on its
obligations (sovereign risk); this type of risk is prominently associated with the country's macroeconomic
performance and its political stability.
Significant resources and sophisticated programs are used to analyze and manage risk. Some companies
run a credit risk department whose job is to assess the financial health of their customers, and extend
credit (or not) accordingly. They may use in-house programs to advice on avoiding, reducing and
transferring risk. They also use the third party provided intelligence.
Companies like Standard & Poor's, Moody's, Fitch Ratings, DBRS, Dun and Bradstreet, Bureau van Dijk
and Rapid Ratings International provide such information for a fee.
For large companies with liquidly traded corporate bonds or Credit Default Swaps, bond yield spreads
and credit default swap spreads indicate market participants’ assessments of credit risk and may be
used as a reference point to price loans or trigger collateral calls.
Most lenders employ their models (credit scorecards) to rank potential and existing customers according
to risk, and then apply appropriate strategies. With products such as unsecured personal loans or
mortgages, lenders charge a higher price for higher-risk customers and vice versa. With revolving
products such as credit cards and overdrafts, the risk is controlled through the setting of credit limits.
Some products also require collateral, usually an asset that is pledged to secure the repayment of the
loan.
Credit scoring models also form part of the framework used by banks or lending institutions to grant
credit to clients. For corporate and commercial borrowers, these models generally have qualitative and
quantitative sections outlining various aspects of the risk including, but not limited to, operating
experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once
this information has been fully reviewed by credit officers and credit committees, the lender provides
the funds subject to the terms and conditions presented within the contract (as outlined above).
Sovereign risk
Sovereign credit risk is the risk of a government being unwilling or unable to meet its loan obligations, or
reneging on loans it guarantees. Many countries have faced sovereign risk in the late-2000s global
recession. The existence of such risk means that creditors should take a two stage decision process
when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk
quality of the country and then consider the firm's credit Quality. [12]
Five macroeconomic variables that affect the probability of sovereign debt rescheduling are:
The probability of rescheduling is an increasing function of debt service ratio, import ratio, the variance
of export revenue and domestic money supply growth. The likelihood of rescheduling is a decreasing
function of investment ratio due to future economic productivity gains. Debt rescheduling likelihood can
increase if the investment ratio rises as the foreign country could become less dependent on its external
creditors and so be less concerned about receiving credit from these countries/investors.
Counterparty risk
A counterparty risk, also known as a default risk or counterparty credit risk (CCR), is a risk that a
counterparty will not pay as obligated on a bond, derivative, insurance policy, or other contract.
Financial institutions or other transaction counterparties may hedge or take out credit insurance or,
particularly in the context of derivatives, require the posting of collateral. Offsetting counterparty risk is
not always possible, e.g. because of temporary liquidity issues or longer-term systemic reasons. Further,
counterparty risk increases due to positively correlated risk factors; accounting for this correlation
between portfolio risk factors and counterparty default in risk management methodology is not trivial.
The capital requirement here is calculated using SA-CCR, the Standardized approach for counterparty
credit risk. This framework replaced both non-internal model approaches: the Current
Exposure Method (CEM) and the Standardised Method (SM). It is a "risk-sensitive methodology", i.e.
conscious of asset class and hedging, that differentiates between margined and non-margined trades
and recognizes netting benefits; issues insufficiently addressed under the preceding frameworks.
Mitigation
Lenders mitigate credit risk in a number of ways, including:
-based pricing – Lenders may charge a higher interest rate to borrowers who are more likely to
default, a practice called risk-based pricing. Lenders consider factors relating to the loan such as loan
purpose, credit rating, and loan-to-value ratio and estimates the effect on yield (credit spread).
– Lenders may write stipulations on the borrower, called covenants, into loan agreements,
such as:
[18]
o Periodically report its financial condition,
o Refrain from paying dividends, repurchasing shares, borrowing further, or other specific, voluntary
actions that negatively affect the company's financial position, and
o Repay the loan in full, at the lender's request, in certain events such as changes in the borrower's
debt-to-equity ratio or interest coverage ratio.
– Lenders and bond holders may hedge their credit risk by

purchasing credit insurance or credit derivatives. These contracts transfer the risk from the lender to the
seller (insurer) in exchange for payment. The most common credit derivative is the credit default swap.
– Lenders can reduce credit risk by reducing the amount of credit extended, either in total
or to certain borrowers. For example, a distributor selling its products to a troubled retailer may attempt
to lessen credit risk by reducing payment terms from net 30 to net
15.
– Lenders to a small number of borrowers (or kinds of borrower) face a high degree of
unsystematic credit risk, called concentration risk.
[19] Lenders reduce this risk by diversifying the borrow – Governments may
establish deposit insurance to guarantee bank deposits in the event of insolvency and to encourage
consumers to hold their savings in the banking system instead of in cash.
Credit Scoring
What are the Different Credit Scoring Systems?
Is it possible to tell which credit scoring company issues the highest-quality credit scores? Most
companies avoid the issue and subscribe to the most reputable service (a subjective approach at best),
or the one with the lowest prices, but either approach may not yield the best results – and results can
vary substantially, since the scoring companies input different types of data into their models, as well as
assign different weights to the data.
What is a Credit Score and how is It Computed?
Your credit score is a three-digit number that represents your creditworthiness or ability to pay off a
loan based on the information in your credit report.
What is a Good Credit Score?
A credit score in the Philippines ranges from 300 to 850, with 850 being the highest rating. The higher
your credit score, the better. Banks, insurance companies, and other financial institutions use the credit
score, among other things, to assess a borrower’s credit risk.
What Factors Affect Your Credit Score?
Credit bureaus calculate credit scores based on five criteria. Take note of these factors when improving
your credit score:
1. Credit payment history: How regular you pay your debts, how much you repay, and whether you’ve
paid on time or not
2. The amount owed or credit utilization ratio: How much of your credit limit you spend. If you’re
maxing out your credit card, you’re likely to miss your loan repayments in the future and get a lower
credit score.
3. Length of credit history: The average age of your credit card and loan accounts, and the length of time
since those were used
4. Types of credit used: Whether you’ve availed of a variety of credit types such as auto loans,
mortgages, and credit cards. This information gives lenders an idea if you can manage different credit
types responsibly.
5. New credit: How often you’ve opened new accounts. Applying for multiple credit cards or loans at
once can hurt your credit score.
What Factors are excluded from Your Credit Score?
-credit banking information (savings accounts, checking accounts, investment accounts, debit
cards, prepaid cards, and other non -credit bank accounts)
What’s the Difference between a Credit Score, Credit Report, and Credit History?
Your credit score, credit report, and credit history are interrelated yet different from each other.
A credit report is a comprehensive summary of all financial transactions, including loans and utility
subscriptions. It contains credit information such as balances and missed payments, as well as personal
data such as name, TIN and SSS/GSIS number, home address, and employer. It’s used as the basis for
computing a person’s credit score in the Philippines.
Meanwhile, a credit history is a record of one’s ability to repay debts over the years. It describes how
you use credit and how responsible you are as a borrower.
Credit Reporting and Scoring System in the Philippines: How Does It Work?
Created through Republic Act 9510 or the Credit Information System Act, the Credit Information
Corporation (CIC) is the only centralized registry of credit data in the Philippines. The CIC is authorized to
collect, consolidate, and share credit information with all financial institutions in the country.
Banks, cooperatives, insurance firms, and telecom companies submit their clients’ credit history
to the CIC, which then collates the information into detailed credit reports. Authorized lenders can
access credit reports from the CIC.
The CIC has four accredited credit bureaus or special accessing entities that compute credit scores in the
Philippines:
Why is a Good Credit Score Important?
Having a good credit score is important, so much so that it’s considered a big deal when it comes to
romantic relationships. Various studies found that higher credit scores increase the likelihood of finding
a lifetime partner, with financial responsibility topping the list of qualities of an ideal mate. There’s even
an online dating site (CreditScoreDating.com) that matches people based on financial compatibility. The
dating service carries the motto “Good Credit is Sexy.”
The same dynamics can also be said about lenders and borrowers. To gain the bank’s trust, you have to
prove your commitment and responsibility to pay back what you owe on time. Your credit report and
credit score in the Philippines will be your proof.
Why You Should Improve Your Credit Score in the Philippines
1. Easy to get a loan or credit card
With a high credit score, you can enjoy easy credit access because lenders will see you as a reliable,
trustworthy borrower. Your loan or credit card applications will get approved faster than those with
poor credit scores.
2. Higher loan amounts and lower interest rates
Credit reports enable lenders to make fair and objective decisions when processing loan and credit card
applications. If you’re found to be creditworthy based on your credit report, you’ll qualify for higher loan
amounts and credit card limits with lower interest rates.
3. Lower insurance costs
Your credit score may also affect how much premium you’re going to pay for your car insurance or life
insurance. You can get a discount on insurance rates with a good credit score, while a bad credit score
can cost you higher premiums.
4. Better deals on property leases
The importance of a credit score in the Philippines goes beyond credit cards and loans. It also matters
when negotiating for better deals, such as when you’re renting a property. If you know you have a high
credit score, you can use that to haggle with a prospective landlord for just a one month advance
payment rather than the usual two month-deposit.
5. Higher chances of getting hired

Your potential employers may conduct background checks and even avail of the employment history
check service from credit bureaus in the Philippines. They may also look specifically at your credit score
or credit report to determine how responsible you are as a potential employee.
How to Check Your Credit Score in the Philippines
Filipinos can get their credit report for a minimal fee from either the CIC or one of its accredited credit
bureaus. You can file a request through the CIC’s website at creditinfo.gov.ph. Just click
‘Services’ on the homepage and select ‘Get a CIC Credit Report’.To access your credit report, you’ll need
to present a valid ID (passport, driver’s license, etc.) and provide your personal information (full name,
birth date, and contact details).
Application for Credit Risk Management
Credit risk refers to the probability of loss due to a borrower’s failure to make payments on any type of
debt. Credit risk management is the practice of mitigating losses by understanding the adequacy of a
bank’s capital and loan loss reserves at any given time – a process that has long been a challenge for
financial institutions.
The global financial crisis – and the credit crunch that followed – put credit risk management into the
regulatory spotlight. As a result, regulators began to demand more transparency. They wanted to know
that a bank has thorough knowledge of customers and their associated credit risk. And new Basel III
regulations will create an even bigger regulatory burden for banks.
To comply with the more stringent regulatory requirements and absorb the higher capital costs for
credit risk, many banks are overhauling their approaches to credit risk. But banks who view this as
strictly a compliance exercise are being short-sighted. Better credit risk management also presents an
opportunity to greatly improve overall performance and secure a competitive advantage.
Challenges to Successful Credit Risk Management
delays.
measures and get a big picture of group wide risk.
duplication of effort and negatively affects a bank’s efficiency ratio.
olio concentrations or
re-grade portfolios often enough to effectively manage risk.
-based reporting processes overburden analysts and
IT.
Best Practices in Credit Risk Management

The first step in effective credit risk management is to gain a complete understanding of a bank’s overall
credit risk by viewing risk at the individual, customer and portfolio levels.
While banks strive for an integrated understanding of their risk profiles, much information is often
scattered among business units. Without a thorough risk assessment, banks have no way of knowing if
capital reserves accurately reflect risks or if loan loss reserves adequately cover potential short-term
credit losses. Vulnerable banks are targets for close scrutiny by regulators and investors, as well as
debilitating losses.
The key to reducing loan losses – and ensuring that capital reserves appropriately reflect the risk profile
– is to implement an integrated, quantitative credit risk solution. This solution should get banks up and
running quickly with simple portfolio measures. It should also accommodate a path to more
sophisticated credit risk management measures as needs evolve. The solution should include:
-time scoring and limits monitoring.
-testing capabilities.
hands of those who need it, when they need it.
Value at Risk (VaR)
Value at risk (VaR) is a statistic that measures and quantifies the level of financial risk within a firm,
portfolio or position over a specific time frame. This metric is most commonly used by investment and
commercial banks to determine the extent and occurrence ratio of potential losses in their institutional
portfolios.
Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR calculations
to specific positions or whole portfolios or to measure firm-wide risk exposure.
Understanding Value at Risk (VaR)
VaR modeling determines the potential for loss in the entity being assessed and the probability of
occurrence for the defined loss. One measures VaR by assessing the amount of potential loss, the
probability of occurrence for the amount of loss, and the timeframe.For example, a financial firm may
determine an asset has a 3% one-month VaR of 2%, representing a 3% chance of the asset declining in
value by 2% during the one-month time frame. The conversion of the 3% chance of occurrence to a daily
ratio places the odds of a 2% loss at one day per month.
Using a firm-wide VaR assessment allows for the determination of the cumulative risks from aggregated
positions held by different trading desks and departments within the institution. Using the data
provided by VaR modeling, financial institutions can determine whether they have sufficient capital
reserves in place to cover losses or whether higher-than-acceptable risks require them to reduce
concentrated holdings.
Example of Problems with Value at Risk (VaR) Calculations
There is no standard protocol for the statistics used to determine asset, portfolio or firm-wide risk.
For example, statistics pulled arbitrarily from a period of low volatility may understate the potential for
risk events to occur and the magnitude of those events. Risk may be further understated using normal
distribution probabilities, which rarely account for extreme or black swan events.
The assessment of potential loss represents the lowest amount of risk in a range of outcomes. For
example, a VaR determination of 95% with 20% asset risk represents an expectation of losing at least
20% one of every 20 days on average. In this calculation, a loss of 50% still validates the risk assessment.
The financial crisis of 2008 that exposed these problems as relatively benign VaR calculations
understated the potential occurrence of risk events posed by portfolios of subprime mortgages.
Risk magnitude was also underestimated, which resulted in extreme leverage ratios within subprime
portfolios. As a result, the underestimations of occurrence and risk magnitude left institutions unable to
cover billions of dollars in losses as subprime mortgage values collapsed
The value at risk (VaR) is a statistical measure that assesses, with a degree of confidence, the financial
risk associated with a portfolio or a firm over a specified period. The VaR measures the probability that a
portfolio will not exceed or break a threshold loss value. The VaR is based solely on potential losses in an
investment and does so by determining the loss distribution. However, the tail loss of the distribution is
not thoroughly assessed in the typical VaR model.
The VaR assesses the worst-case scenario of a firm or an investment portfolio. The model uses a
confidence level, such as 95% or 99%, a time period and a loss amount. For example, an investor
determines that the one-day, 1% VaR of his investment portfolio is $10,000. The VaR determines that
there is a 1% probability that his portfolio will have a loss greater than $10,000 over a one day period.
He has 99% confidence that his worst daily loss will not exceed $10,000.
The VaR can be calculated by using historical returns of a portfolio or firm and plotting the distribution
of the profit and losses. The loss distribution negates the profit and loss distribution.
Therefore, under this convention, the profits will be negative values, and the losses will be positive.For
example, a firm calculates its daily returns for all of its investment portfolios over a one-year period. The
VaR describes the right tail of the loss distribution. Suppose the alpha level selected is 0.05. Then the
corresponding confidence level is 95%. The 95% confidence interval of the daily returns range from 5%
to 10%. Therefore, with 95% confidence, the firm concludes that the expected worst daily loss will not
exceed 5%. However, this is a probabilistic measure and is not certain because losses can be much
greater depending on the heaviness, or fatness, of the tail of the loss distribution.
Value at risk does not assess the kurtosis of the loss distribution. In the VaR context, a high kurtosis
indicates fat tails of the loss distribution, where losses greater than the maximum expected loss may
occur. Extensions of VaR can be used to assess the limitations of this measure, such as the conditional
VaR, also known as tail VaR. The conditional VaR is the expected loss conditioned on the loss exceeding
the VaR of the loss distribution. The conditional VaR thoroughly examines the tail end of a loss
distribution and determines the mean of the tail of the loss distribution that exceeds the VaR.
MODULE SEVEN
COLLECTIONS
1. Identify how internal and external factors affect credit and collection management
Collections is a term used by a business when referring to money owed to that business by a customer.
When a customer does not pay the business within the terms specified, the amount of the bill becomes
past due and is sometimes submitted to a collection agency.
When a business sells a product or service to a customer, payment is expected either at the time of the
transaction or within a defined period of time such as 30 days. Unfortunately, some customers do not
pay the business within those set terms and, at this point, the account can be considered in collections.
Valued Clients versus Delinquent Accounts
Most valuable customers is a marketing term referring to the customers who are the most profitable for
a company. These customers buy more or higher-value products than the average customer. The
companies can provide these customers with advice and guidance to make them loyal.
Usually most valuable customers are rewarded with discount or membership cards that give them
specific privileges. These rewards help the business to generate more revenue as the customers will
purchase more of products/services due to given benefits.[1] Different companies have different ways
to reward their loyal customers
How to identify most valuable customers
Every business has a list of customers who are buying more products from them, comparing to an
average buyer (usually referred as Loyal Customers).[4]
In order to identify most valuable customers, the business will have to evaluate customer's value in
seven areas:
1. Sales minus cost: Generally companies rank their customers by judging from the number of sales that
the customer does with the company, however this does not always have a positive outcome for the
company.
Sometimes when a customer purchases a lot of company's products/services, the cost of doing those
sales may exceed its value because that cost of sales has to be added to the overall equation.[5]
2. Revenue Timing: not all revenue is created equal. Companies make different revenues at different
times. For example, customers are shopping more in the fourth quarter for the holidays due to the
bigger sales in shops.
Sales that are made in off-peak seasons may be more profitable because they fill unused production
capacity or may be done at a slightly higher price.[6]
3. Referrals and buzz: nowadays consumers tend to trust peer reviews, posts in social networks and
tweets more than corporate advertising. If a customer is willing to buzz about company's
products/services it can be a powerful endorsement. [6]
4. Retention: It is usually cheaper to retain old customer rather than seeking new ones. A lot of
businesses are not bothered that much about the customers that already have purchased its
products/services and they mainly focus on attracting new ones, however a customer who has been
with a company over a long time, in general is more profitable, mostly because customer buys the
product/service on regular basis and can refer to the company when recommending to family/friends.
[6]
5. Add on products or services: Customers that buy many items from the company are more profitable
because the cost of acquiring that customer is now spread over a larger sales base. [6]
6. The customer's brand: Customer's brand is mostly valuable for smaller businesses. If a customer is a
well-known public figure and he/she buys company's product and talks about it, it boosts the company's
popularity.[6]
7. Feedback: The majority of the customers will never tell a company what they honestly think about its
product.
Usually only top 10 percent (very satisfied) and bottom 10 percent (very dissatisfied) share their
thoughts about a company's service. Any customer who is willing to share his/her opinion is very
valuable for the business.[6]
Many businesses use the practice of retaining valuable customers in order to increase financial
performance as well as their customer base. The research done by Gartner shows that the 80% of
company's profit come from
20% of existing (loyal) customers.[6] This happens because the customers are inclined to come back for
company's product/service if they had a good experience with them before. Also if the customers were
rewarded with discounts for a long-term relationship with a company, they are willing to buy more of
company's
products/services.[7][8]
Valuable customers is also a good marketing aspect for the company. Customers that are staying with a
company for long terms are more inclined to share their experience of a business, with their friends,
which will work better than expensive advertising because people tend to be more affected by people
they are familiar with. This marketing move will strengthen you brand in the minds of people who are
unfamiliar with it.[6][9]
Regular loyal customers can be the key to success aspect in the highly competitive market. If the
company builds a strong brand image, which helps to retain valuable customers, then it can make it
resistant to competitive forces.[1
What Is Delinquent?
Delinquent describes something or someone who fails to accomplish that which is required by law, duty,
or contractual agreement, such as the failure to make a required payment or perform a particular
action.
In the world of finance and investing, delinquency occurs when an individual or corporation with a
contractual obligation to make payments against a debt, such as loan payments or the interest on a
bond does not make those payments on time or in a regular, timely manner.
Delinquent also refers to the failure to perform a duty or act in a manner expected of a person in a
particular profession or situation. For example, a registered investment advisor who puts a conservative,
income-oriented client into a highly speculative stock could be found delinquent in his fiduciary duties. If
an insurance company fails to warn a universal life policyholder that their policy is in danger of lapsing
due to insufficient premium payments, it could be considered delinquent.
Delinquent vs. Default
In a financial sense, delinquency occurs as soon as a borrower misses a payment on a loan. In contrast,
default occurs when a borrower fails to repay the loan as specified in the original contract.
Most creditors allow a loan to remain delinquent for some time before considering it in default.
The duration lenders allow for delinquency depends on the creditor and the type of loan involved. Key
take away
duty, or contractual agreement.
occurs as soon as a borrower misses a payment on a loan. In contrast, default occurs

when a borrower fails to repay the loan as specified in the original contract.
efault.
Importance of Collection
Why is collection of receivables important to a business? There are a number of reasons why collection
of receivables is important but the most important is Cash Flow. Businesses need cash flow to purchase
supplies and equipment, develop new products, and pay employees, among other things. Receivables or
neglecting to collect them could lead a company to bankruptcy.
Goals of credit and Collection
Too often we see businesses that are focused on the cash aspect of their credit and collections
management. While cash is important, it’s simply the result of effectively managing your accounts
receivable credit and collections process. As such, your goals should not be based on cash improvements
but rather, on improvements in your invoicing and customer communications plan and process. If you
set the right goals and you attain them, the cash will come
So what should your goals be? This will depend somewhat on your particular business needs, but some
examples of goals are provided below to help you understand what is possible. No matter what goals
you set, each should be measurable so you know if you’re reaching your goals or if there are other
things you will need to do in order to attain the results you’ve set for your business.
GOAL #1 IDENTIFY INVOICE PROBLEMS EARLIER
One of the best goals you can set is to identify invoice problems earlier in the process. If the invoice is
incorrect, missing a customer purchase order number, or sent to wrong person or address, you are
unlikely to get paid on time. It’s unlikely that you truly know how long it takes you to identify invoice
issues today, but you should be able to set an easy goal to have someone review all invoices that are
past due the day they are past due to ensure that they are correct.
Set this as an internal policy and the first step taken in your credit and collections process. You may even
want to break this down further so that large dollar invoices are reviewed before they are sent to
customers. After all, large invoices represent the bulk of your cash and the highest financial risk should
the customer refuse payment due to invoice problems. Large dollar invoices will vary by business and
should be clearly defined by your executive team. Some companies may consider a $1,000 invoice a
large invoice while others may consider a large invoice $50,000 or more.
GOAL #2 SEND THE INVOICE SOONER
Again, you may not know how long it takes you to send invoices to customers today, but you should be
able to set a goal to get invoices to customers a lot faster. This will be the result of processing invoices
more frequently (every day or week compared to once or twice a month) and by implementing an
electronic invoice system to send invoices to customers electronically via email, fax, or electronic data
interchange (EDI). The customer has to have the invoice as soon as possible in order for them to pay you
on time. There’s no excuse for late invoice delivery with today’s technology options. In an ideal scenario,
the customer should receive the invoice the day that it’s processed but even small businesses should be
able to send invoices at least once a week giving the customer enough time to process payment before
the invoice due date.
GOAL #3 REMIND CUSTOMER TO PAY
Very few companies have time to remind their customers to pay their bills, but this is a great goal to set.
If you don’t have a credit and collection management system you may want to focus reminders on larger
invoices. You should remind customers that they have invoices that will be due in the next 3-5 business
days that still have an outstanding balance. In most cases, a simple reminder is all you need in order to
get paid faster. Your goal should be to remind every customer to pay when they have bills that will be
due in the near future. Adjust this goal to meet your specific needs.
GOAL #4 GET PAID FASTER
The overall goal for your entire credit and collections process is to get paid faster. Based on your
research, you should understand how long your customers are taking to pay you. You can now set a
reasonable goal to get payment faster. For example, if you’re like most businesses, your customers are
taking you 60 days to pay on a NET 28 invoice. By implementing even modest systems and procedures
you should be able to improve this by 20%, getting paid 12 days faster.
This makes sense when you consider the first three goals – ensure the invoice is correct, ensure they
receive the invoice with enough time to pay you by the due date, and remind them to pay before
they’re past due.
GOAL #5 FINANCIAL RESULTS

While you shouldn’t set financial goals, it is important to understand how your goals impact your
financial results. What does it mean when you get paid 12 days faster? It means that you’re reducing
financing costs for borrowing cash when you have cash flow problems. Let’s look at an example:
For every $1 million in credit sales the average business has about $166,680 in current and outstanding
accounts receivable, meaning that you’re getting paid in 60 days (Days Sales
Outstanding). If the cost to borrow cash from your financial institution is 10% APR, then financing costs
are $16,668 annually. By getting paid 12 days faster, you’re avoiding about $3,334 in financing costs
annually.
Most businesses write-off 4% of accounts receivable. You should easily be able to reduce bad debt
write-offs by 20% by simply identifying invoice problems earlier, getting the invoice to customers
sooner, and reminding customers to pay. Again, assuming $1 million in annual credit sales, this means
that you’re writing off $40,000 annually with a 20% improvement, saving you $8,000 every year.
Keep in mind that financial results in the previous example are based on a business selling $1 million
annually on credit terms. The financial impact to your business will be much greater if your business is
doing $10 million, $100 million, or more.
Of course there are other financial goals that can be set but these are just two examples. You may also
want to reduce invoice processing costs as discussed previously. Maybe you can’t implement electronic
invoicing for all of your customers but cost savings for just half of your customers could be significant.
Factors Affecting Collection Decision
Many elements affect the value and collectability of your accounts receivable portfolio. Below we list 5
key factors that should be considered when determining the timing of placing a delinquent account or
non-paying account in this “New Economy”:
1. Age of the Accounts - There is a strong correlation between the age of a debt and its recoverability.
The older a debt becomes, the more your chance of recovery decreases. The chart below illustrates the
downside of holding on to a delinquent account.
2. Location of the Accounts- With varying regulations it is important to take into account the location of
your customers. Rules and regulations vary from state to state and from country to country.
Furthermore, those rules may affect the statute of limitations and other enforcement options.
Understanding the geographic element is important for making placement decisions.
3. Amount and quality of documentation- Documentation is one of the most important aspects of
determining an account’s collectability. Having email addresses and mobile number as well as the
physical address and office phone number increases your chances for recovery especially when many
office personnel are working from home. Other important account documentation includes copies of
invoices, account statements, credit applications, personal guarantees, and all important
correspondence between your company and your delinquent customer’s company.
4. Work history of the accounts- Sharing your experience with your delinquent customer can help us
understand why they are delinquent or what excuses they have used in the past. Knowing a little of the
history of the account, helps us in making sure we don’t waste time repeating previously ineffective
steps.
5. Original Account Type – The type of account also makes a difference. Was this a new customer with
no history? Was this a pre-paid customer that slipped through the cracks? Is this a good customer that is
ignoring one invoice but won’t share the reason the invoice is not being paid? Is this a customer that has
fallen on hard-times? Knowing this information lets us know what we are up against.
10 Steps to Effective Collections
Adapted from content excerpted from the American Express® OPEN Small Business Network
An effective collections policy requires some kind of formal system that ensures overdue accounts get
paid. Letting late payments languish can disrupt cash flow and harm your company’s chances of success.
To keep receivables flowing smoothly, many businesses use a series of letters and phone calls to
encourage customers to pay. These communications start out friendly and progressively become more
serious and insistent as payments become overdue. How you structure your collections system is an
individual matter – you may be more comfortable calling up clients than sending letters, for instance.
The important thing is to have a system, and you can use the steps outlined below to create yours.
Step 1: Customer satisfaction phone call
Dissatisfied customers are more likely to pay late. These friendly calls let you inquire about your
performance to ensure you met your customers’ needs. End these calls by mentioning that a bill will be
arriving shortly, and reinforce its due date.
Timing: three days after delivery of your product or service, but before payment is due.
Step 2: First overdue notice
This is a friendly reminder that the due date has passed. You are assuming that the client has forgotten,
neglected, or lost the bill and will pay with a gentle prodding. One common method is to send a
duplicate invoice with “past due” stamped on it.
Timing: ten days after the invoice due date.
Step 3: Second overdue notice
Another mild nudge reminds the customer that the account needs attention. This can be a short form
letter with a duplicate invoice attached. Keep it friendly and non-threatening. For example:
[Date]
[Name/address of debtor]
Re:Invoice # ____________
Amount due ____________
Date due ____________
Dear ____________
We recently mailed you a statement showing that your account is past due. Perhaps it has been
overlooked. Here is another copy. Please send payment today, so that we can keep your account
current.
Thank you.
Timing: 10-15 days after first overdue notice was sent/20+ days after the invoice due date
Step 4: First collection phone call
Follow the overdue notices with a phone call to find out if there is a reason for non-payment. For
example, the customer may be dissatisfied with your product or service, or may be experiencing cash
flow problems. Be courteous, but also get a commitment to pay. Be prepared to handle excuses. For
example, if the debtor says the check was sent, ask when it was mailed and where it was sent so you can
determine the day it should arrive.
Timing: 7-10 days after second overdue notice is sent out/27 + days after the invoice due date
Step 5: First collection letter
Keep the tone of this letter consistent with the first phone call – courteous, but direct. Confirm in writing
what was said in the call, and remind the debtor of his or her promise to pay. For example:
[Date]
Re:Invoice # ____________
Amount due ____________
Date due ____________
Dear ____________
This confirms of our conversation on [Date]. As we discussed, you will send us your payment in full. Let
us settle this matter now. Please mail in a check today.
Thank you.
Timing: immediately after the first collection phone call/28+ days after the invoice due date
Step 6: Second collection phone call
The account is now 30-40 days past due. Be polite yet firm, and ask for full immediate payment.
Work to resolve payment problems. If the debtor cannot pay immediately, get him or her to commit to a
payment date.
Timing: ten days after the first collection letter has been sent/38+ days after the invoice due date
Step 7: Second collection letter

Now is the time to communicate the seriousness of the delinquency. This letter should demand
immediate payment, and discuss the short-term consequences of failure to pay. Send this letter –and
any correspondence that follows – via certified mail or overnight mail to give you a record that it was
received. For example:
[Date]
Re:Invoice # ____________
Amount due ____________
Date due ____________
Dear: ____________
Your account is now seriously past due. If payment is not received within 7 days, we will be forced to
suspend your credit privileges with our company. We value you as a customer. Help us continue to serve
you by bringing your account up to date immediately. Please mail us a check today.
Thank you.
Timing: ten days after payment is expected from previous collection phone call/50+ days after the
invoice due date
Step 8: Third collection phone call
While remaining polite and calm, stress the seriousness of the situation. Use this phone call to explain
that this is the last opportunity for the customer to pay before you turn the matter over to a collection
agency and possibly take further legal action. Be sure to communicate the benefits of resolving the issue
– maintaining good relations or good credit. As with the previous phone call, get the debtor to promise
to pay by a certain date.
Timing: 15 days after second collection letter is sent out/65+ days after the invoice due date
Step 9: Final collection letter
The tone is now stern and demanding. Use this letter to confirm what was agreed upon in the last call
and demand payment. State that if payment is not received by the agreed-upon date, you will turn the
account over to a collection agency. For example:
[Date]
Re:Invoice # ____________
Amount due ____________
Date due ____________
Dear ____________
This letter confirms our conversation on [Date].
You must take immediate action to make your account current. If we do not receive payment within ten
days, we will be forced to turn the matter over to a collection agency, which may adversely affect your
credit rating.
Please mail a check to us immediately.
Timing: seven days after third collection phone call/72+ days after the invoice due date
Step 10: Turn over to collection agency
The account is now 90+ days in arrears and may require professional assistance. Receiving a letter from
a collection agency often motivates a debtor to pay, but these services can be costly – agencies typically
take from a quarter to a half of what they collect. Instead of immediately turning the account over to a
collection agency, you might want to enlist your attorney to make a quick phone call to the debtor – this
can often motivate payment.
Timing: If payment has not been received by 10-15 days after the final collection letter is sent/90+days
after the invoice due date
Copyright © 1995-2016, American Express Company. All Rights Reserved.
What is a Collection Cost?
A collection cost is any cost associated with recovering debt on which the borrower has defaulted on his
obligation to pay. Such items as the fees charged by collection agencies and attorneys, for example, are
collection costs, as are the various costs involved in collecting the debt through the legal process. Other
costs associated with borrowing, such as the cost of obtaining credit reports of potential borrowers, are
related to the lending decision, not collection, and so are not collection costs. Likewise, the routine costs
of collecting a debt that is in good standing — printing payment coupons or issuing receipts as payments
are made, for example — are also not considered collection costs.
When a consumer borrows money, finances a purchase or applies for a line of credit, he usually signs an
agreement to repay the money borrowed, with interest. Most such agreements include default
provisions, outlining the steps the lender may take if the borrower doesn’t pay the debt as agreed. The
default provision usually contains a clause that provides for the borrower to pay the collection cost —
that is, all costs incurred by the lender in attempting to collect the unpaid debt.
As long as the borrower pays at least the minimum amount due, on time, the loan is considered to be in
good standing. It generally takes a while before a creditor considers a loan to be in default — such issues
as a single late payment don’t generally lead the creditor to declare the loan in default. Generally,
though, if a borrower misses two consecutive payments, most creditors will declare the loan in default
and trigger the collection process.
When lenders contract with outside collection agencies to collect a defaulted debt, the collection
agencies keep track of the costs they incur in collecting the debt. The postage paid to mail a collection
notice, for example, is one such collection cost, as is the cost of making calls to the borrower. In many
cases, though, the collection agency will simply add a flat fee or a percentage of the debt to be collected
rather than itemize expenses.
Another collection cost is attorney’s fees. If the collection agency is unsuccessful in collecting the debt,
the original lender will refer the case to an attorney, who will continue collection efforts, using the
threat of a lawsuit to persuade the borrower to pay. The attorney generally has the right to negotiate
with the debtor, and the amount under negotiation is the total amount owed to the lender plus the
collection costs added by the collection agency and the attorney. If the case goes to court, the amounts
are less likely to be adjusted through negotiation. If the lender’s attorney wins the case, the debtor is
ordered by the court to pay the amount due, which is generally the full amount owed to the lender, plus
the attorney fees and court costs.
Dealing with Collection Problems
HOW TO FIX YOUR CREDIT AND COLLECTIONS MANAGEMENT PROBLEMS
To truly get the most out of your credit and collections management, you first need to get to know your
business from top to bottom. Figure out who your customers are and what type of industry you are
serving, as well as what industry category your business fits in. Second, you need to identify your credit
and collections management problems. Pick a few to start tackling and fixing, don’t try to fix them all at
once with a general solution. Once you have been through the first two phases, you’re ready to get to
step three of credit and collections management. This is where the real hard work begins.
Step three of credit and collections management is actually fixing the problems you’ve identified.
These can be done in a variety of ways, but we will highlight some of the big solutions for you.SET
CREDIT AND COLLECTIONS MANAGEMENT POLICIES
Your accounting team should have general policies in place to ensure that invoices are going out
correctly. If certain important information is left out such as purchase orders or addressed incorrectly it
will likely not get paid. One way to battle this with a policy is by having someone review all invoices past
due on the day they are due to double check the right information was passed on. Further, for all big
number invoices have a policy that they must be reviewed before they are sent out. The last invoice you
want to be late are your big ticket invoices.
SEND INVOICES SOONER
The faster you get the invoice to your customer, the faster they will pay it. This tactic will also let
customers know that you are serious about getting paid. Companies that lag behind on their invoicing
timelines are typically seen by customers as the least worrisome among outstanding payments. Have a
schedule in places for sending out invoices, such as once a week or X number of days after the service
was provided.
REMIND CUSTOMERS TO PAY
You can tackle this solution in two different ways, or implement both. The first is to remind customers,
by sending out an email or making a phone, that their invoice is due in 3-5 days. The other tactic is to
make reminder phone calls once the invoice goes past due. Most companies will say they don’t have
time for this, but if you use an accounts receivable software that can prioritize these actions for you, it
will be a lot easier.
SET GOALS
Going into the process of fixing your credit and collections management practices is useless if you don’t
set a goal to achieve. The best one to look forward to is decreasing the amount of time to get paid.
During your research you should have discovered what your current days sales outstanding are, make a
modest goal to decrease that. This is another area that an accounts receivable software would come in
hand, most systems are proven to improve faster payments by 20 percent or 12 days
Now you should have all the tools needed to start tackling your credit and collections management.
Although these fixes will definitely improve how long it takes to get paid, make sure you are doing the
research first. The more you know about yourself and your business, the better off you will be to start
getting paid faster.
MODULE EIGHT
CREDIT REMEDIATION
1. Discuss credit remediation strategies and client care campaigns commonly used.
What Is Credit Repair?
Credit repair is the process of fixing poor credit standing that may have deteriorated for a variety of
different reasons. Repairing credit standing may be as simple as disputing mistaken information with the
credit agencies. Identity theft, and they damage incurred, may require extensive credit repair work.
Another form of credit repair is to deal with fundamental financial issues, such as budgeting, and begin
to address legitimate concerns on the part of lenders.
KEY TAKEAWAYS
he credit bureau and point out anything on

your report that is incorrect or untrue, then asking for it to be removed.
How Credit Repair Works
Though numerous companies claim they can clean up bad credit reports, correcting erroneous
information that may appear on credit reports takes time and effort. The details cited to credit reporting
agencies cannot be removed by a third party. Rather the details, if misrepresented or inaccurate, can be
disputed. Credit repair companies may investigate such information, but so can the individual the report
is assessing. Individuals are entitled to free credit reports every 12 months from credit reporting
agencies, as well as when an adverse action is taken against them, such as being denied credit based on
information in the report.1
Disputes may be filed when incomplete or inaccurate information appears on their credit reports.
Aside from correcting such information, or catching fraudulent transactions on one’s credit, rebuilding
and repairing credit can rest more heavily on credit usage and credit activity.
The payment history of the individual can be a significant factor on their credit standing. Taking steps to
make sure payments are up to date or improve the payment schedule for outstanding credit can
beneficially affect their credit score. Furthermore, the amount of credit used by the individual can also
play a role. For instance, if an individual is actively using large portions of the credit available to them,
even if they are maintaining minimum payments on time, the size of the debt they are carrying can
negatively affect their credit rating. The issue is that their liquidity may be pressured by the overall debt
against them. By taking measures to reduce their overall debt load, they may see improvements to their
credit profile.
Credit Repair Services
A number of businesses claiming to do credit repair have sprung up over time, and while some may
provide services that can assist consumers, the actual results of their efforts may be questioned. In
some cases, credit repair may require legal as well as financial expertise. Depending on the extent of the
problem, it may require simply cleaning up misunderstandings, while in other cases professional
intervention is needed.
The fees a credit repair company charges can vary. Typically, there are two types of fees: an initial setup
fee and a monthly service fee. The initial fee can range from $10 to $100, while the monthly fee typically
runs between $30 and $150 a month, although some companies do charge more.When considering the
fees, it’s important to weigh what you’re getting in return. According to the Federal Trade Commission
(FTC), credit repair firms can’t legally do anything for you that you can’t do for yourself.2 You just have
to be willing to spend the time reviewing your credit reports for negative or inaccurate information,
reaching out to the credit bureaus to dispute that information, and following up on those disputes to
make sure they’re being investigated. If you're unable or unwilling to spend that time, then do your
research to ensure you'll be working with one of the best credit repair companies.
How to Rebuild Credit: A DIY Credit Repair Guide
Rebuilding credit yourself requires a great deal of time and effort. However, by paying off debts and
building new credit responsibly, you can overcome past financial mistakes to work toward great credit.
Damaged credit history and poor credit scores can throw a big wrench into your financial life.
You’ll have more difficulty obtaining loans and credit cards than people with good credit. If you do get a
loan or credit card, you’ll usually pay a higher interest rate than people who have higher credit scores.
You also won’t be eligible for credit cards with the best rewards and benefits.
However, if you have bad credit, don’t despair — there are several practical ways to begin reversing
your situation and put yourself on track toward good credit.
There are six key steps involved in repairing your credit:
1. Assess your credit situation.
2. Dispute inaccurate credit report information.

3. Pay down debts.
4. Learn about responsible credit habits.
5. Build new credit.
6. Wait. You may be able to skip a step or two, depending on your situation. Even so, it’s wise to
understand the full process in case unexpected financial troubles come up again in the future.
Step 1: Assess Your Credit Situation
Before taking action to improve your less-than-stellar credit, check your three credit reports and scores.
You need to identify why your credit scores dropped in the first place.
You probably already have a good idea of what happened, whether you missed credit card payments or
defaulted on a personal loan. Regardless, taking a comprehensive, honest look at your financial situation
is the first step on the path toward great credit. It also presents a valuable opportunity to identify and
dispute incorrect information that could be hurting your scores.
Here’s an idea of how you should go about this step.
1. Check your credit scores: You should be able to check a credit score for each of your reports for free.
You may be able to view a score through your credit card. If not, many online services let you access a
free credit score by simply signing up.
2. Examine your credit reports: Under federal law, you’re allowed one free credit report from each
major consumer credit bureau — Equifax, Experian, and TransUnion —every 12 months. You can get
your free reports at AnnualCreditReport.com. While your credit scores offer helpful insight into your
situation, credit reports provide a detailed picture that should make it easier to find the exact problems
at play. Make a list of any potentially negative information you find, including late payments, collection
accounts, inquiries, and credit cards with high balances compared to their limits.
3. Create a plan of action: Once you’ve looked through your reports to determine what you need to
work on, browse through the steps we’ve outlined below, and address each issue with the appropriate
solution.
Step 2: Dispute Inaccurate Information
If you find any inaccuracies while you’re digging through your credit reports, you have the legal right to
dispute them. When you dispute an account, the credit bureau has to investigate and delete the item
from your credit report if it isn’t verified as accurate.
A deletion could boost your credit scores in certain cases, if the removed item was negative. But even if
a deletion doesn’t improve your scores, it’s still important to ensure that all information on your reports
is accurate.
For example, a positive mortgage account that doesn’t belong to you might not hurt your credit score.
But it could make it hard to borrow in the future because, on paper, it looks like you owe more money
than you do.
Step 3: Pay down Debts

Paying down your existing debts is simultaneously one of the toughest and most important elements of
the credit repair process. It’ll nearly always take a lot of time, effort, and (of course) money. But once
you make peace with your debts, you can lay a foundation for future stability.
The amount of debt you owe (especially your credit card utilization) accounts for 30% of your
FICO Scores. Paying down credit card debt is often a very effective way to improve your credit scores.
Ready to get started? Here are a few debt elimination options.
Pay Outright
If your debts are still current or just a little behind (meaning you have haven’t gone into default yet), you
may be able to come up with a plan to start reducing your balances. This may stop the bleeding before
your credit situation gets out of hand. Often, you may simply need to adjust your budget and prioritize
your debts differently.
Consider your credit card balances, for example.
Making only the minimum monthly payment on a credit card, it could take you years to whittle the
balance down to zero, depending on the size of the debt. That’s why you should try paying card balances
down on a monthly basis, or as quickly as possible otherwise.
Consolidate Debt
Managing a bunch of debts at once can be tough, especially if one or several of them have high interest
rates.
Debt consolidation involves taking out a loan to pay off several debts in one shot, leaving you with a
single bill to pay in their place (you can also use services like Tally). Ideally, your new loan should have a
much lower interest rate than what you’d get with most credit cards.
Consolidating credit card debts this way could also boost your credit scores since the balance of an
instalment loan won’t impact your credit the same way a revolving account balance will. The impact to
your credit scores, however, also depends on your ability to make the loan payments (and payments for
any other remaining debts) on time each month.
Debt consolidation is a great way to address high-interest debts. But if you choose this route, consider
keeping your old credit cards open. You can shred them or set them aside, but the age of the accounts
and their lack of balances may help your credit scores in the long run. (Note: Closing a credit card
doesn’t immediately cause you to lose credit for the age of the account. However, closed accounts are
deleted from your credit reports after 7–10 years.)Negotiate With Lenders
Lenders want their money. If you can’t keep up with the payments you initially agreed to make, a lender
may be willing to negotiate. A more manageable payment plan or an arrangement that allows it to come
out as favorably as possible would be preferable than an outright default.
Reach out to lenders if you’re struggling with your current minimum payment. You can request
adjustments to accommodate your financial situation. A certified credit counselor may also be able to
negotiate a debt management plan (DMP) on your behalf, typically for a fee.
Aside from payment plan improvements, you may also be able to negotiate an opportunity to settle a
debt for less than its total. But debt settlement will generally require a large, lump-sum payment up
front, which may not be easy to afford. Also, unless you’re currently past due, most creditors won’t
entertain the idea of a lump-sum settlement.
Collection Accounts
It’s worth pointing out that you should exercise caution when paying old collection accounts.
When you don’t pay a debt, your creditors and collection agencies that purchase the debt may have the
right to sue you. However, as a debt grows older, it may become time-barred. Once a debt is time-
barred, a debt collector can no longer sue you.
The time-barred debt clock is different in every state. You can learn more about time-barred debts in
this guide from the Federal Trade Commission.
If you make even a small payment on a time-barred debt, you might restart the collection clock. In other
words, one payment could open the door to a potential lawsuit for your remaining unpaid balance. So, if
you plan to settle an old collection account, it’s usually best to wait until you’ve saved a full, lump-sum
settlement amount first. You may also want to speak with a consumer debt attorney for advice.
Finally, even if you do pay or settle a collection account, don’t expect an immediate jump in your credit
scores. Unless a lender is using a newer scoring model (like FICO 9), paid collections may continue to
damage your credit scores as long as the account is on your reports.
The good news, however, is that as collections grow older, they impact your credit less and less.
After seven years from the date of default on the original account, collections have to be deleted from
your credit reports altogether.
Step 4: Learn Responsible Credit Habits
After you’ve gotten a handle on delinquent debts, late bills, and high credit card balances, take some
time to educate yourself on the many ways you can make sure you never run into those problems again.
Make All Payments on Time
This one’s a bit obvious, but you should never miss a loan or credit card payment unless it absolutely
can’t be avoided. Payment history is one of the most prominent factors in many credit scoring models.
Minimum payments are enough if you’re only trying to avoid late fees, but we strongly recommend you
pay down your full credit card statement balances each month to avoid interest charges (unless you
have a 0% rate). This applies primarily to purchases, however, as cash advances and balance transfers
usually begin accruing interest immediately.
We also recommend activating automatic payments so you never have to go out of your way to submit
a payment before its due date. Just keep an eye on your online account to ensure the payments always
go through.
Late payments can’t be reported to the credit bureaus until they’re at least 30 days late, but you can
face late fees and/or other consequences with the lender from the moment you’re late.
After the 30-day waiting period has passed, the late payment will likely be reported to the consumer
credit bureaus. A new late payment on your credit reports will almost certainly damage your credit
scores.
Keep Your Credit Card Balances Low
The ratio of your overall credit card debt to your credit limits is called credit utilization. Credit utilization
plays a major role in your credit scores.
The modern FICO Score 8, for example, calculates 30% of your credit scores from your amounts owed
category of your credit reports. Your credit utilization is the most important factor considered here.
Vantage Score 3.0 takes a different approach. It uses credit utilization for 20% of its scoring formula and
your total amounts owed for another 11%.
That doesn’t mean racking up big credit card charges throughout the month will automatically hurt you,
though. As long as your balances are paid down before the statement closing date, your credit utilization
ratio should remain low with no damage done to your scores.
Don’t Borrow More Than You Can Afford
Never borrow so much money that you can’t pay it off in a timely manner. We strongly recommend
paying off credit card balances in full each month. If you can’t commit to paying your credit cards in full
each month, you should probably avoid swiping them altogether while you’re trying to rebuild credit.
The same goes for loans. If you’re not absolutely certain you’ll be able to afford the monthly payment
without worry, the loan probably isn’t the right move.
Step 5: Build New Credit
If you’ve paid off and/or negotiated old debts, addressed inaccurate credit information on your reports,
and developed a solid handle on how to deal with credit in the future, you might be ready to start
building new credit accounts.
There are several ways to build new credit. We’ll guide you through a few of the best options typically
available to individuals with poor credit scores.
Become an Authorized User
Find a trusted friend or family member with a consistent history of full, on-time payments, and ask to be
added as an authorized user on his or her credit card account.
You can get an authorized user card to actually use or you can be added but not given a card at all.
The account’s payment information (positive or negative) will generally still appear on your credit
reports either way. Some card issuers don’t report authorized user accounts to the credit bureaus.
There may be certain requirements that prevent you from becoming an authorized user. However,
there’s normally no credit check necessary.
Open a Credit Card
There are several credit cards you’ll probably qualify for even if your credit scores are very low.
Most of them are secured.
Sure, you may have to provide a refundable deposit and settle for a card that lacks rewards and
benefits. Nevertheless, credit cards are still among the most useful tools for rebuilding credit
Step 6: Wait
In general, the only thing that will remove accurate negative information from your credit reports is
time. Late payments, collection accounts, and other negative items will typically remain on your credit
reports for 7–10 years. In rare cases, you may be able to get valid late payments removed, but you
shouldn’t count on it. There’s often nothing to do about negative credit entries except to wait until
they’re removed from your reports.
Fortunately, the impact negative credit information has on your credit scores tends to decrease as that
information gets older. You’ll probably see your credit scores go up once the information is removed
from your reports (all other things being equal), but there’s a good chance they’ll increase gradually
even before that. It will also take time before the effects of your new accounts and positive behavior are
felt. The key is to be patient and stick with your strategies. By staying responsible, even people with the
worst credit can eventually qualify for desirable loans and better credit cards with great rates.
15 Reasons You Need to Fix Your Credit
You might think bad credit only keeps you from getting a credit card or loan, but it goes further than
that. Bad credit can leave you homeless, carless, and jobless. That's because more and more businesses
are using your credit to make decisions about you. Still not convinced it's time to get your credit act
together? Here are 15 reasons you need to fix your credit.
Save Money on Interest
Low credit scores typically mean higher interest rates, and that means higher finance charges on your
credit card balances. Repairing your credit would allow you to get a more competitive interest rate and
cut back on the money you pay in interest.
Stop Paying High Security Deposits
Utility service providers and even phone companies check your credit before allowing you to establish
service. To offset the risk of a default, those service providers charge you a deposit.
Making your payments on time will allow you to get your deposit back. Improving your credit score
keeps you from having to pay the deposit altogether.
Get a Lower Insurance Rate
Believe it or not, your credit affects your insurance premiums. This includes auto, life, and home
insurance. A bad credit history means you'll pay more for insurance than you would if you had better
credit.
Stop Paying Cash for Everything

If you have bad credit, you'll have a hard time getting a credit card, which means you'll end up paying
cash for everything. It may not be a nuisance until you need to do something like renting a car, where
you have to pay an extra deposit if you don't use a credit card.
Get a Higher Credit Limit
Generally, as you demonstrate you can pay your bill on time, your creditors will increase your credit
limit. But, a credit card issuer will check your credit score before increasing your credit limit. A bad credit
history might get your credit limit cut hurting your credit score even more by raising your credit
utilization.
Stop Debt Collector Harassment
Repairing your credit includes paying off those debt collection accounts. Until you do, you face relentless
calls and letters from debt collectors. While you can take action to stop debt collector calls, collection
accounts often move from one debt collector to another. When a new collector gets your debt, you'll
have to go through the process of sending letters to stop the calls all over again.
Feel Better About Your Credit Score
After you repair your credit, you won't have to be afraid of checking your credit score or worse, having
someone else check it. You can have confidence knowing you have a healthy credit score.
Buy a New House
Homeownership has always been the American Dream. Bad credit is the nightmare that keeps you from
realizing that dream. Many banks won't lend you a mortgage until you've repaired your credit.
Those that will approve you with a high interest rate that makes home ownership cost a lot more.
Rent an Apartment
Not only can bad credit keep you from buying a home, it can also keep you from renting an apartment.
Many landlords now check credit to determine the likelihood that you'll be late on your rent. Bad credit
could get your rental application denied.
Buy a New (Or Newer) Car
Auto lenders are among the many businesses that check your credit before lending to you. Without a
good credit score, your auto loan application could be denied leaving you to drive the same vehicle.
Get a Job
Employers check credit before deciding to hire you. Some government, financial, management, and
executive jobs are particularly curious about your financial history. A bad credit history could cost you
the job, or the promotion you've been working hard to get.
Take Some Financial Pressure off Your Spouse
When one spouse has better credit than the other, the spouse with good credit will be the one applying
for the loans and credit cards. Improving your credit will let you bear some of the credit brunt rather
than placing it entirely on your spouse.
Stop Relying on Co-Signers
When you have bad credit, you'll often need others to co-sign for your loans and credit cards. If you can
find someone to co-sign, you're putting financial pressure on them but they don't receive any of the
benefits. Repairing your credit will save you the time and hassle of burdening someone else with co-
signatures.
Start Your Own Business
Starting a new business takes money, so many entrepreneurs rely on small business loans to get their
businesses off the ground. Bad credit can keep you from getting the financing you need to start your
new business. You'll have to improve your credit before a bank will give you a loan.
Protect Your Children's Credit Score
Having bad credit can tempt you to use your child's credit. You might think you'd never do that but you
never know what you'll do when you're desperate. Say you have to have electricity turned on, but your
credit's too bad. You could easily rationalize using your child's credit to have the electricity turned on.
Keep your own good credit and you won't think about exploiting your child's.

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MODULE ONE

CREDIT AND COLLECTION: AN OVERVIEW

After this lesson, the reader must be able to:

1. Explain the different core credit and collection concepts.

2. Explain credit management philosophies.

INTRODUCTION TO CREDIT & COLLECTION

THE NEED OF MONEY

“Money is barren. It does not breed.”-Aristotle DOCTRINES OF CREDIT

THE GROWING NEED AND DEMAND OF MONEY

b) The demise of barter as a method of exchange in progressive countries of the world.

c) “JUSTUM PRETIUM”: the doctrine of the just price

THE BIRTH OF CREDIT

a) Latin. “CREDERE” – means “to trust”

OTHER DEFINITIONS OF CREDIT

c) IN COMMERCE: Credit pertains to an exchange transaction.

THE USE OF CREDIT

-blood of the business”

f) Credit spreads progress to various sectors of the economy.

g) Credit makes possible the birth of new industries.

a) Credit at times, encourages speculation.

c) Because of credit, many entrepreneurs resort over-expansion.

THE COST OF USING CREDIT

The price of credit depends upon the cost of providing it.

HOW CREDIT AFFECTS PRICES

the same way as increases and decreases

d credit with which to buy

ter and in the ability as well as

The money standard must be stable.

CLASSES AND KINDS OF CREDIT

KINDS OF CONSUMER CREDIT

- Charge account is one kind of personal or consumer credit

- It is the oldest form of sales or purchase credit.

- It is a very convenient way of shopping.

- Charges accounts provide a valuable means of reference in many business transaction.

- To identify credit customers- Tangible evidence of their charge account

- Color photograph encompassed in the credit card

- They are marked as valid until a stated date

- Individual term as "Buying on time"

- PRECAUTIONS IN BUYING ON INSTALLMENT: Truth on the Lending

- Always insist for an extra copy of the contract.

INSTALLMENT CREDIT AND CHARGE ACCOUNT, COMPARED

INSTALLMENT CREDIT CHARGE ACCOUNT

1. Installment credit is largely confined to durable consumer goods.

1. Purchases on charge account consist of non-durable consumer items.

* Revolving credit plans manifest themselves under a variety of names.

- Most lenders ask a borrower to sign a promissory note.

- The borrower who sign the note is the maker

- Anything used as security for a loan is called collateral

- Implied - basis of charge account.

- Expressed - promissory note trade acceptance.

- is equally known as COMMERCIAL CREDIT

- Sometimes, it is also called TRADE CREDIT

- It is granted by manufacturers, wholesalers, and jobbers as an incident of sale.

ent form of savings, for it leaves invested funds undisturbed

eed for a short period to help out the borrower with

al purpose is to finance the plating, improvement, and harvesting of

vailed of by manufacturers and public utility firms in the

nance the acquisition or improvement of real estate, either