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 creditnstruments
i
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.

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

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 The amount withdrawn is in excess of the depositor’s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

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.

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

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 3 rd 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
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 Promise to Pay  Bonds:
Credit  Long-Term notes

Evidences of  Stock Certificate

Ownership in a  Stock Right
Corporation

COMMERCIAL CREDIT INSTRUMENT

Commercial credit instrument are subdivided as to Promises to pay and

Orders to pay.
 “PROMISES TO PAY”

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.

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.
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.

A. 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.

B. 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 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

REFERENCES:

Books:
Apolo, J. J. T. (2003). Credit and Collection Management in the Philippine
Setting. 2nd edition. Mandaluyong City: National Book Store.
Briones Sr. , J.G. (2005). Credit and Collection Management: Made Easy for
Filipino College Students. Mandaluyong City: National Book Store
Leuterio, M. M. and Estepa, C. B. (2001). Economics of Money and Banking.
Manila Philippines: UST Publishing House.
Miranda, Gregorio S. (2002). Credits and Collections: Fourth Edition.
Mandaluyong City: National Book Store.
Mutya, Ruby F. (2014) Introduction to Philippine Money, Credit and Banking:
3rd edition. National Book Store.

E-books:

Credit And Collection Principles And Pract : F Chapin : Free Download,

Borrow, and
Streaming : Internet Archive. (2020). Retrieved
from https://archive.org/details/in.ernet.dli.2015.223858

"Credit and Collection." Small Business Sourcebook: The Entrepreneur's

Resource, edited by Virgil L. Burton, III, 37th ed., vol. 3, Gale, 2020, pp.
1545-1553. Gale eBooks,
https://link.gale.com/apps/doc/CX7632600369/GVRL?
u=gvrlasia09&sid=GVRL&xid=26 964af3.
Logemann, Jan, ed. (2012). The Development of Consumer Credit in Global
Perspective: Business, Regulation, and Culture. New York: Palgrave
Macmillan. Retrieved from https://www.academicscope.com/classification-of-
credit/

Masupil, J. (2015, August 25). Classification and Instruments of Credit.

Retrieved from https://prezi.com/3qzsbcbz9px5/classification-and-
instruments-of-credit/