CreditCollection Modules

LEARNING MODULES IN FM 6 CREDIT AND COLLECTION
This includes Module 1 and 2
MODULE 1
This module provides an overview of the fundamentals of credit as review from
the topics in basic finance. This provides students on credit importance and
awareness on the possible impact of credit if not properly utilized. This covers
the definition of credit, elements of credit, bases of credit, advantages and
disadvantages of credit and other relevant topics which explains the existence
of credit and credit transactions.
TOPICS
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URS-IM-AA-CI-0051 Rev 00 Effective Date: August 24, 2020
Definition, Nature,
Advantages and
Disadvantages of Credit
MODULE 1
DEFINITION, NATURE, ADVANTAGES AND DISADVANTAGES OF
CREDIT
Credit is one of the unique

features of our business
system. Business firms sell
to consumers on credit and
buy from other
businessmen on credit. The
word credit comes from the
latin word “CREDERE’ or
“CREDITUM” which means
“To Trust”. The wide
spread use of credit is a
strong evidence to support
the belief that people have
trust in one another.
In the emergence of credit, it might be helpful to point

out, is not one of design but rather, it is a product of
necessity. Thus, it may be logical to expect, it passed
through a long process of evolution and development.
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How do you define credit? This term is broad

with many different meanings in the financial
world. Credit is generally defined as a contractual
agreement in which a borrower receives
something of value now and agrees to repay the
lender at a later date—generally with interest.
Credit is generally defined as an agreement
between a lender and a borrower, who promises
to repay the lender at a later date—generally with
interest.
Credit also refers to an individual or
business' creditworthiness or credit history.
In accounting, a credit may either decreases
assets or increases liabilities and equity on a
company's balance sheet.
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For example, when someone uses his or her Visa card to make a purchase, the card is
considered a form of credit because they are buying goods with the understanding they will
pay the bank back later.
Financial resources are not the only form of credit that may be offered. There may be an
exchange of goods and services in exchange for a deferred payment, which is another type of
credit.
When suppliers give products or services to an individual but don't require payment until
later, that is a form of credit. So when a restaurant receives a truckload of food from a vendor
who doesn't demand payment until a month later, the vendor is offering the restaurant a form
of credit.
Credit is defined as the ability to obtain a thing of value in exchange for a promise to pay
definite sum of money on demand or future determinable time. A thing of value may mean
cash, goods or services.
Credit may also mean the ability to possess goods, services or even money in exchange
for a promise to pay it equivalent in monetary units at determinable future time.
Credit is an arrangement that allows to buy goods or services now and pay for them later.
It can also be understood to mean these transactions or exchanges in which payment is
to be expected at some time after acceptance of the goods or money.
In the first and most common definition of the term, credit refers to an agreement to
purchase a good or service with the express promise to pay for it later. This is known as buying
on credit. The most common form of buying on credit is via the use of credit cards. People tend
to make purchases with credit cards because they may not have enough cash on hand to make
the purchase. Accepting credit cards can help increase sales at retailers or between
businesses.
The amount of money a consumer or business has available to borrow—or their

creditworthiness—is also called credit. For example, someone may say, "He has great credit,
so he's not worried about the bank rejecting his mortgage application."
Service credit is an agreement between a consumer and a service provider such as a

utility, cell phone, or cable service.
In other cases, credit refers to a deduction in the amount one owes. For example, imagine
someone owes his credit card company PhP1, 000, but he returns a purchase worth PhP300
to the store. He receives a credit on his account and then owes only PhP700.
Finally, credit is an entry that depicts in accounting to increase assets or decrease liability.
So a credit increases net income on the company's income statement while debit reduces net
income.
For whatever it is worth, credit stems from trust- thus credit business would mean
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Credit is a very powerful and excellent device in the economy that accommodates
transactions smoothly and effectively without the use of money in the time of transaction.
Credit is considers to be the “Life-Blood of Business”. A business firm which sells goods
in credit confers benefits to its customers just as it helps the continued operation of its
business. Through credit, an increase in the volume of sales is expected by the firm.
Credit connects our business and financial

enterprises in an invisible but mighty chain. Unfortunately,
failure in one sector of the economy generally spreads
rapidly to others until they engulf the whole economy.
It must be emphasized that credit represents the vey
force that sustains and aids business in the attainment of
its objectives. This is apparent, if not obvious, to say the
least. It is only through credit that business transactions
in large volume become possible. Credit not only finances
trade and commerce in almost every conceivable way, but
it also provides the needs of seasonal business.
Based from the definition of credit, the following elements were present:
1. It is the ability to obtain a thing of value — A thing of value may mean cash form of
credit, merchandise or even services.
2. A Promise to pay --- the borrower (Debtor) makes a promise to pay the lender
( Creditor). A promise to pay is valid if it is through writing and acknowledge by both
parties wherein the amount of the loan, interest and maturity is specified.
3. Definite Sum of Money --- Credit involves the exact amount of money loaned or
extended by the creditor to the debtor.
4. Payable on Demand or Future Time --- Credit has specific date when to settle the
obligation , if none, it is considered to be payable on demand or anytime the creditor
demands for payment.
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CHARACTERISTICS OF CREDIT
1. It is a bi-partite or two-party contract. Two parties are involved in the credit agreement,
the debtor and the creditor. The debtor is the party requesting for the loan while the party
extending the loan is the creditor.
2. It is elastic. The amount of credit may be increased or decreased in value by the creditor,
this usually depends on the value of the collateral pledge by the debtor.
3. The Presence of Trust and Faith. The creditor rely more on the debtor’s ability and
willingness to pay his debt. This is also the risk factor in credit particularly when the debtor
was not able to fulfill his obligation.
4. It involves futurity. Credit has its maturity for the settlement
of obligation.
For the credit system to continue in its existence and attain a

healthy growth and development, it is necessary that it should
be anchored a strong pillars/foundations for support. As
observed, the foundations of credit are:
1. Confidence. Creditors must have absolute confidence in the personal character

and in the ability as well as willingness of their debtors to accept honor and settle their
obligations.
2. Proper Facilities. This exist in performing credit operations, sources of
credit information must be available to those granting credit. If a correct and proper
evaluation of credit rating is to be made which is the first criterion in the grant of credit. Credit
Information includes data about the debtor as a gauge of his paying capacity which can be
gathered out of a conduct of credit investigation. Moreover, a credit document should be
present which serves as a written agreement signed by both parties.
3. Stability of Monetary Standards. Money must be stable wherein the
purchasing power of money is considered when extending credit. The more stable the value
of money is, the greater the possibility for approving credit.
4. Government Assistance. Government must stand ready to assist the creditor
in enforcing payment of loans extended to debtors. Debtors are given more protection since
they cannot be imprisoned for non-performance of obligation that is they do not have any
asset or property. In this case, the creditors take the risk.
5. Credit Risk. It is the possibility that the debtor may not fulfill his obligations. Credit
risk shall be borne by the creditors.
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C’s OF CREDIT
The five C’s, or characteristics of credit — character, capacity, capital,
conditions and collateral — are the framework used by many traditional lenders
to evaluate potential borrowers.
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
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Administration. Keep a record
URS-IM-AA-CI-0051
that shows your
Rev 00
investment in the business.
Effective Date: August 24, 2020
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.
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.
ADVANTAGES OF CREDIT
Credit has its own advantages such as:
1. The use of goods and services as you pay for them. Just like
driving a car as you pay for it.
2. The opportunity to buy costly items that you might not be able to
buy with cash. Can you imagine paying cash for a brand new car?
3. A source of cash for emergency or unexpected expenses. A
person would always have a way to pay for emergency expenses—
like if your car breaks down or you have been hospitalized.
4. Convenience. It is easier and safer to have credit and you don’t
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e carry large amount of cash.
Aside form advantages of credit, definitely it has its disadvantages on the part of the
borrower.
1. The Reduction of Future Income. The best example of this is spending future
income now and living beyond your income.
2. Expense. Using credit usually costs money.

It is automatically makes the item more
expensive than if you had just paid for it with cash
3. Temptation. In credit it is easy to spend
money you don’t/won’t have. You use credit to
live beyond your means—buying items you
simply can’t afford.
4. The Risk of Serious Consequences if you

Misuse Credit. Some of identified effect of misuse credit are,
failure to pay debts on time, bankruptcy, repossession and damaged to
credit score.
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This module presents the different classification of credit that are

evident nowadays. This explains how this credit are distinguish from others.
This covers also the discussion of the tools that are used to facilitate the
transactions in credit. This include the classification of credit instruments
and its benefits in the business transactions. This introduces calculation of
net proceeds for short-term period and how to recognize the aspects of
checks.
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TOPICS
Classification of Credit
and
Classification of Credit
Instruments
MODULE 2
CLASSIFICATION OF CREDIT and CREDIT INSTRUMENTS
Learning Objectives
1. Recognize the types of credit based on the different situations.
2. Classify the different types of credit instruments and give own
examples.
3. Recognize/ Identify the aspects of checks.
4. Calculate loan net proceeds and due date.
Please click the link and participate first: https://www.menti.com/x7dazmf8j8
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LESSON 1. CLASSIFICATION OF CREDIT
In as much as credit is by and large, the product of necessity, it follows the different
circumstances calling for assistance and remedies at one time or another have been
responsible for the birth of numerous classes and kinds of credit familiar to the world
today.
AS TO ACCEPTABILITY
CREDIT OF GENERAL ACCEPTABILITY
It includes those forms of credit which all
persons within a country are willing to take in
payment for goods delivered or services rendered.
Ex. Credit money, Government Checks
CREDIT OF LIMITED
ACCEPTABILITY
Credit instruments of limited acceptability are issued under
such condition as to make them as acceptable means of
payment only w/in a restricted field. They include the
promissory note, the bill of exchange, various forms of bank
credit and the open book account.
AS TO TERM
DEMAND LOAN – no definite maturity date, the borrower or debtor must be
ready because the creditor can get the necessary payment anytime.
TIME-LOAN – loans w/c have definite maturity dates

 Short-term loan – payable w/in or on 1 year
 Medium-term loan – “often 1 year but not more than 5 years”
 Long-term loan – payable after 5 years or more
AS TO FORM (ACCOMMODATION)
DIRECT LOAN. The lender may give to the borrower the EXACT AMOUNT as
contained in the promissory note. Interest will be paid at the maturity date or
every installment.
DISCOUNT. The lender collects in advance the

interest and gives to the borrower the balance
OVERDRAFT. The amount withdrawn is in excess of the depositor’s net balance

in the bank. There is a pre-arranged amount that can be withdrawn for a definite
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period of time fixed in the agreement or contract but the bank and the customer
or depositor.
AS TO TYPE OF USER
CONSUMER or PERSONAL CREDIT
It is usually extended to the individual in w/c the purpose is to finance
some personal needs like the purchase of merchandize or commodities on a
depressed payment plan.
MERCANTILE OR COMMERCIAL CREDIT

It is usually extended to persons dealing in COMMERCE and TRADE and is
used to finance the purchase of inventories.
BANK CREDIT
The commercial banks extend short-term credit to businessmen for working
capital purposes, that is, for the purchase of raw materials, the payment of wages
and other expenses of a business incident to current operations.
INVESTMENT CREDIT
Businessman usually obtain long-term funds through intermediary financial
institutions such as investment banks, savings bank, insurance company or
temporarily from commercial banks, primarily for the purpose of obtaining fixed
capital.
AS TO SECURITY
SECURED LOANS- loans guaranteed by the assignment of some tangible assets
of value which may be sold by the lender in case the borrower fails to pay for
settlement of the debt
UNSECURED LOANS- no collateral,

character or clean loans are backed up
safely by the integrity, ability and the
willingness of the borrower to pay.
AS TO PURPOSE OR USE
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AGRICULTURAL CREDIT.
These are loans granted to
finance the cultivation,
development and
improvement of agricultural
land.
COMMERCIAL CREDIT is used to finance day to day operation.

A type of short-term loan granted to finance the production and distribution of
commodities either by wholesale or retail, whether in storage or in transit to
foreign or domestic markets.
INDUSTRIAL CREDIT- It is used to finance the manufacture or goods, the
construction of plant buildings or the acquisition and installation of equipment of
machineries.
CONSUMER CREDIT- loan granted for the purchase of goods or services for
personal purposes, usually for immediate consumption.
AS TO MANNER OF PAYMENT
1. SELF-LIQUIDATING LOAN- loan pays for itself from the income of the
amount borrowed.
2. NON SELF LIQUIDATING- loans are payable when payments comes from
earnings of the borrower.
ACTIVITY 1: Lesson 1
Determine what type of credit is described in the following situation .(2pt each)
_____________1. (As to Acceptability) Credit instruments are acceptable means of
payment only within a restricted field .
_____________2. (As to Maturity) These are payable within a specified period of time
usually more than five years.
_____________3. (As to Form) This type of credit allows the lender to collect interest in
advance.
_____________4. (As to Type of User) This loan is usually extended to persons dealing in
COMMERCE and TRADE and is used to finance the purchase of
inventories.
_____________5. (As to Security) This is also known as character or clean loan since
it does not require a collateral against loan.
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G _____7. Secured loan g. Loans with collateral

H _____8. Self-Liquidating loan h. Payments for loans comes
from income of the amount
borrowed
E _____9. Short-term loan i. Payments for loans comes
from Personal income of the
borrower
A _____10. Unsecured loan j. To obtain fixed capital
k. Used for personal needs
ASAQ 2: Lesson 1
Read the given situation and classify credit.
Noname Bank approved the loan application of Dimatuwid Company. The amount
borrowed will be intended for the construction of a plant. This shall be paid for 10 years
securing its mortgage property. The businessman issued long-term promissory note and
agreed to pay the interest and principal on installment basis.
**Credit as to…. Choices Classification

Acceptability General, limited Limited
Form Discount , direct Direct
Maturity Demand, Time loan Time
Security Secured, unsecured Secured
Purpose Personal, Commercial, Industrial
industrial
Manner of Payment Self-liquidating, non-self- Self-Liquidating
liquidating
LESSON 2. CREDIT INSTRUMENTS
CREDIT INSTRUMENTS
An oral agreement to settle an obligation can be
drawn into a written contract.
LEGAL TERMS
NEGOTIATION is the transfer of an instrument as to possession and title. If payable to

BEARER, negotiation is by mere delivery. If payable to ORDER, negotiation is effected
by both endorsement and delivery.
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ENDORSEMENT – signing the name at the back of check to negotiate it.
PRESENTMENT means proper presentation of the instrument either for payment or for
acceptance. If the instrument presented for payment is paid or accepted by the drawee,
it is known to be HONORED. DISHONORED payment rejected by the drawee.
`
PROTEST. If an instrument is DISHONORED upon presentation, a protest may be filed
or waived depending upon the circumstances. If filed, the protest is usually in writing.
Procedures for protest is covered by law.
PAYABLE TO BEARER. When the payee is not specify the name as when it is
payable to “CASH” is to a fictitious person, the instrument is payable to the bearer.
PAYABLE TO ORDER. When there is a specified payee named in the inst. or when it
is so indicated by the words “or order” such inst. is payable to order.
ADVANTAGES OF CREDIT INSTRUMENT
1. The borrowers can receive long-term credits.

2. The creditor is under no obligation to continue his relationship w/ any given debtor
for any definite period time. He can sell the Credit Instrument regain his liquidity.
3. The marketability of Credit Instrument permits a diversification of risk by means of
an infinite variety of combinations of Credit Instrument held by individual creditors.
4. Potential liquidity and diversification of risks induce many persons with disposable
capital to supply loanable funds for long-term purposes.
5. Negotiable credit instrument are also useful in the case of short-term credit
because they allow the expanded market.
CLASSIFICATION OF CREDIT INSTRUMENT
AS TO ACCEPTABILITY
As to acceptability, the instruments may either be of unlimited or limited
acceptance. Those instruments which pass from hand –to-hand w/o question as
to its source and which in effect possess the characteristics of money, are
considered of Unlimited Acceptability.
Ex. GOVERNMENT CREDIT MONEY and PRIVATE BANK NOTES
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All other instruments are of Limited Acceptability as their acceptance will be
predicated on the credit standing of the issuer or maker.
AS TO FORM
The credit inst. may either be orders to pay or promises to pay.
ORDER TO PAY is generally defined as the order of one person to a second

person to pay a 3rd person a sum, certain in money on demand or at future
determinable time. It may be in the form of checks, drafts, acceptances or postal
money orders. It has 3 parties namely: DRAWER, who gives the order; DRAWEE,
who is ordered to pay and PAYEE, who is to receive payment.
PROMISE TO PAY contains the promise of one person to pay another a sum
certain in money on demand or at a future determinable time. It may be open book
accounts, promissory notes, collateral PN, letters of credit and bonds. There are
only 2 parties in a promise to pay, the MAKER or the person promising to pay and
the one to receive payment is the PAYEE
For related topics on credit instruments, you may click this link
https://www.youtube.com/watch?v=B8V5CtdZFys
AS TO FUNCTIONS
Credit instruments may be classified as:
1. CREDIT MONEY emphasizes their use as a medium of exchange.
2. COMMERCIAL CREDIT INSTRUMENTS which comprise of the instruments
used to facilitate the use of credit in short-term commercial pursuits.
3. INVESTMENT CREDIT INSTRUMENT are those used for long-term credit.
AS TO NEGOTIABILITY
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Negotiability enhances the instruments as it results in the ff.
1. The transferee obtains legal title and can sue in his own name.
2. If the transferee is a holder for value and which notice, he is free from defenses
that might have been set up against his transferor, except those which could
nullify the contract altogether.
Table 2.1. CLASSIFICATION OF CREDIT INSTRUMENTS

Function Form Instrument
A. Credit Money Promise to Pay Government Credit Money
Bank Credit Money
B.Commercial Credit Promise to Pay Open Book Account
Instruments Promissory Note
Collateral Note
Commercial Letter of Credit
Traveller’s Letter of Credit
Orders to Pay Checks
a. Personal
b. Cashier’s/manager’s/treasurer’s
c. Certified
d. Traveller’s
Drafts
a. Money Order
b. Bank
c. Trade or Commercial
d. Sight or Demand
e. Time: Time Date, Time Sight
Acceptances:
a. Trade
b. Banker’s
3. Investment Credit Promise to Pay  Bonds:
 Long-Term notes
Evidences of Ownership  Stock Certificate

in a Corporation  Stock Right
COMMERCIAL CREDIT INSTRUMENT
Commercial credit instrument are subdivided as to Promises to pay and Orders to pay.
“PROMISES TO PAY”
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A. OPEN BOOK ACCOUNT. It is one of the most common forms of credit instrument
which in effect gives the implied verbal promise of the debtor when he buys
consumable goods on credit.
B. PROMISSORY NOTE. It is an unconditional written promise to the maker to pay a
sum certain in money to bearer or order on demand or at a future determinable
time.
C. COLLATERAL PROMISSORY NOTE. This type of note is similar to the ordinary
promissory note. However, it is called a collateral note because the collateral is
described on its face or a separate document bears such description.
D. COMMERCIAL LETTERS OF CREDIT. It is a written promise on the part of the
bank to honor drafts drawn against it or for its account, by a specified beneficiary
or his order, under the specifications contained in the letter of credit.
E. TRAVELLER’S LETTER OF CREDIT. It is similar in intent as the commercial
letter of credit. The bank’s credit standing is likewise substituted for that of the
traveler. Its use is to provide the traveler with funds enroute.
“ORDERS TO PAY”
A. CHECKS – generally is an order of a depositor to his bank to pay a sum certain

in money to a third person or himself on demand.
CLASSIFICATIONS OF CHECKS
1. PERSONAL CHECK (check in general), Sometimes known as a business check.

Its drawer is an individual for personal use or purpose.
2. CASHIER’S/ MANAGER’S/ TREASURER’S. As in a check this is an order to

pay.
3. CERTIFIED CHECK – Originally a personal check. The bank’s certification is

required by the recipient of the check. shall have been processed.
4. TRAVELLER’S CHECK – A variation of the traveler’s letter of credit, the

traveler’s check is used by traveler’s also.
SOME ASPECTS RELATED TO CHECKS
CROSSED CHECK is one which is meant for deposit only or for a specified purpose
only which is also used to limit its further negotiation. The face of the check will bear two
parallel lines on the left upper corner.
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POST-DATED CHECK is one which is dated beyond the date of deposit or actual
issuance. For example, if the (abc) check (EX.) were bought for deposit on Dec. 29, 1968
or EARLIER than Jan. 2, 1969 (date on check), then it would be a post-dated check as
for as the bank is concerned. You can make advance payment. It is a check written by
the drawer (payer) for a date in the future.
STALE CHECK – check deposited or presented for payment after six months from date
of deposit or issuance. Watch video: https://www.youtube.com/watch?v=0ALT8l1NEqw
*The LAW states that CHECKS sold be presented for payment at a REASONABLE
PERIOD OF TIME. The SAFEST thing to do, however, is to present the check for
payment the soonest after its receipt.
RUBBER OR BOUNCING CHECKS – checks returned to the drawer. Also termed as

BAD CHECKS, which means that they are not sufficiently covered with FUNDS.
Watch this video for more info: https://www.youtube.com/watch?v=NwNgyX4LjJE
CANCELLED CHECK – when the deposits is check is finally cleared and paid by his
bank, these checks are marked cancelled.
DATED CHECK – check presented for payment with in six month.
BLANK CHECK – check without amounts written
ADVANTAGES OF CHECKS
1. A check facilitates payment as exact amounts could be written on its face.

2. The check serves as a receipt for payment.
3. The check is more portable than ever money itself.
4. It is safer to use on certain occasions.
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5. Payment could be recalled if necessary through stop-payment order.
6. The use of checks afford the owner bank accommodations, such as facilitating
payment of out-of-town checks or perhaps the facility of getting a loan.
Disadvantages of Check
Checks may cause either embarrassment on the part of the owner or loss of money
or loss of trust. However, our law makes this a criminal offense and thus minimizes
the issuance of bad checks.
B. DRAFTS are orders to pay and are likewise drawn by a drawer against a drawee
to pay a 3rd person a sum certain in money on demand or at a future
determinable time.
C. ACCEPTANCE – is originally an order to pay. It is a time draft. It is also a

promise to pay. It would then certain the promise of the drawee (now known as
acceptor) to pay the draft at maturity.
INVESTMENT CREDIT
In the realm of investment credit, the instruments used are promises to pay
which are in the form of:
1. Bonds
2. Long-term notes
3. Evidences of ownership in a corporation
BONDS AND LONG-TERM NOTES
1. BONDS are long-term promissory notes issued under a corporate seal, in large
sums usually, and in series.
2. LONG-TERM PROMISSORY NOTES. Bonds and long-term notes are both
promises to pay and their terms of payment covers 5 years or more.
Watch related videos on https://www.investopedia.com/terms/d/debtinstrument.asp
EVIDENCES OF OWNERSHIP
1. STOCK CERTIFICATE. This instrument evidences the part of ownership of a

corporation’s capital through purchase of a share or shares of stock. The
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corporation is not under obligation to declare dividends if earned and if ever, the
stockholders shares according to the type of stock he owns.
2. STOCK RIGHT. The RIGHT referred to here is the pre-emptive right attached to
ownership of a share of stock. This means that the original stockholder is given
the option to purchase new additional shares of stock at the new issue price
before such stocks are offered to the public.
Identification of the Aspect of Checks

Assume a fixed 30-day period in a month. Date of presentment is the time where
the bearer of the instrument bring the check for deposit or encashment. While the date of
the check is the date written by the issuer of the check.
If the date of the check is March 17, 2020, and it is presented for payment on August 27,
2020, then it is known as dated check since it is within 6 months from the date of the
check. Otherwise, it is known as stale check if presented for payment or deposit for more
than 6 months. On the other hand, if the date of the check is beyond the given date of
presentment (August 27, 2020) then the check is known as post-dated check.
Computation of the NET PROCEEDS of Loans
Principal amount approved for loan is P 200,000 and will be released on

September 22, 2020. This is payable within one year. This is subject only for UID, SF,
insurance and other charges.
LOAN RELEASE SHEET
Principal Amount --------------------- P 200,000

Less:
Unearned Interest Discount (24%) P 48,000
Service Fee (3%) 6,000
Insurance Fee (1%) 2,000
Other Charges (.3%) 600 _ 56,600
Net Proceeds P 143,400
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Credit Management:
Practices and Procedures
This unit covers the midterm topics of the subject course. This presents the
discussion on the management of credit in general perspective including the
procedures in the credit transactions. Some of the detailed steps in the
scrutiny of credit will be discussed.
This includes Module 3 and 4
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This part comprises the heart of the module as it focuses on the management
of credit. This recognize how to make decisions and act within social and
ethical dimensions in performing credit functions and responsibilities of credit
department. This includes the objectives of credit management, credit
department, credit men and their qualities, and the principles of sound credit
management. This includes the installment credit operations.
TOPICS
Credit Management
Credit Department
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Installment Credit
MODULE 3
CREDIT MANAGEMENT, CREDIT DEPARTMENT AND
INSTALLMENT CREDIT
Learning Objectives:
Describe and explain the following:
 Credit Management
 Credit Department and
 Installment Credit
LESSON 1. CREDIT MANAGEMENT

Introduction to credit risk management
The old-style approach to credit is volatile. Once there is a credit problem, the
business reacts by enforcing legal rights. The ability to react is an important part of credit
management. Credit management, also requires involvement of prevention. In fact,
prevention is a proactive action and is far more important. It is essential to know legal
rights as a planning tool in order to appraise your strong point or threat position and to
preserve your rights. Protection of legal rights includes the capacity to examine legal
forms that create an agreement and to manage or adjust that contract. In that case, it is
significant to have your own contract practices available that will best reserve your
position.
First, it is imperative to identify that if you extend credit to a customer, you are a
creditor. You must think and act like a bank, judiciously assessing the creditworthiness of
your client and preserving your legal rights. You must remain flexible to familiarize to an
countless variability of credit circumstances. Honestly, careless guidelines and
procedures will cause in lost business that could have been securely assisted and
increased losses from defaults that could have been avoided. Appraising and checking
an account requires a holistic approach involving management, salespeople, the credit
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department and field performance personnel. Good credit controls and procedures
increase sales and profits. A knowledgeable and experienced credit department
personnel can increase sales by constructing a safe credit management package for
accounts that would otherwise be turned away. Sales and field people have an extremely
important role in credit management by keeping their eyes and ears open to collect
information about customers and projects.
Credit Management
Credit management is the process of granting

credit, setting the terms it's granted on,
recovering this credit when it's due, and
ensuring compliance with company credit
policy, among other credit related functions.
The goal within a bank or company in
controlling credit is to improve revenues and
profit by facilitating sales and reducing
financial risks.
The Principal Objectives of Credit Management
1. Maximizing sales:
 help increase the volume of sales while minimizing losses.
 Increased sales and profits are the by – products of a better understanding
and skillful handling of all credit functions.
2. Controlling the amount of receivables.

Purpose of control: To assure performance in accordance with plans.
Qualification of a Credit Manager: the ability to review and appraise the
operations of his department and the performance of his staff in terms of DESIRED
RESULTS.
Importance of maintaining effective control.

a. Project desired results more accurately
b. Identify and forecast major trends in credit activities
c. Determine the need for changes in policies / or practices
d. Detects credit problems to take corrective action before they become
critical and conserve time and effort.
3. Controlling costs of credit and collection.
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 Expenses incurred in the extension of credit and in the collection of A/R.

 It does not necessarily mean minimizing expenses but decreasing cost per
unit.
Principles of a
Sound Credit Management
1. ESTIMATION.
a. All available sources of credit information must be utilized for proper estimation
of credit risk
b. For individual who buy for consumption, character and their ability serve as
important bases of credit; for business concerns, it is the net worth and
condition of the business as well as the reputation for paying their bills.
c. All credit information gathered and received must be kept strict confidence.
Only those authorized must have access to it.
2. ENFORCEMENT.
a. Collection of accounts should start from the
moment they become due. There is no room
for vacillation insofar as collection is
concerned.
b. Get the money due without offending the
customers.
c. Collection records must be kept and
maintained and should indicate when
notices were sent.
3. EVALUATION.
a. Results must be evaluated against company policies and procedures.
b. If a situation should arise in the future which preclude/prevent good-paying
customers to discharge their obligations on time, policies and procedures may
be modified without losing sight of the company goals and objectives.
c. Records must be periodically reviewed or kept up to date.
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A credit manager is a person employed by an

organization to manage the credit department and
make decisions concerning credit limits, acceptable
levels of risk, terms of payment and enforcement
actions with their customers. This function is often
combined with Accounts Receivable and
Collections into one department of a company.
The role of credit manager is variable in its scope and Credit managers are
responsible for:
1. Controlling bad debt exposure and expenses, through the direct

management of credit terms on the company's ledgers.
Credit terms are terms that indicate when payment is due for sales that are made
on credit, possible discounts, and any applicable interest or late payment fees. For
example, the credit terms for credit sales may be 2/10, net 30. This means that the
amount is due in 30 days (net 30).
2. Maintaining strong cash flows through efficient collections. The efficiency

of cash flow is measured using various methods, most common of which
is Days Sales Outstanding (DSO).
In accountancy, days sales outstanding (also called DSO and days receivables) is
a calculation used by a company to estimate the size of their outstanding accounts
receivable. It measures this size not in units of currency, but in average sales days.
3. Ensuring an adequate Allowance for Doubtful Accounts is kept by the

company.
Bad debt occasionally called Uncollectible accounts expense is a

monetary amount owed to a creditor that is unlikely to be paid and, or which the creditor
is not willing to take action to collect for various reasons, often due to the debtor not
having the money to pay, for example due to a company going into liquidation or
insolvency.[1]
4. Monitoring the Accounts Receivable portfolio for trends and warning signs.
To manage the credit process, today's credit executive must go beyond traditional
“customer” analysis and move to analysis of the entire receivables portfolio. The term
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“portfolio” is also used to describe the collection of financial instruments held by an
investor or the loans advanced by a bank.
5. Hiring and firing of credit analysts, accounts receivable and collections

personnel.
A credit analyst is a financial professional who assesses the creditworthiness of

securities, individuals, or companies. Credit analysts are typically employed by
commercial and investment banks, credit card issuing institutions, credit rating agencies,
and investment companies.
6. Enforcing the "stop list" of supply of goods and services to customers.
A stop list is effectively a blacklist of clients who are no longer to be supplied in lieu of
missed, late or incomplete payments. It is crucial that a stop list is shared effectively with
everyone in the organization, so everyone knows who is on the list and to ensure they do
not provide any further goods or services whilst payment remains outstanding
7. Removing bad debts from the ledger (Bad Debt Write-Offs).
Writing it off means adjusting your books to represent the real amounts of your current
accounts. To write off bad debt, you need to remove it from the amount in your accounts
receivable. Your business balance sheet will be affected by bad debt.
8. Setting credit limits.
The term credit limit refers to the maximum amount of credit a financial institution
extends to a client. A lending institution extends a credit limit on a credit card or
a line of credit. Lenders usually set credit limits based on the information given by
the credit-seeking applicant.
9. Setting credit terms beyond those within credit analysts' authority.
The responsibilities of the credit analyst include analyzing credit data and financial
information of persons or companies that are applying for credit or loans to determine the
risk that the bank, or other lending or credit-granting institution will not recoup funds
loaned. The level of risk is then used to determine if a loan or line of credit will be granted,
and if so, the terms of the loan, including interest rate. Credit analysts will prepare reports
based upon their findings to help make decisions on lending and credit-worthiness.
10. Setting credit rating criteria.

A credit rating is an evaluation of the credit risk of a prospective debtor (an individual,
a business, company or a government), predicting their ability to pay back the debt, and
an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents
an evaluation of a credit rating agency of the qualitative and quantitative information for
the prospective debtor, including information provided by the prospective debtor and other
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non-public information obtained by the credit rating agency's analysts. Setting and
ensuring compliance with a corporate credit policy.
11. Pursuing legal remedies for non-payers.
Legal remedy, also referred to as judicial relief or a judicial remedy, is the means
with which a court of law, usually in the exercise of civil law jurisdiction, enforces a right,
imposes a penalty, or makes another court order to impose its will in order to compensate
for the harm of a wrongful act inflicted upon an individual
12. Obtaining security interests where necessary. Common examples of this could
be Personal Property Security Act (PPSA)'s, letters of credit or bank/personal
guarantees.
PPSA aims to strengthen the secured transactions legal framework in the Philippines,
which shall provide for the creation, perfection, determination of priority, establishment of
a centralized notice registry, and enforcement of security interests in personal property
and for other purposes.
A bank guarantee is a promise from a lending institution that ensures the bank will
step up if a debtor can't cover a debt. Letters of credit are also financial promises on
behalf of one party in a transaction and are especially significant in international trade.
Bank guarantees are often used in real estate contracts and infrastructure projects, while
letters of credit are primarily used in global transactions.
13. Initiating legal or other recovery actions against customers who are delinquent.
Debt recovery is when a loan—such as a credit card balance—continues to go unpaid,

and a creditor hires a third party, known as a collection service, to focus on collecting the
money.
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LESSON 2 CREDIT DEPARTMENT
Credit departments work in conjunction with the sales

department to make sure that the sales extended on credit
are going to credit worthy customers who will pay in a
timely manner.
Functions of the Credit Department
1. Gathering, collating and sorting credit information

2. Investigation, analysis, evaluating, appraisal and
recommendation
3. Collection and follow ups
Often times friction is created between these two

departments – sales want the sale no matter what, and
credit departments are tasked with only allowing sales that will end up being paid.
A good CFO or Controller will have these departments work together harmoniously.
The credit department tends to remain fairly consistent in size and scope during
changing business conditions, whether the economic conditions are good or bad, due to
an increased support role when sales volumes increase, as well as increased support
needed when delinquencies increase.
Large variations exist among companies, but a credit department is inevitably

either centralized or decentralized. Centralized credit departments are entirely based in
the company’s main headquarters. Decentralized credit departments are not housed in
the headquarters, but report to the headquarters from a remote office or offices. The role
of the mid-level credit manager and the top-level credit executive play similar roles over
decentralized and centralized organization structure. However, their authority and duties
may differ depending on the credit policies enacted by the credit department.
The benefits of a centralized credit department include:
– Economies of scale
– Consistency and control
The benefits of a decentralized credit department include:
– Internal and external relationships

– Involvement in setting strategic priorities
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The core activities of the credit department include:
o Maximizing sales,
o Accelerating cash inflow,
o Minimizing bad debt losses,
o Reviewing and approving new accounts,
o Developing and updating credit and collection policies,
o Establishing appropriate credit limits and terms of sale for new and active
customers,
o Creating new or more appropriate payment terms [terms of sale],
o Placing accounts on credit hold, and releasing orders from credit hold,
o Managing the collection function,
o Maintaining current information in the credit file on each active customer,
o Documenting credit decisions and actions,
o Performing financial analysis on customer financial statements,
o Researching and resolving disputes and deductions that would otherwise delay or
prevent payment of accounts receivable,
o Communicating with other departments within the company including order entry,
sales and shipping,
o Management reporting, and
o Safeguarding the company's investment in accounts receivable.
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LESSON#3 INSTALLMENT CREDIT
Installment credit is a structured loan in which money is lent with fixed terms, monthly
payments and interest. With most types of installment credit, you make fixed payments
until the loan is fully paid off.
The essence of an installment loan is consistency. You can expect to pay the same
amount on the same date every month. In rare cases, such as a mortgage on a house,
the interest rate of an installment loan can be variable. If your interest changes during the
course of your loan, your monthly payment may go up or down.
Installment credit can be issued in a period of months or years, depending on the loan
amount. The interest rate on your loan typically depends on your credit and the length of
the loan. Longer loan terms are usually paired with higher interest rates.
Here’s an example of a simple installment loan:
You need a $5,000 loan for home repairs. Your loan comes with a 6% interest rate and
an installment period of 24 months. That means your fixed monthly payment is $221.60,
and it’s due on the 15th of every month.
After making your 24th loan payment, you will have paid $5,318.57 to borrow $5,000. The
additional $318.57 is what you paid in interest.
Determine your payments with this simple calculator and continue on for different types
of installment loans.
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Common types of installment loans
Mortgages
Mortgages are a popular type of installment loan. Mortgage loans are commonly are
commonly issued over 15- or 30-year periods, and the interest rate typically climbs the
longer the loan term. Another popular installment loan for mortgages is the 5-year
adjustable-rate mortgage (ARM), in which the interest rate can change after 5 years.
Student loans
Student loans are installment loans that can be issued federally or privately. Typically,
students have 10 years (sometimes longer) to pay back federal student loans. If the
installment loan is acquired privately, interest rates and loan terms can vary greatly.
Auto loans
Auto installment loans are, on average, much shorter than mortgages or student loans.
Installments are usually paid anywhere from 12 to 96 months. And like a mortgage, the
interest is usually higher if your loan term is longer. A longer loan works out to a lower
monthly payment, but when your account for total interest paid, you end up paying more
money for your vehicle.
Personal loans
Most personal loans also fall into the installment loan category. Depending on the
borrower and the terms of repayment, personal loans can have higher interest rates than
mortgages or auto loans. Online loans available to those that need money urgently have
become increasingly popular, but they come with a hefty price tag and an assortment of
hidden fees.
Advantages of installment credit
Predictability
Unlike revolving credit, where your minimum can adjust every month, installment
payments are fixed and allow you to budget appropriately. If your installment credit comes
with a variable interest rate, there is a potential to see slight changes at certain times
during your loan term. But overall, if you’re paying installments loans, you know the exact
number you can expect to pay each month.
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Lower interest rates
When comparing interest rates of credit cards, installment loans are usually a more frugal
approach to borrowing money. Depending on the type of loan, installment loans are more
likely to offer much lower rates than revolving credit. But when it comes to personal loans
or payday installment loans, interest rates can equal or surpass those of revolving credit.
Quick approvals
Installment loans can be obtained rather quickly, and it doesn’t take long to get cash.
Some loans can get approved in as quickly as 24 hours, and the process normally doesn’t
take longer than two weeks.
Disadvantages of installment credit

Qualifying
On average, getting your hands on an installment loan can be more difficult than getting
approved for a credit card. Qualified borrowers, rejoice! But if you have questionable
credit, you may have to face a disappointing disapproval notice.
Prepayment consequences
Some lenders do not allow you to make payments larger than your fixed monthly payment.
And those who do may charge a sizable prepayment fee. So, when you want to pay your
loan down faster to avoid interest, your extra payments may be washed out by
prepayment fees. It’s always best to thoroughly research prospective lenders and their
prepayment terms before entering into an installment agreement.
Increasing interest
If your loan term is longer (which means lower monthly payments), your interest rate will
be higher. Loans with shorter terms have attractive interest rates, but for the average
person, the monthly payment is unfeasible.
How installment credit affects your credit score
Installment credit plays a big role in your credit score. If you make every payment of your
installment loan on time, you’re likely to see your score tick up over the period of your
loan.
Unlike closing a credit card account, once an installment account is closed out with a final
payment, you’ll probably see a satisfying boost to your credit score.
But if you close a credit card account, your score can fall.
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You may think that paying down your installment loan quicker will get you a better score,
but that is not necessarily true. More or larger payments won’t necessarily have a greater
impact on your score than making your regular payments, but once the account is paid in
full, you should see a positive nudge.
Pay off installment loans early to avoid interest
While paying off debt earlier won’t affect your credit score positively, paying off a loan
early is never a bad thing to do — especially when it comes to avoiding interest. Here’s
how you can do it with a mortgage:
You have a 30-year mortgage. You borrowed $100,000 at a 4% interest rate. If you pay
your fixed monthly installment, at the end of the 30 years you will have paid $171,869.51
— almost double the amount of what you borrowed!
But if you add $100 to your monthly mortgage payment, you’d shave eight years off your
loan and would only pay $49,405 in interest payments.
Another interest-smashing option is using your tax refund.
Using the example above, if you get a $1,000 tax refund and put that extra amount toward
your mortgage every April, you’d whittle your interest down to approximately $52,000.
That’s nearly $20,000 of extra money you get to keep.
Recap of installment credit
We covered a lot. These are the key things to know before you enter into an installment
loan:
 Research your potential creditors for hidden fees and prepayment penalties.
 Try to lock in the lowest interest rate possible before you sign for an installment
loan.
 If you can, opt for shorter loan terms to avoid higher interest rates.
 Look for ways to boost your credit score before obtaining an installment loan.
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This module provides understanding on the general practices and

procedures in the grant of credit. Evidently, it shows how cautious the
institution in the grant of loan as the result could greatly affect the entire
organization. This examines and scrutinizes the documents presented by
the parties for proper verification. This includes discussion on, but not
limited to, credit application, the interview process, investigation,
inspection and appraisal. This include the process of determining the
scope of credit analysis, the types of properties for inspection and the
basic methods and procedures of appraisal.
TOPICS
Credit Practices and
Procedures:
Credit Application, Credit Interview
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Credit Investigation
Inspection and Appraisal
MODULE 4
CREDIT PRACTICES AND PROCEDURES
Learning Objectives
1. Discuss credit application and interview
2. Identify the various sources and qualities of credit information
3. Discuss the nature of credit investigation
4. Describe the functions, purpose and process of inspection and
appraisal
Introduction
Credit practices and procedures consist of
steps and methods relating to credit evaluation
and analysis. The credit analysis process refers
to the evaluation of a borrower’s loan application
to determine the financial health and
managerial strength of an entity. It seeks to
determine its creditworthiness and the level of
credit risk.
Credit Application
The main function of the credit department is credit evaluation. Evaluating the
credit worthiness of a potential credit customer in an efficient, repeatable, and accurate
manner helps to minimize credit risk/exposure, protect margins, and maximize profits.
The first step is the accomplishment of credit application.
A credit application is a form used by potential borrowers to get approval for credit
from lenders. The information on the application is used to determine the borrower's
credit history, business/employment status, and ability to repay the loan amount.
Purpose of Credit Application

 To understand the nature of the customer’s business dealings and sources of
income
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 To assist the credit analyst to make a credit decision and in the periodic review of
credit relationship, and provide support to counsel as needed
 To allow the creditor to obtain information necessary to make decisions about a
customer’s ability and willingness to meet obligations within credit terms
 To serve as an investigative tool in fact-finding and fact- verification endeavors
 To serve as a contract that specifies the rights and obligations of both the applicant
and creditor
Information to be included on the credit application may include:
 Contact Information
 Credit Information
 Employment or Business Dealings
 Other Sources of income
 Bank and/or Trade References
 Payment Terms
Click this link watch this video for more information:

The Credit Application Process --https://www.youtube.com/watch?v=N9LyTYkyEpg
Credit Interview
The next step in the credit evaluation process is credit interview. A credit interview
validates the information stated in the credit application.
Purpose of Credit Interview

 To determine the qualification of the credit applicant
 To find out if the credit applicant is mature enough to handle the responsibility
 To validate the identity and status of the applicant
 To determine the credit experience of the applicant
 To find out if his/her financial condition will permit making payments after
considering all the factors
Credit Information
Credit review is based on the information of the credit applicant. The assessment
of an applicant’s credit standing is based on different sources and types of information.
It incorporates the economic and qualitative data concerning the borrower.
The credit company needs the following relevant information:

 Credit history
 Reputation
 Financial condition including assets and liabilities
 Transaction records with suppliers, banks and other financial institutions
 Income and/or employment
 Personal circumstances such as age, residence and marital status
The following are the sources of credit information

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 Internal source such as credit record and customer supplied information
 External sources which include trade references, banks, newspaper clippings,
court cases, reports from competitors, credit reporting agencies
Qualities of Credit Information

 Updated customer data
 Completeness and consistency of the documents submitted by the borrower
 Accuracy and genuineness of documents presented and submitted
 Credibility of information from external sources
Credit Information System Act
Republic Act No. 9510, otherwise known as, Credit Information System Act of
2008 or CISA Law is an act establishing the credit information system in the Philippines. The
State distinguished the need to build a centralized and comprehensive credit information
system for the dissemination and collection of fair and accurate information relevant to, or
arising from, credit and credit-related activities of all entities participating in the financial
system.
Credit Information Corporation
The Credit Information Corporation (CIC) is a government-owned and controlled
corporation that is envisioned to be the leading provider of independent, reliable and accurate
credit information in the Philippines. CIC was created in 2008 by virtue of Republic Act. No.
9510, otherwise known as the Credit Information System Act (CISA). To collect, collate and
disseminate credit information.
Click this link watch this video for more information:

Understanding Credit: CIBI Information, Inc,
https://www.youtube.com/watch?v=mneDUAWSiwc
Credit Investigation
One of the core functions of the credit department is credit investigation. A credit
investigation is a procedure undertaken by a financial institution to examine a potential
client's ability to pay back a loan.
Purpose of Credit Investigation

 to validate the credit information supplied by the applicant
 to gather additional relevant data
 to collect factual and accurate information that will lead to an appropriate credit
decision
Scope of Credit Investigation

I. Company’s Background/ history
II. Financial Conditions
III. Dealings with Government Lending Agencies, etc.
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IV. Banks Experience with the subject
V. Court Cases
Factors in determining the scope of Credit Investigation

1. Purposes and Types of Investigation
2. Company Credit Policy
3. Client Classification
4. Amount involved.
5. Time and resource Constraints.
Types of Credit Investigation
1. Direct investigation occurs when the creditor collects credit information either
through direct contact with the customer or through direct contact with non-
commercial sources of information such as competitors, banks and other trade
references that may have relevant details to share.
Other Sources of Direct Investigation

 Government Offices
 Bankruptcy Court Information
 Internet
 Customer Website
2. Indirect investigation usually refers to acquiring information from third-party

sources that are in the business of preparing information on
businesses/companies. These third-party sources are referred to as commercial
credit agencies, bureaus or “repositories.”
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Duties and Responsibilities of Credit Investigator
 Compile and analyze credit information gathered
by investigation
 Obtain information about potential creditors from
banks, credit bureaus, and other credit services
 Interview credit applicants by telephone or in
person in order to obtain personal and financial
data needed to complete credit report
 Prepare reports of findings and recommendations
 Contact former employers and other
acquaintances to verify applicants' references,
employment, health history, and social behavior
 Examine city directories and public records in order
to verify residence property ownership,
bankruptcies, liens, arrest record, or unpaid taxes
of applicants
Qualities and Qualifications of Credit Investigators
 Education: Bachelor’s degree in Finance, Accounting, Business Administration, or

a related field
 Computer skills
 Communications skills: the ability to communicate effectively both orally and in
writing, and must be able to communicate with diverse groups and populations
 Organizational skills: the ability to effectively prioritize tasks and manage multiple
assignments
 Confidentiality: must be discreet with their clients’ private credit information
 Time management skills: the ability to meet deadlines and manage relationship
manager and client expectations
 Collaboration skills: must be able to work in a team-oriented environment
 Interpersonal skills: skills for relationship building and establishing rapport
Inspection and Appraisal

Inspection is the evaluation of the physical condition of a building, equipment, machinery
or any properly used as loan collateral.
Property appraisal is a valuation of property, such as real estate, a business, equipment

or machinery, by the estimate of an authorized person
Appraisal determines the value of the property in terms of:

1. Market value: highest price estimated which a property will bring if exposed for sale
in the open market; the price under which a willing seller will sell and a willing buyer
will buy
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Credit Investigator career Information (n.d.) www.worky.com › Workypedia › Categories

› Finance. Retrieved July 21, 2020
Klagan, J. (2020). Credit application. Investopediawww.investopedia.com. Retrieved July

21, 2020
Principles of Business Credit (n.d). web.nacm.org › educ_presentations ›

Principles_Ch9_v3. Retrieved July 21, 2020
Understanding the Appraisal (n.d). www.appraisalinstitute.org. Retrieved July 21, 2020
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Collection Policies and Procedures
This unit presents the topics for the final term. While the first unit focuses on credit
principles, and second unit emphasizes credit management, this unit concentrates
on the collection policies and its implementation. Maintaining goodwill to different
types of customers are also in the center of this discussion. This acquaints the
collecting organization of some efforts utilized to be able to achieve its goals of
recovering every single cents. This is to maximize the earnings with least costs to
the organization. This includes the collection policies and procedures that are
executed in every credit department to be able to achieve their goals. Topics like
collection letters and ways to recover from bad debts are also discussed in this
unit.
This includes Module 5, 6 and 7
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This module provides information on the important role of collection
department in every organization engaged in lending business. Once credit
is granted, collection comes next. The role of the collectors in dealing with
the different types of debtors is also stressed. Collection department
procedures and techniques is included.
TOPICS
Collection Policies and
Functions
Classification of Debtors
MODULE 5
COLLECTION POLICIES AND FUNCTIONS
LEARNING
MODU
GOALS
LE
5
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By the end of this lesson, you should be able to:
Understand collection policy and its importance to the

organization.
Know the basics of collection policy.
Explain the role of Credit and Collection Department within the
Organization.
Identify the different types of debtors.
Introduction
In the current economic and business environment, liquidity and accounts

receivable has emerged as a topic of concern. Making sales is important, but collecting
on those sales is critical.
When a company sells goods on credit, it reports the transaction on both its income
statement and its balance sheet. On the income statement, increases are reported in
sales revenues, cost of goods sold, and (possibly) expenses. On the balance sheet, an
increase is reported in accounts receivable, a decrease is reported in inventory, and a
change is reported in stockholders' equity for the amount of the net income earned on the
sale. In order for the firm minimize its bad debts, a sound collection policy and procedure
is adopted.
WHAT IS A CREDIT COLLECTIONS POLICY?
A credit collections policy is a document that includes “clear,

written guidelines that set the terms and conditions for supplying
goods on credit, customer qualification criteria, procedure for
making collections, and steps to be taken in case of customer
delinquency”.
In fewer words, it is a guide offering an organized and repeatable philosophy on
selling on the rules, regulations and procedures to manage daily operations. The goal for
a credit collections plan is to clearly define these elements so that sales and collections
employees conform to documented steps and procedures designed to optimize your
resources, reduce credit risk, and improve overall cash flow.
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WHY IS IT IMPORTANT TO HAVE A CREDIT COLLECTIONS POLICY IN PLACE?
A well written and comprehensive credit collection policy will:
 Ensure continuity in the department in the event that key personnel leave the
credit department.
 Help make sure all customers are treated fairly.
 Ensure consistent credit decisions are being made.
 Be used as a training tool for new sales associates and the credit and collections
team.
 Be used to ensure consistency of procedure and execution between the credit
department, sales, and management.
Your policy can be as general or as specific as you would like, just keep in mind
that in order to protect your cash flow, arming your employees with knowledge and
predefined best practices and procedures is best so they always know what to do in
certain situations and can react quickly and confidently to resolve any problems or answer
any questions.
Watch. https://www.youtube.com/watc Read More here

h?v=obVSRABqKK8&t=129s
https://anytimecollect.com/develop-credit-policy-plan/
https://www.youtube.com/watch?
v=V-vMl8asQZc https://bizfluent.com/facts-6802372-importance-credit-
policies.html
Credit and Collection Policy Basics

If you don't have a credit and collections policy, or if you haven’t reviewed your
policy in awhile, it’s time to get started.
Effectively managing accounts receivable is about ensuring consistency in your
credit and collection processes. The secret to this consistency is designing and actively
implementing a credit and collection policy. Properly constructed and applied, this policy
has the power to breathe new life into your entire credit-to-cash process. An old policy,
however, that hasn’t been reviewed under the current conditions may be doing your
company more harm than good.
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 Develop a Mission Statement

 Define and Set Goals
 Measure to Manage
 Clarify Departmental Responsibilities and Focus Resources
 Establish a Credit Evaluation Process
 Systematize Collection Procedures
 Establish Terms of Sale
 Keep the Momentum - Keep It Relevant
Read and Watch here
https://www.abc-amega.com/Articles/Credit-Management/credit-and-collection-policy-basics
https://www.youtube.com/watch?v=uif5knxTOWg
https://www.youtube.com/watch?v=rKka6t7poGI
https://www.youtube.com/watch?v=obVSRABqKK8
How to Deal With Clients Who Won't Pay - Collection Call Best Practices
Click this https://www.youtube.com/watch?v=LGwKXj0B6V4
Billing and Cash Collections

Click this https://www.youtube.com/watch?v=ZNUf3a8cGoQ
Role of the Credit and Collections Department in Business
Companies expect their credit department to be sales oriented. Put simply,
this means the credit department should be looking for reasons to justify establishing
open account terms and/or releasing orders pending, rather than looking for excuses
to hold orders or to reject applicants for open account terms. Having this simple idea
in mind can make the difference between having the credit department seen by
senior management as a roadblock to the company reaching its goals, and having
the credit department and the credit manager viewed in a far more favorable light.
The credit function is an important component of any company's business
operations. Using creative methods when necessary to structure transactions so
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that sales can be approved, the credit department can make a significant contribution
to sales and profit maximization. The key is knowing when and how to accomplish
the sale safely. It’s important to find the best way to minimize the risk of late payment
or non-payment by customers.
The core activities of the credit department include:
o Maximizing sales,
o Accelerating cash inflow,
o Minimizing bad debt losses,
o Reviewing and approving new accounts,
o Developing and updating credit and collection policies,
o Establishing appropriate credit limits and terms of sale for new and active
customers,
o Creating new or more appropriate payment terms [terms of sale],
o Placing accounts on credit hold, and releasing orders from credit hold,
o Managing the collection function,
o Maintaining current information in the credit file on each active customer,
o Documenting credit decisions and actions,
o Performing financial analysis on customer financial statements,
o Researching and resolving disputes and deductions that would otherwise delay or
prevent payment of accounts receivable,
o Communicating with other departments within the company including order entry,
sales and shipping,
o Management reporting, and
o Safeguarding the company's investment in accounts receivable.
Collections and Credit Holds: Customers occasionally overreact to a decision

by a creditor company to place orders on credit hold. However, most debtors
understand the collection process that creditors use, and understand the risk
they face when they delay payment. Occasionally, the penalty for delaying
payments to creditors involves a credit hold.
Collections and Credit Risk Management: Most collection problems and bad debts result from
a flawed or inadequate initial credit investigation. It may be helpful to think of credit extension as
making a loan to an applicant. We know that a bank would not make a loan without a completed
and signed application, and without a detailed understanding of the creditworthiness and financial
worth of the applicant. The care that banks take in approving loans should not be lost on trade
creditors. A creditor should not approve open account terms until there is sufficient
documentation to show the applicant is creditworthy.
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https://creditinstitute.org/Shared_Content/Knowl
edge-Centre/Article/Role-Of-The-Credit-And-
Collections-Department-In-Business.aspx
Types of Debtors
A debtor is an entity that owes a debt to another entity. The entity may be an
individual, a firm, a government, a company or other legal person. The counterparty is
called a creditor. When the counterpart of this debt arrangement is a
bank, the debtor is more often referred to as a borrower.
 Cooperative Debtor
 Chronic Complainer
 Politician Type
 Uncooperative & Indifferent
 Paranoiac
 Belligerent / Pugnacious
 The Elusive Type
According to Paying Habits:

 Prompt Payors
 Delinquent Debtors
Fair Credit
Slow Credit
No Good Credit
Read More
https://www.bierensgroup.com/en-gb/article/5-types-of-
debtors-how-can-you-get-your-invoice-paid/
https://www.bms.co.in/what-are-the-different-types-of-
debtors/
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This module discusses the effort of the organization with the use of collection
letters and other instruments to foster efficiency in the collection. This helps
the students to recognize the importance of collection letters. This aims to
devise a good collection letter characterized of being responsive with good
quality. The goals of maintaining goodwill to the customers are given
importance while achieving its goals of recovering the credit granted.
TOPICS
Collection Letters
Bad-Debts and
Write-Off
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MODULE 6
COLLECTION LETTERS
BAD DEBTS AND WRITE-OFF
• To define what is a collection letter;

• To discuss the importance of writing a collection
letter;
• To understand the qualities of a good collection
letter;
• To describe the types of collection letters;
• To define the meaning of bad debts;
• To explain the meaning of writing-off of a bad debt
• To identify and discuss the two (2) methods of
writing-off a debt
INTRODUCTION
The primary job of the person responsible for collections is to collect the money as close
to the terms of the obligation as possible. The debtor has an obligation to pay within the
terms of the agreement. It is the job of the collection person to make sure that this
obligation is met.
The tone may be indulgent at first, but should be intensified and accelerated as much as
necessary to ensure payment by a debtor. After the initial contact with the delinquent
customer, it is important to keep additional contacts on a strict schedule. Systematic
follow-up of accounts, even those which cannot pay immediately, reinforces the serious
nature of the outstanding debt and emphasizes the importance attached to it by the
creditor.
Even though the customer may be experiencing some difficulty in meeting payments, it
does not preclude them from becoming a good customer in the future. Therefore, it is
important to preserve goodwill while pressing for collection. This requires not only tact,
but knowledge of the customer and industry.
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One way to collect the credit granted to customers is by writing a collection letter. After
exhausting all other efforts to recover these credits and when further collections seems
to be futile, the company is now left with a decision to write-off its collectibles.
WHAT IS A COLLECTION LETTER?

A collection letter (also known as dunning letter) is a notification sent in writing, informing
a consumer of his past due payments. It reminds the debtor of his delinquent payment
owed to a creditor.
IMPORTANCE OF WRITING A COLLECTION LETTER

It is said that a sale never becomes complete until and unless the account is paid. This is
why collection letters form part of the machinery of the company. Basically, collection
letters are made to:
1. To collect the credit granted to customers – the best collection letters are those
which bring immediate and favorable results, that is to get the money due to the company.
Even with steady sales and growth, if a company has continual cash flow issues due to
lack of accounts receivable management, that could slow or stop the company's growth.
2. To keep and retain goodwill of the customer – collection letters must be written
as to make them appeal to the debtors’ feelings and sentiments. Extreme care should be
exercised so as not to break down the delinquent’s morale.
QUALITIES OF A GOOD COLLECTION LETTER

Although a collection letter is a firm notice to a borrower, it must be constructed carefully.
The following are characteristics of a good collection letter:
1. It should be short and direct
A letter that is direct, brief and concise eliminates room for misunderstandings.
Avoid beating around the bush and go direct to the point.
2. It should use dated action

The creditor expects action from the debtor as of a specific date and not in “the
new future” which might give a reason to the debtor to procrastinate.
3. It should be written from the customer’s viewpoint

The debtor should be helped in understanding that it is not only to the advantage of the
company-creditor to discharge the credit but also to his best interest and advantage.
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4. It should not provide any cause or occasion to arouse the anger or bitterness
of the customer
Threatening letters will not produce desired results. It could only aggravate the
situation causing ill-will between two parties and would destroy the goodwill which
took the company years to build.
5. It should be revised periodically

Avoid using the same standard format of collection letters. Collection letter formats
and contents must be reviewed and revised to go with the changes and needs of
the situation.
6. It should have a humanistic approach

Regardless whether the customer is paying on time or not, he still deserves to be
treated fairly and with respect.
7. It should follow a definite pattern

Collection letters should be progressive, that is it should start from a casual
reminder to a final notice that legal action will be taken if payment is not received
as of a definite date. However, reasonable time must be given to the debtor to
enable him to raise the necessary funds so as not to push him back unnecessarily
against the wall.
8. It should be written in such a way as to make it appear as if it were the last

to be sent to the debtor
This may make the debtor think seriously about his obligation and induce him to
pay immediately.
TYPE OF COLLECTION LETTERS

Collection letters are of several types, classified according to stages of collection
procedure. They are as follows:
1. Reminder – This letter is made in case a creditor needs to bring to the attention of
the debtor his existing obligation to the company, with the presumption that the latter must
have overlooked paying the same owing to the busy world that we live in.
2. Follow-up – This letter is crafted when one or two reminder letters fail to bring any
response from the debtor. They should still be friendly in tone, but nevertheless, firmer.
The letter should touch on an inquiry on why the debtor has not settled his obligation and
emphasizing the reason why the obligation must be paid by the debtor the soonest
possible time.
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3. Discussion – This letter initiates or extends an offer to the customer to help him
in his predicament by discussing it together to avoid any misunderstanding and unpleasant
consequences.
4. Appeal – There ae times that a company may opt not to send a discussion letter
and go directly in making an appeal letter. In this case, the appeal letter could have a
characteristic of both discussion and appeal letter. This letter aims to the customer’s soft
spot --- such as making him conscious of the impact of his delinquency on his integrity and
reputation, his standing in the community, his sense of responsibility, etc.
5. Demand – when the reminder, follow-ups, and appeal letters failed to produce the
desired results, the creditor may realize that he has a problem in his hands hence
the necessity of writing a demand letter. This is a letter which informs the
delinquent debtor of the consequences that befall him when the case is brought to
court
If after all efforts have been exhausted by the company in collecting from the
delinquent customer have failed since the customer had declared bankruptcy, the
company may consider writing-off this account which was initially considered by the
company as bad debts.
WHAT IS A BAD DEBT?

Bad debt is an expense that a business incurs once the repayment of credit
previously extended to a customer is estimated to be uncollectible. It is a contingency that
must be accounted for by all businesses who extend credit to customers, as there is
always a risk that payment will not be received.
WHAT DOES “WRITING-OFF A BAD DEBT” MEANS?

The write-off of a bad account usually refers to eliminating an account receivable due to
the customer's inability to pay the amount owed.
TWO (2) METHODS IN WRITING-OFF A DEBT
1. Direct write-off method
Under the direct write-off method, a company writes off a bad account receivable when
a specific account is determined to be uncollectible. This usually occurs many months
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after the credit sale occurred. The entry to write off the bad account under the direct
write-off method is:
Debit Bad Debts Expense (to report the amount of the loss on the company's
income statement)
Credit Accounts Receivable (to remove the amount that will not be collected)
2. Allowance method
Under the allowance method, a company anticipates that some of its credit sales and
accounts receivable will not be collected and establishes an Allowance for Doubtful
Accounts prior to knowing the specific account or accounts that will become
uncollectible. The Allowance account is established and adjusted with the following
journal entry:
Debit Bad Debts Expense, and

Credit Allowance for Doubtful Accounts
When a specific customer's account is identified as uncollectible, the journal entry to
write off the account is:
A credit to Accounts Receivable (to remove the amount that will not be collected)
A debit to Allowance for Doubtful Accounts (to reduce the Allowance balance that
was previously established)
Note that under the allowance method the write-off did not affect an income statement
account. The income statement account Bad Debts Expense was affected earlier when
the Allowance balance was established or adjusted.
For financial reporting purposes the allowance method is preferred since it means the
loss (bad debts expense) is recognized closer to the time of the credit sales. This also
means that the balance sheet will be reporting a lower, more realistic amount of its
accounts receivable sooner.
REFERENCES:
Books
Miranda, G. Credit and Collection 4th Edition
Websites
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Risk is everywhere-the risk of default is present in credit. There are loans

that remains hard to collect. This module presents the recovery effort that
maybe used by the organization to realize its goals of collecting the loans
while minimizing the cost. This shows the problems that maybe experienced
and gives alternative solution to problem account. Further, some relevant
laws to credit and collection are provided in this module.
TOPICS
Recovery of Credit Granted

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Relevant Laws in
Credit and Collection
MODULE 7
RECOVERY OF CREDIT GRANTED
RELEVANT LAWS IN CREDIT AND COLLECTION
Learning Objectives
1. Identify the factors affecting the different remedies in case of non-
payment
2. Understand and differentiate the different classification of credit
3. Explain the different factors affecting recovery efforts
4. Determine different recovery friendly efforts
5. Elaborate on the different relevant laws in credit and collection like
New Bouncing Checks Law and Usury Law
REMEDIES IN CASE OF NON-PAYMENT FACTORS:
1. The loan or credit transaction has been consumed.

2. There was complete transfer of possession and ownership (by delivery)
*questions on goods in transit shall not be covered here
3. The seller has discharged with his obligation to deliver a determinate thing but the
buyer refuses to, or cannot pay.
4. There are no product defects or violations of warranties on the part of the seller.
CLASSIFICATION OF CREDIT
1. Simple loan (Mutuum)
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a. Loans on fungible and consumable things
b. Cash loans
2. Durables: appliances
3. Movables: vehicles
4. Immovable:
a. Real estate
b. Credit securities by immovable
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Factors for Determining Recovery Efforts
1. Nature of the object of the credit (cash or merchandise);

2. If loan is secured or not;
3. If secured, nature of the property used as security (personal, movable,
immovable, incorporeal rights):
4. Nature of the documents used (mortgage, pledge, trust receipt);
5. Nature of the relationship between the buyer and seller;
6. Nature of the seller’s business;
7. Special circumstances attending the sale or credit transaction.
Debtor’s Motivation to Pay
1. In a Real Estate Mortgage

The Market Value of the property mortgage is substantially more than the
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balance of the loan.
To Illustrate:
Real Estate Property:

Php1,000,000.00
Mortgage value (50% of MV); Php500,000.00

Interest: 24% annual (Php120,000.00)
Php620,000 < Php1,000,000
The difference is vast. Motivation to pay is high.
BUT: (After 3 years - no payment on part of the debtor)
Loan Balance: Php860,000.00

Php860,000 vs. Php1,000,000
Difference diminishes therefore the motivation to pay acts accordingly.
2. Merchandise (Wholesaler and Retailer)

a. Profitable relationship;
b. Higher credit limit
c. Protection of credit standing for trade references
3. End-users or consumers
a. Movable Items: Very low which is why it is sold by withholding ownership.
b. Consumables (edible and potable): unpredictable which is why most
establishments are cash-basis
Friendly Recovery Efforts
1. Term extension – adding days to the due date of the account

2. Merchandise Return or Swap – if most of the merchandise have remained unsold;
if the merchandise cannot be sold in the debtor’s locality; if goods can still be sold
somewhere else.
3. Condonation of penalties and surcharges
Condonation: forgiving of debt
4. Restructuring
a. Simple – terms are extended and terms are reduced to affordable levels
b. Document substitution – e.g. from accounts receivable (sales invoice) to notes
receivable
Promissory Note
Advantages of Promissory Notes:
(1) Strengthens financial condition of the creditor;
(2) A negotiable PN could be used to pay debts, or collateral.
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c. Novation – change in credit agreement

*Dual function of Novation:
(1) Extinguish or modify
(2) Substitute
5. Deposit of durables and movables at the branch store - with promise that
surcharges and penalties would be suspended.
6. Debtor substitution – the debtor is replaced by another debtor with a more
establish credit reputation
7. Dacion en Pago
debtor who has a property securing the debt, sells the property to the creditor to
settle his debt; credit standing is not adversely affected.
“Article 1245. Dation in payment whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.”
e.g. D owes Php30,000. To fulfill the obligation, D with consent of C delivers a piano.
If the piano is worth less than Php30,000, the conveyance must be deemed to
extinguish the obligation to the extent only of the value agreed upon unless the
parties by their agreement have considered the piano as full payment, in which
case, the obligation is totally extinguished.
8. Addition or guarantor or surety

If the debtor has a lot of final difficulties, debtor substitution is not possible
Rationale:
Article 1236. creditor is not bound to accept payment by a third person unless
stipulated BECAUSE “a creditor should have the right to insist on the liability of the
debtor” (Report of the Code Commission, p.12)
9. Securitization – applies to unsecured credit obligations. The creditor may request

the debtor to collateralize his debt. To persuade the debtor, the
creditor may provide a generous term extension or possible
condonation of surcharges and penalties.
Advantages to Debtor:
 Discontinuation of collection pressure

 Opportunity to have plenty of time to reorganize his financial resources
 Opportunity to keep his credit reputation in tact
Advantages to Creditor:
 Protection of Asset
 There is a specific collection time frame and he may readjust his own
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resources accordingly.
RELEVANT LAWS AFFECTING CREDIT TRANSACTIONS
The following laws, in one way or the other, whenever and wherever applicable govern
the relationship between debtor and creditor, obligor and oblige, and other forms of credit
transactions.
1. The New Civil Code, specifically the following provisions:

a. Emancipation and Age of Majority – Arts. 397 to 406
b. Obligations and Contracts – Arts. 1156 to 1439
c. Sales – Arts. 1458 to 1638
d. Barter or Exchange – Arts. 1638 to 1641
e. Lease – Arts. 1642 to 1688
f. Partnership – Arts. 1767 to 1866
g. Agency – Arts. 1858 to 1932
h. Loan – Arts. 1933 to 1960
i. Deposit – Arts. 1962 to 1967
j. Compromise and Arbitrations – Art. 2028 to 2046
k. Guaranty – Arts. 2047 to 2081
l. Pledge, Mortgage, and Antithesis – Arts. 2085 to 2141
m. Concurrence and preference of credits – Arts. 2236 to 2251
2. Negotiable Instruments Law
3. Chattel Mortgage Law
4. Revised Penal Code
5. PD No. 22 on the New Bouncing Checks Law
6. Insolvency Law
7. Financing Law (RA 5980, as amended by RA 1454 (Usury Law)
8. Truth in Lending Act
9. Corporation Law
10. Warehouse Receipts Law
11. Banking and Retail Law
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12. The Rules of Court
The most frequently invoked laws in litigations arising out of credit transactions are
BP 22 (Bouncing Checks Law) and Usury Law. These laws are discussed in details
as follows:
BP 22 Bouncing
Checks Law
*Checks – a written request or order by a depositor called the “drawer” to a bank,

called the “drawee,” to pay on encashment a person called a “payee,” a certain sum
of money.
*Bouncing check – check that has no funds or credit to cover its amount i.e. DAIF
(drawn against insufficient fund check) or NSF (no-sufficient fund check).
*Post dated check – one that is dated after it is issued and delivered
*Reason for enactment – Art. 315, Par 2 d of the RPC does not include in the crime
of estafa the act of issuing a bounced check in payment of pre-existing obligation.
*Purpose of BP 22 – to put a stop to the harmful practice of circulating worthless

check which when multiplied a thousand fold, can very well pollute the channels of
trade and hurt the welfare of society and public interest. (Pp. vs. Lozano)
*Constitutionality – BP 22 is a fundamental exercise by the state of its police power

or to pass laws that will promote health, morals and general welfare of the people.
What BP 22 punishes is the issuance of a worthless check and not the non-payment
of debt.
- it does not violates the non – impairment clause because checks are not
merely contract but are substitute for money. They form part of the banking system
and not entirely free from the regulatory power of the state.
*Checks covered - present-dated or post- dated, issued to apply on account (to pay
a pre- existing obligation), or for value (given in mutual or simultaneous exchange for
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something of value), guarantee, accommodation or deposit checks, memorandum and
a foreign checks
 Acts Punished
1. Issuing any check to apply on account or for value, knowing at the time of issue that
he does not have sufficient funds with the d bank for payment of such checks upon
presentment, which check is subsequently dishonored by the bank for insufficiency of
funds or would have been dishonored for the same reason had not the drawer, without
any valid reason, ordered the bank to stop payment.
 Elements
1. A person issues any check.
2. Check is made to apply on account or for value.
3. The person knows at the time of issuance that he does not have sufficient funds
with the bank.
4. The check is subsequently dishonored, or would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the bank to
stop payment.
2. Having sufficient funds with the bank when he issues a check, but failed to keep
sufficient funds to cover the full amount of the check if presented within a period of 90
days from the date appearing thereon for which reason it is dishonored by the bank.
Elements
1. The person has sufficient funds in the bank when he issues a check.
2. He fails to keep sufficient funds to cover the full amount of the check if presented
within 90 days from the date thereon.
3. The check is dishonored.
Imposable Penalties
1. Imprisonment of not less than 30 days but not exceeding 1 year.
2. Fine of not less than but not more than double the amount of the check, which
shall not to exceed Php 200,000
3. Both imprisonment and fine.
*Circular # 12-2000
- if there is good faith or a clear mistake on the part of the accused and he
is a first time offender or the issuance of the check was the offshoot of a legitimate
business transaction, imposition of fine alone should be considered as the more
appropriate penalty.
*Circular #13-2001
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- It clarifies that circular # 12-2000 does not remove imprisonment as an
alternative penalty for violations of BP22. It also stated that circular #12-2000 does
not remove imprisonment as an alternative penalty but merely lays down a rule of
preference in the application of the penalties.
*Persons Liable
Personal checks – the signatory or the signatories

Corporate checks – the person or persons who actually signed the bounced
check.
 Lina Lim Lao vs. Court of Appeals – the SC underscored the point that being a
signatory to the dishonored corporate checks nearly engenders the prima facie
presumption that as officer of the corporation, the accused who co-signed the
check knew of the insufficiency of funds. It does not, however, make the accused
automatically guilty under BP22.
*Rule on Notice of Dishonor
 Corporate checks – Responsibilities under BP22 is personal to the accused so

that the latter’s own knowledge of the dishonor is necessary. Constructive notice
to the corporation, as when the demand was sent to the main and not to its
extension office where the accused was on field duty is not enough to satisfy due
process. Notice to the corporation which has a personality distinct and separate
from the officer who issued the check is not tantamount to notice to the latter. (Lina
Lim Lao vs. CA)
 The insufficiency of funds shall be explicitly stated in the dishonor, hence, a mere
oral notice or demand to pay is sufficient for conviction under BP22 (Domagsang
vs. CA)
 A signatory to the check who was not informed of the dishonored is not liable.
*Valid Defenses against BP 22
 Lack of notice of Dishonor – failure to notify the accused of the dishonor of the
checks will defeat the presumption of knowledge of insufficiency of funds.
 Forgery – a check is forged when the signature appearing thereon was made without
the authority of the person whose signature appears it. In the case of PNB vs.
CA, the SC decided that the dishonor of a check is a defense when the stop
payment requested by the drawer was due to forgery in the endorsement of a
lost check.
 Prescription – termination of the right or power to prosecute or punish the

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offender after the lapse of a definite period from the commission of the crime, or if
not known, from the day of its discovery. BP22 prescribes after 4 years beginning
from the lapse of 5 banking days from notice of dishonor.
 Duplicity of Offense – a single information charges more than one offense.

Duplicity is a defense in BP 22 if there is also an information for estafa that
embodies all the elements of any of the offenses punishable under BP22.
 Failure to bring the accused for trial within the time limit set by the Speedy
Trial Act and Rules of Criminal Procedure. (Rule 119, Sec 9, Rules of Criminal
Procedure)
 Failure to present the checks for payment within 90 days from the date of
issue.
 Lack of the necessary Signature/s – as to corporate, association or partnership

check wherein particular officers are authorized signatories, proof that not all of such
authorized signatories or less that that required have signed the check is a defense.
The incompleteness or unauthorized drawing of the check did not make the check a
valid order to the bank to pay. As a result, the drawer is not under obligation to deposit
or maintain sufficient funds for its payment.
 Dishonor with a mere stamp in the check “stop payment” – the bank is
directed as well to state in the notice of dishonor even against a “stop payment”
that there were no sufficient funds in or credit with it to pay the check.
 Lack, or illegal consideration in the issuance of the check – the Supreme

Court held in the case of Igos vs. Court of Appeals that malice or intent is
immaterial, the offense being malum prohibitum, “could not be an absolute
proposition without desending to absurdity.” Also in the earlier case of Magno vs.
Court of Appeals, the SC will not limit itself to determining the commission of the
prohibited act. It must go one step backward by ascertaining the nature of the
transaction under which the check was issued not only to find out if the same was
drawn for an actual valuable consideration, but also to determine, who, between
the drawer and the payee, is the actual and potential wrong-doer. Hence, if a check
were issued by a kidnap victim to the kidnapper for ransom, it would be unseemly
to hold the drawer liable if the check was dishonored and unpaid.
Usury Law
(Act 2655, as amended by Presidential Decree No. 116)
The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which
provides, among others, that the legal rate of interest for the loan or forbearance of any
money, goods or credits, where such loan or renewal or forbearance is secured in whole
or in part by a mortgage upon real estate the title to which is duly registered, in the
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absence of express contract as to such rate of interest, shall be 12% per annum. Any
amount of interest paid or stipulated to be paid in excess of that fixed by law is considered
usurious, therefore unlawful.
However, pursuant to Central Bank Circular No. 905, adopted on 22 December

1982, the Supreme Court declared that the Usury law is now "legally inexistent".It should
be clarified that CB Circular No. 905 did not repeal nor in anyway amend the Usury Law
but simply suspended the latter's effectivity. Usury has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon.
Usury is defined as:
 Contracting for or receiving something in excess of the amount allowed by law

for the forbearance of money, goods or things in action
 Any amount of interest paid or stipulated to be paid in excess of that fixed by
law.
Background
 Taking of excessive interest for the loan of money has been regarded with
abhorrence from the earliest times – prohibited by the ancient laws of the
Chinese and Hindus, the Mosaic Law of the Jews, by the Koran, by the
Athenians and by the Romans and has been frowned upon by distinguished
publicists throughout all the ages.
 The early American colonial usury acts were modeled after the English act, the
rate of interest allowed being usually higher. These early enactments adopted
the penalty for usury fixed by the statue of the mother country. The tendency of
subsequent statutes has been steadily to mitigate the punishment inflicted on
the usurer.
 The illegality of usury is now wholly a creature of legislation. The Philippine

statute on the subject is Act No. 2655. It is a drastic law following in many
respects the most advanced American Legislation. Central Bank Circular No.
905 simply suspended the effectivity of the Usury Law, it did not repeal or in
any way suspend the Usury Law. Only a law can repeal another law.
Usury Law
 The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which
100 | P a g e
provides, among others, that the legal rate of interest for the loan or
forbearance of any money, goods or credits, where such loan or renewal or
forbearance is secured in whole or in part by a mortgage upon real estate the
title to which is duly registered, in the absence of express contract as to such
rate of interest, shall be 12% per annum. Any amount of interest paid or
stipulated to be paid in excess of that fixed by law is considered usurious,
therefore unlawful.
 Usury law has been enacted for the protection of the borrower from the
imposition of unscrupulous lenders who are ready to take undue advantage of
the necessities of others. It forms a part of the public policy of the state, and is
intended to prevent excessive charges for the loan of money.
 It proceeds on the theory that a usurious loan is attributable to such inequality
in the relation of the lender and borrower that the borrower’s necessities deprive
him of freedom in contracting and place him at the mercy of the lender.
 Pursuant to Central Bank Circular No. 905, adopted on 22 December 1982, the
Supreme Court declared that the Usury law is now "legally inexistent". Under
the authority.
SECTION 1.
 The rate of interest, including commissions, premiums, fees and other charges,
on a loan or forbearance of any money, goods, or credits, regardless of maturity
and whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling
prescribed under or pursuant to the Usury Law, as amended.
SECTION 2.
 The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of express contract as to
such rate of interest, shall continue to be twelve per cent (12%) per annum.
It should be clarified that CB Circular No. 905 did not repeal nor in anyway amend the
Usury Law but simply suspended the latter's effectivity. Usury has been legally non-
existent in our jurisdiction. Interest can now be charged as lender and borrower may agree
upon.
Elements:
1. Loan or forbearance.
2. An understanding between the parties that the loan shall or may be returned.
3. Unlawful intent to take more than the legal rate for the use of money.
101 | P a g e
4. Taking or agreeing to take for the use of the loan of something in excess of what
is allowed by law.
 To determine whether all of these elements is present, the court will disregard
the form which the transaction may take and look only upon its substance.
Interest Rates under the Usury Law:
 With the suspension of the Usury Law and the removal of interest ceilings, the
parties are generally free to stipulate the interest rates to be imposed on
monetary obligations. As a rule, the interest rate agreed by the creditor and the
debtor is binding upon them. This rule, however, is not absolute. The striking
down of unconscionable interest is based on Article 1409 of the Civil Code,
which considers certain contracts as inexistent and void from the beginning,
including: "Those whose cause, object or purpose is contrary to law, morals,
good customs, public order or public policy".
 In a recent case, the SC again dealt with the validity of interest agreed by the
parties, stating that:
Stipulated interest rates are illegal if they are unconscionable and the Court is
allowed to temper interest rates when necessary. In exercising this vested
power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What may be iniquitous and
unconscionable in one case, may be just in another.
 In that case, the SC reduced the interest rate from 18% to 12% per annum,
noting, among others, that the amount involved has ballooned to an outrageous
amount four times the principal debt. Indeed, there is no hard and fast rule to
determine the reasonableness of interest rates. Stipulated interest rates of
21%, 23% and 24% per annum had been sustained in certain cases. On the
other hand, there are plenty of cases when the SC equitably reduced the
stipulated interest rates; for instance, from 18% to 10% per annum. The SC
also voided the stipulated interest of 5.5% per month (or 66% per annum), for
being “excessive, iniquitous, unconscionable and exorbitant, hence, contrary to
morals (contra bonos mores), if not against the law”. The same is true with
cases involving 36% per annum, 6% per month (or 72% per annum), and 10%
and 8% per month. In these instances, the SC imposed the legal interest of
12%.
 “legal interest” doesn’t mean that anything beyond 12% is “illegal”. It simply
means that in a loan or forbearance of money, the interest due should be that
stipulated in writing, and in the absence thereof, the rate shall be 12% per
annum.
102 | P a g e
Interest Rate Ceiling
 The Usury Law had been rendered legally ineffective by Resolution No. 224
dated 3 December 1982 of the Monetary Board of the Central Bank, and later
by Central Bank Circular No. 905 which took effect on 1 January 1983. These
circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity. The effect of these circulars is to allow the parties to
agree on any interest that may be charged on a loan. The virtual repeal of the
Usury Law is within the range of judicial notice which courts are bound to take
into account. Although interest rates are no longer subject to a ceiling, the
lender still does not have an unbridled license to impose increased interest
rates. The lender and the borrower should agree on the imposed rate,
and such imposed rate should be in writing.
Here, the stipulations on interest rate repricing are valid because (1) the parties mutually agreed
on said stipulations; (2) repricing takes effect only upon Solidbank’s written notice to Permanent
of the new interest rate; and (3) Permanent has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate. The phrases “irrevocably authorize,” “at any
time” and “adjustment of the interest rate shall be effective from the date indicated in the written
notice sent to us by the bank, or if no date is indicated, from the time the notice was sent,”
emphasize that Permanent should receive a written notice from Solidbank as a condition for the
adjustment of the interest rates. (Solidbank Corporation vs. Permanent Homes, Inc., G.R. No.
171925, July 23, 2010.)
ACTIVITY 1
Analyze the different case scenarios and classify what friendly recovery effort
was extended. Explain.
1. A is indebted to B with P30,000 but due to Pandemic A cannot afford to pay B.

B decided to get some properties of A to settle the obligation.
2. X has an obligation to Y amounting to P50,000, P25,000 was successfully paid

by X leaving a balance of P25,000. X ask for more time to pay and Y executed
legal documents to make the agreement binding.
SAQ 1
Let’s Do this
103 | P a g e

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LEARNING MODULES IN FM 6 CREDIT AND COLLECTION

This includes Module 1 and 2

Credit is one of the unique

In the emergence of credit, it might be helpful to point

How do you define credit? This term is broad

The amount of money a consumer or business has available to borrow—or their

Service credit is an agreement between a consumer and a service provider such as a

Credit connects our business and financial

For the credit system to continue in its existence and attain a

1. Confidence. Creditors must have absolute confidence in the personal character

What it is: A lender’s opinion of a borrower’s general trustworthiness, credibility and

What it is: Your ability to repay the loan.

What it is: The amount of money invested by the business

What it is: Assets that are used to guarantee or

2. Expense. Using credit usually costs money.

4. The Risk of Serious Consequences if you

This module presents the different classification of credit that are

Please click the link and participate first: https://www.menti.com/x7dazmf8j8

TIME-LOAN – loans w/c have definite maturity dates

DISCOUNT. The lender collects in advance the

OVERDRAFT. The amount withdrawn is in excess of the depositor’s net balance

MERCANTILE OR COMMERCIAL CREDIT

UNSECURED LOANS- no collateral,

COMMERCIAL CREDIT is used to finance day to day operation.

G _____7. Secured loan g. Loans with collateral

**Credit as to…. Choices Classification

LESSON 2. CREDIT INSTRUMENTS

NEGOTIATION is the transfer of an instrument as to possession and title. If payable to

ENDORSEMENT – signing the name at the back of check to negotiate it.

ADVANTAGES OF CREDIT INSTRUMENT

1. The borrowers can receive long-term credits.

ORDER TO PAY is generally defined as the order of one person to a second

Table 2.1. CLASSIFICATION OF CREDIT INSTRUMENTS

Evidences of Ownership  Stock Certificate

COMMERCIAL CREDIT INSTRUMENT

A. CHECKS – generally is an order of a depositor to his bank to pay a sum certain

1. PERSONAL CHECK (check in general), Sometimes known as a business check.

2. CASHIER’S/ MANAGER’S/ TREASURER’S. As in a check this is an order to

3. CERTIFIED CHECK – Originally a personal check. The bank’s certification is

4. TRAVELLER’S CHECK – A variation of the traveler’s letter of credit, the

SOME ASPECTS RELATED TO CHECKS

RUBBER OR BOUNCING CHECKS – checks returned to the drawer. Also termed as

DATED CHECK – check presented for payment with in six month.

BLANK CHECK – check without amounts written

1. A check facilitates payment as exact amounts could be written on its face.

C. ACCEPTANCE – is originally an order to pay. It is a time draft. It is also a

BONDS AND LONG-TERM NOTES

Watch related videos on https://www.investopedia.com/terms/d/debtinstrument.asp

1. STOCK CERTIFICATE. This instrument evidences the part of ownership of a

Identification of the Aspect of Checks

Computation of the NET PROCEEDS of Loans

Principal amount approved for loan is P 200,000 and will be released on

LOAN RELEASE SHEET

Principal Amount --------------------- P 200,000

This includes Module 3 and 4

LESSON 1. CREDIT MANAGEMENT

Credit management is the process of granting

The Principal Objectives of Credit Management

2. Controlling the amount of receivables.

Importance of maintaining effective control.

3. Controlling costs of credit and collection.

 Expenses incurred in the extension of credit and in the collection of A/R.