Credit Collection Units 1 3

For Classroom Discussion Only
PROFESSIONAL 7:
CREDIT & COLLECTION
JONAS EMMANUEL C. NAVARRO, LPT, MBA

FACULTY, CMBT
Preface
This module will provide a detailed discussion on credit and

collection matters. Many people will tell you that, as a business owner in
today's economy, you don't have any choice but to offer credit to your
customers. They'll tell you that credit is as essential to business success
as oxygen is to breathing. Well, they're mostly right. But it's not an
absolute rule for every business, particularly for smaller businesses with
fairly small customer bases. Credit is good but should be offset by
investing your loan money to other income generating ventures.
This module will help the learner to become an effective credit

and collection manager in the future.
The Author,
JECN
Professional 7: Credit and Collection| 1

UNIT I. Introduction to Credit and Collection
Overview
This unit will give the students an understanding on credit and collection and its basics. They
will be provided with detailed discussions on birth of credit up to its important five (5) C’s.
At the end of the unit, higher-order thinking skills activities will be given to assess their
retention of the topic discussed.
Learning Objectives
At the end of the unit, the students should be able to:
1. Describe the emergence and challenges faced by the credit economy;

2. Explain the barter to money economy and define credit and it’s significance;
3. Compare and contrast the advantages and disadvantages of credit;
4. Identify the different classes of credit; and
5. Present in simulation the C’s of Credit.
Lesson Proper
Introduction
Delayed payments by customers can seriously impact the finances of a business, but it is
usually necessary to offer some level of credit to them. The Credit and Collection subject
shows how to strike a balance between more sales and a reasonable amount of bad debt. It
does so by focusing on when to extend credit to questionable customers and how to select
the best approach to collecting from late-paying customers. The discussion includes credit
policies, credit monitoring, collection techniques, and the necessary controls, procedures,
and reports to manage the process. The course also addresses more advanced concepts, such
as credit and collection technology, the role of product and service improvements, and
litigation tactics.
I. THE EMERGENCE AND CHALLENGE OF THE CREDIT ECONOMY

As human history moves toward the year 2000, with its awe-inspiring challenges and
opportunities on the one hand and a host of problems , on the other, business and industry
are attracting increasing attention from companies and institutions almost on a global scale
that could affect the life and standard of living of people all over the world.
From the time of simple barter, through the stage of money economy to today’s credit
economy, remarkable developments have taken place far and wide. With the tremendous
growth in the use of credit, during the latter part of the twentieth century, as the dynamic
force which propels the economies of the many highly industrialized countries of the world,
gifted writers are not found wanting in describing such important development. A number of
them has been quick to coin such terms as “The moneyless society,” “The Credit Society,”
and many others to describe such development.

II. BARTER TO MONEY ECONOMY
The early stage of human history was marked by economic self-sufficiency of small family
units. Able-bodied members of family units were charged with the task and responsibility of
providing the basic needs of life, such as food, clothing and shelter. But as man equipped with
better tools as well as learning in the production of goods, surplus goods beyond the
immediate needs of the family became common. Hence, the need for a system of exchange
termed as barter.
Barter
The earliest method of acquiring goods that were owned by someone else was probably by a
simple act of plunder or robbery. Where the brute force and strength had the force of
authority. When primitive society gave way to recognition of private property in any article,
only those things that are already owned by an individual can be conveyed unto another,
either as a gift or in exchange for other articles. The practice of exchanging gifts among
individuals signified equality among men. Such direct exchange devoid of the use of a medium
came to be known as a barter. Barter became inefficient when economic good being offered
in exchange were of quite different values. More so, when they were indivisible. The solution
to this pernicious problem, characteristics of exchange through the use of barter, brought
about the development of a common medium of exchange that took various forms.
The Need for Money of Adam Smith, in his book entitled “Wealth of Nations.”
Entertained the belief that money originated in the man’s rational effort to meet the necessity
of finding some medium of exchange. It was introduced into man’s economic life designed
purposely to overcome the shortcomings of barter. Money is responsible for increasing
production and adds to the creation of wealth. Money as a multiplier effect. In the beginning,
the use of money was not intended for production, rather, for consumption, which explains
why the taking of interest on money lent was not only looked-upon with disfavor but actually
forbidden.
Aristotle, said in this connection: “Money is barren. It does not breed.” As such, he concluded
that it is intended to be used only in exchange but not to increase at interest. Barrenness was
to him an essential nature of money; usury (interest) which made money bear fruit, was
unnatural. In due time, important modifications appeared in the history of though governing
interest. Of these exceptions, the most important was the doctrine of “damnum emergens,”
that is, suffering of a loss by the lender. Where a delay (mora) occurred in the repayment of
a loan, the lender was entitled to exact conventional penalty. Still more important in helping
to break down the original prohibition was the doctrine relating to “lucrum cessans.” To have
lost the chance of gain through lending money also became a justification for the receiving of
interest.
The Growing Need and Demand for Money
Many events have contributed to the growing need and demand for money. However, four
stood out prominently because of their importance and far reaching significance. The
decline in the spiritual power of the church and the eventual recognition of the institution of

private property. This led to the sanction of exchange provided there was a fair exchange.
This brought about the birth of that dictum—“justum pretium” which in economics means the
doctrine of the “just price.”
The fall of feudalism and the rise of mercantilism.
Under mercantilism, gold and silver were equated with the wealth of nation, so much so that
national commercial policy was aimed and directed towards the acquisition of gold and silver
which then were held synonymous with money.
The rise of specialization. The birth of capitalism.
The fact however that the supply of money in many instances could not adequately meet the
increasing volume goods entering the exchange transaction accounted for money being
supplemented by the use of credit.
III. THE BIRTH OF CREDIT: ITS MEANING, NATURE, FOUNDATION AND

IMPORTANCE
One of the unique features of our business system is that it operates to a large extent on
promises, called credit. The word credit comes from the Latin word credere, which means
“to trust.” The widespread use of credit is a strong evidence to support the belief that the
people have trust in one another.
The emergence of credit might be helpful to point out that it is not one design, rather a
product of necessity. Thus, as may be logical to expect, it passed through a long process of
evolution and development.
Nature of credit
A credit transaction involves two parties—creditor and debtor. Insofar as the debtor is
concerned, credit to him represents power—the ability to obtain goods without in actual
tender of payment. Since the grant of credit by the creditor to the debtor is accompanied by
a promise on the part of the latter to pay at a certain date, an obligation arises which must be
discharged as promised.
The creditor, as a seller of goods or services on credit, has both the moral and legal right to
demand of his debtor to pay the obligations when due. Thus, credit is essentially a transfer of
goods, services, or funds giving rise to obligations that must be discharged in the future.
Definition of Credit and Credit Transactions
Credit refers to the power or the ability to obtain either money, goods or services at the
present time in exchange of a promise to pay with money upon demand or at a future
determinable time or period. Not all individuals or institutions have the same capability to
obtain credit. It depends how the debtors merits the trust and confidence of the creditor.
The term “credit transactions” as defined by Apollo (2005) is not limited to the traditional
definition, i. e., “securing something of value, whether tangible or intangible, in return for a
promise to pay at some determinate future date”. According to him, any contract, transaction,
or undertaking may not initially involve payment in some determinate future time but later
by some force of circumstances, whether agreed to or not, result in credit granting. For
example, a C.O.D. (Cash on delivery) sale, when not paid upon delivery, either intentionally
or unintentionally, sometimes even with fraudulent intent, will partake of the nature of a
credit sale. Credit transaction in this module, means any contract, undertaking, transaction,
not paid on the agreed time, for any reason whatever. Credit is a very powerful and excellent
device in the economy that accommodates transactions smoothly and effectively even
without the use of money during the time of the transaction.
Credit and debt are synonymous with each other from two different points of view. From the
point of view of the person to whom the future payment is to be made, the obligation is credit
and the one who is obligated to pay in the future, the obligation is a debt. But when a credit
is extended in terms of money with the promise of interest to be paid, then legally it is
referred to as a loan.
Other Meanings of Credit
• In banking, credit is held refer to “an entry in the books of a bank showing its
obligation to a customer,” that is, for the deposits made by the latter. In
bookkeeping, credit is “an entry showing that the person named has a right to demand
something but not necessarily money.”
• In commerce, credit pertains to “an exchange transaction.”
• In another sense, credit may be held synonymously with specific reference to the
buyer’s credit standing, that is, the ability to obtain goods and services, or even money
against a promise to pay for them at a later date.
• Likewise, the term credit may refer to a credit instrument, that is, a document which
serves to evidence the existence of a business transaction anchored on trust.
The Use of Credit
The use of credit especially in the business world is so common that, by way of compliment,
it is generally called as “the life-blood of business.”
Basic Elements of Credit
An individual's creditworthiness can be measured in a number of different ways. Although

many lenders rely on an individual's credit score as developed by a credit reporting bureau
to gauge whether he will pay back money loaned him, there are a number of other factors
that can be used to determine a person's credit risk, related both to his history with debt and
his current financial situation.
According to Michael Wolfe, the elements of Credit are the following:
• Debt History
• Income
• Current Debt
• Collateral

1. Debt History
One of the main factors that goes into a person's creditworthiness is his history of paying
back or not paying back -- loans in the past. Credit reporting bureaus, as well as most lenders,
consider a borrower's past actions a strong indication of what he will do in the future. If a
person has a history of defaults, he will be considered a far higher risk than a person with a
clean record of on-time paybacks.
2. Income
In addition, a person's credit can be determined by how much money he currently has at his
disposal. A person who has a large income or significant savings is considered a stronger
candidate to lend to than a person who does not have a large income, as the poorer person
does not have the same access to funds. A person with a larger income will also have access
to larger loans.
3. Current Debt
A lender must also look at the number of loans that a person currently has out. If a person
has a large number of loans out right now, then he may be at a higher risk of default, as any
lender who offers him a new loan may be last in line to be paid back. Therefore, people who
don't have any outstanding loans generally have better credit than people who do.
4. Collateral
Finally, loans can be split into two main types – secured and unsecured. A secured loan is a
loan that is backed by some form of collateral, A collateral an asset that the lender can seize
in the event that the borrower defaults. Unsecured loans are loans that are not backed by
collateral. Generally, secured loans command less interest because the lender is more likely
to be compensated.
Main Functions of Credit
1.Economy in the use of money
The credit system economies the use of metallic money and paper notes. The credit
instruments like promissory notes, bills of exchange, checks, credit cards, etc. are used in the
modern society as money-substitutes, and so they have reduced the cost of issuing metallic
money and paper notes. Likewise they have minimized or eliminated the risks and
inconveniences involved in cash transactions.
2.Easy exchange and remittance
The credit instruments minimize the cash transactions and thereby make the scope of
exchange wider and the remittance of funds easier. They permit wealth to be transferred to
places where more economic use can be made of it.
3.Helpful to production
The credit system facilitates large- scale production. It stimulates and finances production in
anticipation of demand. Producers nowadays very often obtain credit from banks to begin
and expand their operations. Even the farmers and the small artisans depend on bank credit
for production. The wholesale and retail traders conduct their trading with bank credit. It is
rightly said that the credit system lubricates the production processes and keeps the wheels
of production constantly moving. There is a steady flow of goods from the wholesaler to the
retailer and from the latter to the consumer with the help of credit.
4.Promotion of trade especially foreign trade
The bills of exchange have increased the scope of both internal and external trade as the
trade- payments can now be made without the transfer of funds or gold. The commercial
credit enables the buyers to make payments for the value received at convenient times. So,
the credit system enables the traders to tide over periods of difficulty.
5.Expansion of bank credit
The credit system enables the banks to create a large amount of credit out of a small amount
of deposit. This has resulted in the vast expansion of bank deposits.
6.Financial accommodation to industries
Industries get short-term credit from foe commercial banks and the long-term credit from
the development banks. This enables them not only to tide over the temporary financial
stringency but also to maintain continuity in their activities.
7.Benefits to consumers
Bank credit to the consumers enables them to buy durable consumer goods, especially
household goods on installment basis.
8. Credit to the government sector
The credit to the government also helps them to meet both temporary necessities and growth
requirements.
9. Stability
If the issue of credit is properly regulated, it tends to stabilize trade and reduce fluctuations
in prices.
Characteristics of Credit
1.It is a two – party contract.
There are two parties involved in the agreement, namely the creditor who is the source of
credit or one who extends the loan and the debtor who is the party requesting for a loan.
2.It is elastic.
This can be increased or decreased by the creditor depending on the capacity to pay of the
debtor and the amount of his collateral.

3.The presence of trust of faith.
The creditor relies on the debtor’s ability and willingness to pay his debt. This is the risk
factor especially when the debtor fails to pay on the maturity period.
4.It involves futurity.
The debtor has to pay or fulfill his obligation when it falls due at the same future time.
According to Dawten and Weshans which was cited by Mutya (2002), credit is classified as:
IV. ADVANTAGES AND DISADVANTAGES OF CREDIT
➢ PROS OF CREDIT
• Credit facilitates and contributes to the increase in wealth by making funds available
for productive purposes.
• Credit saves time and expense by providing a safer and more convenient means of
completing transactions.
• Credit help expands the purchasing power of every member of the business
community—from producer to ultimate consumer.
• Credit enables immediate consumption of goods thereby providing for an increase in
material well-being.
• Credit help expand economic opportunities through education, job training and job
creation.
• Credit spreads progress to various sectors of the economy.
• Credit makes possible the birth of new industries.
• Credit helps buying become more convenient for customers.
➢ CONS OF CREDIT
• Credit, at times, encourages speculation. This happens when those in charge of the
savings of other people throw caution to the winds and thereby become careless and
unscrupulous in their eagerness and desire to expand credit and make huge profits.
• Credit also tends to contribute to extravagance and carelessness on the part of the
people who obtain them.
• Because of credit, many entrepreneurs resort to over-expansion.
• Credit causes one businessmen to be dependent upon others.
V. CLASSES AND KINDS OF CREDIT

According to Type of User
a. Consumer credit is used by individuals to help finance or refinance the purchase of

commodities for personal consumption. Functions of consumer credit are:
1. Convenient form of payment. It involves purchases from a retail store that are paid weekly,
twice a month or monthly.
2. Aids in financial emergencies. This happens during financial stress or financial difficulty of
some people.

3. Buying durables on installment. Financing the purchase of durable goods like appliances
by buying them on installment basis.
b. Commercial credit is a kind of credit extended by one businessman to another

businessman. In short, the creditor and debtor are both businessman.
c. Commercial bank credit. The creditor is the commercial bank while the debtor can be a
business firm or private businessman.
According to Purpose
a. Investment credit. This type of credit is extended by banks for business firms which
intend to acquire fixed assets like land, building, equipment’s, among others that are intended
for long range business.
b. Agricultural credit. This is a loan intended for the acquisition of farm inputs like
fertilizers, insecticides, pesticides, transportation of agricultural products and other farm
improvements. Hence, the debtors are the farmers and the creditors are the rural banks.
c. Export credit which uses the letter of credit or LC. This LC is issued by the importer’s bank;
it guarantees payment to exporter of some specified amount of money.
d. Real estate loan. This is intended for the purchase of house and lot, house construction or
improvement.
e. Industrial credit. This is intended to finance industries like logging, fishing, mining, among
others.
According to Maturity
a. Short-term loans – payable within one year.
b. Medium-term loans – payable within two to five years
c. Long-term loans – payable for more than five years
According to Form of Credit
a. Cash forms – in form of money or e-money Eg. Credit Card Limit of Php 100,000
b. Merchandise form- in form of goods. Eg. Supplies of Building Materials (Plywood, Cement
etc.)
Sources of Credit
1.Banks
2.Pawnshops
3.Private individuals
4.Retail store
5.Credit unions/cooperatives

6.Insurance companies
7.Pension funds
8.Savings and loans associations
9.Money market funds
10.Mutual saving funds
The Credit Card System
This is very common anywhere. The system employs a simple device called credit card that
serve as the instrument used to accommodate the holder to credit facilities in obtaining goods
or services or even cash. There are two types of credit card known in the local financial
markets, namely the exclusive outlet and multiple accredited business outlets.
Exclusive Outlet. There is an exclusive single business firm and its branches where the credit
card holders can use their credit card. The banks offers this to attract depositors, thus, this
will cause monetary deposits and at the same time create captured clients for their affiliate
business entities.
Multiple Accredited Business Outlets. The credit cardholders have the great advantage of
being able to use their credit card to different accredited business outlets where the credit
card issuer has pre-arrange agreement with and that it will honor payment of any purchases
made by the credit cardholders. Under this system, the credit cardholder can also avail
himself of a cash advance over the counter or ATM. He may likewise use it for payments of
electric bill, telephone bill, air fare tickets, among others.
• Credit Card Issuer refers to the party who issues the credit card.
• Credit Cardholder refers to the party who has subscribed to the insurance of a credit
card with existing contract with the credit card issuer.
Accredited Business Establishment refers to a group of business establishments
where the credit cardholder can transact for his purchases or any other business like
payment of various bills. These establishments have pre-arranged agreement with the credit
card issuer.
Purchase Order (PO) refers to the kind of credit extended to a consumer by department
stores or supermarkets.
The Cost of Using The Credit
To use credit wisely, it is necessary to know how much it costs. But it may be asked: What
then determines the cost of credit? The price of credit, like the price of almost any other good
or service, depends upon the cost of providing it. When you use credit, the price you pay has
to cover the lender’s cost plus a fair profit. When you get a loan, there are generally two costs
you must pay: fees and interest.
1. Fees
Fees are charged by financial institutions for activities such as reviewing your loan
application and servicing the account. Examples of fees include:

• Maintenance fees
• Service charges
• Late fees
2. Interest
Interest is the amount of money a financial institution charges for letting you use its money.
The rate of interest can be either fixed or variable.
• Fixed rate means the interest rate stays the same throughout the term of the loan.
•Variable rate means the interest rate might change during the loan term. The loan
agreement will show the details of the rate changes.
Truth in Lending disclosures
Credit terms can appear confusing because of the various rates and fees lenders charge.
Lending laws requires banks to state charges in a clear and uniform manner so you can easily
compare the actual cost of borrowing. The section on credit cards describes these disclosures
for credit cards. For most other types of loans, lenders must disclose the:
• Amount financed.
• Annual percentage rate (APR).
• Finance charge.
• Total payments
VI. FIVE (5) C’S OF CREDIT

What Are the 5 Cs of Credit?
The five Cs of credit is a system used by lenders to gauge the creditworthiness of potential
borrowers. The system weighs five characteristics of the borrower and conditions of the loan,
attempting to estimate the chance of default and, consequently, the risk of a financial loss for
the lender. The five Cs of credit are character, capacity, capital, collateral, and conditions.
Understanding the 5 Cs of Credit
The five-Cs-of-credit method of evaluating a borrower incorporates both qualitative and

quantitative measures. Lenders may look at a borrower’s credit reports, credit scores, income
statements, and other documents relevant to the borrower’s financial situation. They also
consider information about the loan itself.
Each lender has its own method for analyzing a borrower’s creditworthiness. Most lenders
use the five Cs—character, capacity, capital, collateral, and conditions—when analyzing
individual or business credit applications.
1. Character
Character, the first C, more specifically refers to credit history, which is a borrower’s
reputation or track record for repaying debts. This information appears on the borrower’s
credit reports, which are generated by the major credit bureaus. Credit reports contain
detailed information about how much an applicant has borrowed in the past and whether

they have repaid loans on time. These reports also contain information on collection accounts
and bankruptcies, and they retain most information for seven to 10 years.
Many lenders have a minimum credit score requirement before an applicant is approved for
a new loan. Minimum credit score requirements generally vary from lender to lender and
from one loan product to the next. The general rule is the higher a borrower’s credit score,
the higher the likelihood of being approved.
Lenders also regularly rely on credit scores to set the rates and terms of loans. The result is
often more attractive loan offers for borrowers who have good to excellent credit. Given how
crucial a good credit score and credit reports are to secure a loan, it’s worth considering one
of the best credit monitoring services to ensure that this information stays safe.
Improving Your 5 Cs: Character
Prospective borrowers should ensure that credit history is correct and accurate on their
credit report. Adverse, incorrect discrepancies can be detrimental to your credit history and
credit score. Consider implementing automatic payments on recurring billings to ensure
future obligations are paid on time. Paying monthly recurring debts and building a history of
on-time payments help to build your credit score.
2. Capacity
Capacity measures the borrower’s ability to repay a loan by comparing income against
recurring debts and assessing the borrower’s debt-to-income (DTI) ratio. Lenders calculate
DTI by adding a borrower’s total monthly debt payments and dividing that by the borrower’s
gross monthly income. The lower an applicant’s DTI, the better the chance of qualifying for a
new loan.
Every lender is different, but many lenders prefer an applicant’s DTI to be around 35% or
less before approving an application for new financing. It is worth noting that sometimes
lenders are prohibited from issuing loans to consumers with higher DTIs as well.
Improving Your 5 Cs: Capacity
You can improve your capacity by increasing your salary or wages or decreasing debt. A
lender will likely want to see a history of stable income. Although switching jobs may result
in higher pay, the lender may want to ensure that your job security is stable and that your
pay will continue to be consistent.
Lenders may consider incorporating freelance, gig, or other supplemental income. However,
income must often be stable and recurring for maximum consideration and benefit. Securing
more stable income streams may improve your capacity.
Regarding debt, paying down balances will continue to improve your capacity. Refinancing
debt to lower interest rates or lower monthly payments may temporarily alleviate pressure
on your debt-to-income metrics, though these new loans may cost more in the long run. Be
mindful that lenders may often be more interested in monthly payment obligations than in

full debt balances. So, paying off an entire loan and eliminating that monthly obligation will
improve your capacity.
3. Capital
Lenders also consider any capital that the borrower puts toward a potential investment. A
large capital contribution by the borrower decreases the chance of default. Borrowers who
can put a down payment on a home, for example, typically find it easier to receive a
mortgage—even special mortgages designed to make homeownership accessible to more
people.
Down payment size can also affect the rates and terms of a borrower’s loan. Generally, larger
down payments or larger capital contributions result in better rates and terms. With
mortgage loans, for example, a down payment of 20% or more should help a borrower avoid
the requirement to purchase additional private mortgage insurance (PMI).
Improving Your 5 Cs: Capital
Capital is often obtained over time, and it might take a bit more patience to build up a larger
down payment on a major purchase. Depending on your purchasing time line, you may want
to ensure that your down payment savings are yielding growth, such as through investments.
Some investors with a long investment horizon may consider placing their capital in index
funds or exchange-traded funds (ETFs) for potential growth at the risk of loss of capital.
Another consideration is the timing of the major purchase. It may be more advantageous to
move forward with a major purchase with a lower down payment as opposed to waiting to
build capital. In many situations, the value of the asset may appreciate (such as housing prices
on the rise). In these cases, it would be less beneficial to spend time building capital.
4. Collateral
Collateral can help a borrower secure loans. It gives the lender the assurance that if the
borrower defaults on the loan, the lender can get something back by repossessing the
collateral. The collateral is often the object for which one is borrowing the money: Auto loans,
for instance, are secured by cars, and mortgages are secured by homes.
For this reason, collateral-backed loans are sometimes referred to as secured loans or
secured debt. They are generally considered to be less risky for lenders to issue. As a result,
loans that are secured by some form of collateral are commonly offered with lower interest
rates and better terms compared to other unsecured forms of financing.
Improving Your 5 Cs: Collateral
You may improve your collateral by simply entering into a specific type of loan agreement. A
lender will often place a lien on specific types of assets to ensure that they have the right to
recover losses in the event of your default. This collateral agreement may be a requirement
for your loan.

Some other types of loans may require external collateral. For example, private, personal
loans may require placing your car as collateral. For these types of loans, ensure you have
assets that you can post, and remember that the bank is only entitled to these assets if you
default.
5. Conditions
In addition to examining income, lenders look at the general conditions relating to the loan.
This may include the length of time that an applicant has been employed at their current job,
how their industry is performing, and future job stability.
The conditions of the loan, such as the interest rate and the amount of principal, influence the
lender’s desire to finance the borrower. Conditions can refer to how a borrower intends to
use the money. Business loans that may provide future cash flow may have better conditions
than a house renovation during a slumping housing environment in which the borrower has
no intention of selling.
Additionally, lenders may consider conditions outside of the borrower’s control, such as the
state of the economy, industry trends, or pending legislative changes. For companies trying
to secure a loan, these uncontrollable conditions may be the prospects of key suppliers or
customer financial security in the coming years.
Improving Your 5 Cs: Conditions
Conditions are the least likely of the five Cs to be controllable. Many conditions such as
macroeconomic, global, political, or broad financial circumstances may not pertain
specifically to a borrower. Instead, they may be conditions that all borrowers may face.
A borrower may be able to control some conditions. Ensure that you have a strong, solid
reason for incurring debt, and be able to show how your current financial position supports
it. Businesses, for example, may need to demonstrate strong prospects and healthy financial
projections.
The Bottomline:
Lenders use certain criteria to evaluate borrowers prior to issuing debt. The criteria often fall
into several categories, which are collectively referred to as the five Cs. To ensure the best
credit terms, lenders must consider their credit character, capacity to make payments,
collateral on hand, capital available for up-front deposits, and conditions prevalent in the
market.
References
• https://www.investopedia.com/terms/f/five-c-credit.asp
• https://www.studocu.com/ph/document/bukidnon-state-university/business

Assessing Learning
Name: ________________________________________________ Score: ______/100

Section: ______________________________________________ Date: _____________________
Module Activity # 1
General Direction: Write the questions and your answers in a yellow paper.
Essay. ( 60pts)
1. What is credit? Its characteristics? Classifications? Discuss it all comprehensively.

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2. Expound the advantages and disadvantages of credit. When credit is good or bad? Give
scenario.
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3. What are the 5 C’s of credit? Explain each thoroughly with examples.
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II. Find and define words. (40pts)
In bullet form, kindly write 20 words/phrases with one sentence definition based on UNIT I.
Write it on a yellow paper.

Unit II. Different Sources of Credit
Overview
This unit will give the students vital points different sources of credit. They will be provided
with detailed discussions on the topic aforementioned above. At the end of the unit, higher-
order thinking skills activities will be given to assess their retention of the topic discussed.
Learning Objectives
1. Define what financial intermediaries and financial institutions are;

2. Analyze line of credit and its importance;
3. Identify the other sources of credit and their terms and agreements; and
4. Portray and present as microfinance or insurance manager.
Lesson Proper
Introduction
Credit, as you already know, is an arrangement to receive cash, goods or services now and
pay for them in the future. Consumer credit refers to the use of credit for personal needs by
individuals and families as contrasted to credit used for business or agricultural purposes.If
your business gets into trouble by incurring too much debt, this will likely affect the
business's profitability, which will in turn likely affect your ability to qualify for personal
credit. The flip side of this can also be true: If you are over-burdened with personal debt, your
business creditors (who can be expected to ask for your personal guarantee on loans made
to your small business) may be less willing to extent credit to your business if they think your
personal guarantee to be of little or no value.
“Recap/Review”

I. FINANCIAL INSTITUTIONS
Financial institutions are entities that help individuals and businesses fulfill their monetary
or financial requirements, either by depositing money, investing it, or managing it. Some of
the institutions labeled under this category include – banks, investment firms, trusts,
brokerage ventures, insurance companies, etc.
II. FINANCIAL INTERMEDIARIES
Financial intermediation refers to the practice of linking an investor and borrower. Acting
as a third party, an intermediary aims to meet the financial needs of both parties to mutual
satisfaction. Looking at the wider picture, intermediaries benefit consumers and businesses
alike by offering services on a larger economy of scale than would otherwise be possible. A
financial intermediary serves two fundamental purposes:
• Creating funds
• Managing the payments systems
TYPES OF FINANCIAL INTERMEDIARIES
As you can see, there are many different types of financial intermediaries, from banks to
private equity firms. Here’s a non-exhaustive list of some of the different types of
organizations that fall into this business category.
1. Banks: Commercial and central banks serve as financial intermediaries by

facilitating borrowing and lending on a widespread scale. Credit unions and
building societies also work in the same way, but on a cooperative basis.
2. Stock exchanges: Investors can buy and sell stocks via a third-party stock
exchange, facilitating security trading.
3. Mutual funds: These actively manage capital pooled together by shareholders.
Fund managers make recommendations and purchase stock in companies,

serving as middlemen between the businesses and investors. A mutual fund can
benefit all parties involved, providing companies with capital and shareholders
with assets.
4. Financial advisors: Investment brokers or financial advisors provide an
additional level of guidance. They give expert advice to businesses or individuals,
collecting funds and investing them in bonds, equities, or securities.
5. Insurance companies: An insurance company also qualifies as a financial
intermediary because it takes the money from businesses or individuals to secure
them against various risks. Insurance premiums are pooled together to pay for
claims as necessary.
Advantages of business intermediation
Business intermediation offers myriad benefits to all parties involved. When using a financial
intermediary, savers can make larger investments by pooling funds together. At the same
time, businesses gain access to a broader pool of investors. Here are some additional
advantages provided by business intermediation:
• Reduced costs: By growing economies of scale, costs are kept lower for start-up
businesses or borrowers. Operational costs, paperwork, and credit analysis are all
handled at scale.
• Reduced risk: Funds are spread across a diverse range of investment types. A
diversified portfolio spreads out the risk of capital loss.
• Reduced fraud: Intermediaries also reduce the risk of fraudulent behavior as they
have additional security measures in place.
• Convenience: Rather than spending time on research, investors are connected with
borrowers via a third party who does all the work.
• Greater liquidity: Financial intermediaries have the assets in place to allow for
greater asset liquidity. Borrowers can withdraw funds as needed.
Disadvantages of business intermediation
However, there are also a few disadvantages to financial intermediaries. Here are some of the
potential drawbacks to be aware of:
• Lower investment returns: Because the intermediary has its own financial
interests, the returns are not as high as they would be without the middleman.
Additional commission fees or expenses may be charged.
• Mismatched goals: A financial intermediary may not be working as an impartial
third party. They may offer investment opportunities that come with hidden risk or
that don’t align with an investor’s best interests.
III. LINE OF CREDIT

A line of credit is a type of loan that lets you borrow money up to a pre-set limit. You don't
have to use the funds for a specific purpose. You can use as little or as much of the funds as
you like, up to a specified maximum. You can pay back the money you owe at any time.
From time to time, purchases may crop up that require a more nuanced type of financing than
you've used in the past. When it comes to taking on debt for a large project or other financial
need, it's important to weigh your options. Luckily, you have choices, especially when you're
looking for something that's perhaps more flexible and provides different opportunities than
traditional methods.
One example — a line of credit — allows the borrower to draw on their loan multiple times,
potentially for a longer time period and with higher borrowing amounts than your average
loan. Plus, although a line of credit is a generic name for one type of financing option, there
are multiple products that fall under the umbrella of a line of credit that might be helpful to
borrowers’ cash flow needs.
Line of Credit: An Explanation
A line of credit comes in various forms, each of which has their own distinctions, and they can
be used for individuals or businesses. All lines of credit provide the borrower with a set
amount of money to use for expenses, typically with the ability to make withdrawals
throughout a given period of time (draw period).
In this way, most lines of credit are more flexible than other similar products that provide
financing. Still, it’s important to understand the differences between each type of line of credit
before settling on the right one for you. Different types of lines of credit include:
• Open-End credit or Revolving line of credit

• Closed-End Credit
• Secured credit
• Unsecured credit
• Personal line of credit
• Home equity line of credit (HELOC)
Open-End vs. Closed-End Credit
Open-end credit also known as a line of credit allows the borrower to make repeated
withdrawals throughout the draw period and payments throughout the life of the loan.
Good examples of open-end credit products are credit cards, as well as both personal lines of
credit and HELOCs. For these products, once the amount drawn against the line of credit is
paid back, the money becomes available to borrow from again - during the same draw period.
In this way, open-end credit is a flexible way to fund financial projects or needs that cost a
significant amount of money over a longer time frame. Although it may be convenient to have
a continuous line of credit, there may be additional fees associated with keeping the product
open. These are often charged either annually, or broken up into monthly installments.
Closed-End Credit
In contrast to open-end credit, a closed-end credit product, also known as an installment loan,
provides a borrower with a specific lump sum that they would likely use to pay for a certain
product or service upfront. In this way, closed-end credit is less flexible than open-end credit,
since it serves a specific purpose and the money must be disbursed in one lump sum, and
once repaid cannot be drawn again.

The Basics of Closed-End Credit
With open-end, or revolving credit, loans are made on a continuous basis as you purchase
items, and you are billed periodically to make at least partial payment. Using a credit card
issued by a store, a bank card such as VISA or MasterCard, or overdraft protection are
examples of open-end credit.
There is a maximum amount of credit that you can use, called your line of credit. Unless you
pay off the debt in full each month, you will often have to pay a high-rate of interest or other
kinds of finance charges for the use of credit.
• Revolving check credit. This is a type of open-end credit extended by banks. It is a

prearranged loan for a specific amount that you can use by writing a special check.
Repayment is made in installments over a set period, and the finance charges are
based on the amount of credit used during the month and on the outstanding balance.
• Charge cards. Charge cards are usually issued by department stores and oil
companies and, ordinarily, can be used only to buy products from the company that
issued that card. They have been largely replaced with credit cards, although many
are still in use. You pay your balance at your own pace, with interest.
• Credit cards. Credit cards, also called bank cards, are issued by financial institutions.
Credit cards provide prompt and convenient access to short-term loans. You borrow
up to a set amount (your credit limit) and pay back the loan at your own pace—
provided you pay the minimum due. You will also pay interest on what you owe, and
may incur other charges, such as late payment charges. Whatever amount you repay
becomes immediately available to reuse. VISA, MasterCard, American Express and
Discover are the most widely recognized credit cards.
• Travel and Entertainment (T&E) cards. This cards require that you pay in full each
month, but they do not charge interest. American Express (not the credit card
version), Diners Club and Carte Blanche are the most common T&E cards.
• Debit cards. These are issued by many banks and work like a check. When you buy
something, the cost is electronically deducted (debited) from your bank account and
deposited into the seller's account. Strictly speaking, they are not "credit" because
you pay immediately (or as quickly as funds can be transferred electronically).
Closed-end credit products allow for money to be lent for a fixed amount of time. Typically,
once a closed-end credit is originated borrowers need to make regular, scheduled payments,
on both principal and interest, starting immediately thereafter.
Secured vs. Unsecured Credit
Besides the length of availability and flexibility for a line of credit, whether or not a product
is secured or unsecured is an important variance, as well. This is the difference between
whether or not a borrower will be required to put something down as collateral on the loan.
There are a number of considerations to keep in mind for each.
Secured Credit
Secured credit is a type of loan wherein the borrower provides a security interest in
something of value — otherwise known as collateral — in order to obtain a loan. An example

of a secured line of credit is a HELOC, where the customer must pledge their home as
collateral for the loan itself. Although the borrowing amount of a HELOC is dependent on how
much equity the borrower actually has in their home, traditionally speaking, a secured line of
credit is less of a risk for the lender, which often translates into potentially higher borrowing
amounts, as well as lower interest rates.
Unsecured Credit
As opposed to secured credit, unsecured credit is more of a risk to the lender, since the
borrower doesn't have to put up any collateral to gain the loan. A personal line of credit is a
good example of an unsecured line of credit, as well as a traditional credit card. Because of
the added risk to the lender, most lenders make underwriting decision based on independent
financial factors — like credit score, credit history and income — and may have more
stringent requirements for these factors.
Personal Line of Credit vs. HELOC
The fundamentals of these two types of lines of credit are similar in that both provide
consumers access to money whenever they might need it during a given period of time,
known as their draw period. A major difference between the HELOC vs. personal line of credit
is that one requires collateral to secure the loan, while the other doesn’t. Potential loan
amounts, fees and interest rates are additional factors to consider when deciding between
the two.
Personal Line of Credit
A personal line of credit is a type of loan that offers consumers a specific amount of money,
known as a credit limit, from which they can borrow from for a given period of time, which is
usually over a number of years. Borrowers can access these funds from a financial institution
like First Republic Bank as needed throughout their draw period and, assuming they stick to
the terms of the loan, once the amount drawn is paid back, it becomes available to borrow
from again during the draw period.
In this way, a personal line of credit is a type of flexible, revolving line of credit. A personal
line of credit is a great option for financial situations that require a significant investment
over a certain period of time, like making upgrades to a home, or covering a portion of your
child’s K-12 education.
Although there is no collateral required for this type of line of credit, there are other
considerations to take into account. Qualifications typically depend on financial aspects like
the borrower's income, credit history and expenses. There may be additional fees to consider,
as well.
For example, an annual maintenance fee ensures that the line of credit stays open during the
draw period, and this is often charged either annually or broken up into monthly payments.
There may be late fees on delinquent payments, as well as small transaction fees for
withdrawals. Although interest rates for personal lines of credit tend to be variable in most
cases, at First Republic Bank, the personal line of credit is available at a low fixed rate, which

also makes them a good option for consolidating other high-interest loans. It is also important
to keep in mind that all fees will be individually set by the financial institution. At First
Republic Bank, for example, borrowers pay no origination fees, maintenance or prepayment
fees for the life of the loan. (Comparing fees between products is just one of the ways to help
find the best personal line of credit for your needs.)
HELOC (Home Equity Lines of Credit)
A HELOC works similarly to a personal line of credit — offering access to a set amount of cash
during a set draw period as a home equity loan — with one big distinction: collateral. To be
eligible for a HELOC, a borrower would need to offer their home as collateral to secure the
loan. In general, the amount of money available to the borrower will be based on the equity
they have in their home, not the overall value of the home itself.
Like a personal line of credit, interest and monthly minimum payments for a HELOC only
begin from the point where the borrower makes their first withdrawal. Maximum loan
amounts should be considered when deciding between a HELOC and personal line of credit,
since a HELOC loan amount is dependent on the borrower’s home equity. Interest rates for
HELOCs also tend to be variable, which means that they can fluctuate throughout the life of
the loan.
Be sure to inquire about any additional terms and conditions that a lender might have for a
HELOC before signing up for one, too. For example, at First Republic, there is no required
annual review of a HELOC, and no additional closing costs if the product is closed
simultaneously with a First Republic mortgage.
Please note that the above-mentioned lines of credit may not be mutually exclusive. For
instance, a personal line of credit may be secured or unsecured.
Here are some of the key distinctions to keep in mind when determining which type of lines
of credit are best for your specific needs.
How do I use a line of credit?
A line of credit is convenient for financing your short-term needs. “It certainly varies
depending on your business model. But typically, we’re talking about the supplies you need
to make and sell your products,” says Brassard.
He gives the example of a distribution company that buys Php200,000 worth of inventory.
The company takes this amount from its line of credit until it receives the merchandise and
sells it. Let’s say two months go by.
“The company will have paid Php200,000. But depending on its profit margin, it may have
gotten Php250,000 by reselling the inventory,” says Brassard. “The company will therefore
put Php200,000 back into its line of credit and keep the Php50,000 profit to pay its fixed costs
and reinvest in its working capital. Its goal will be to eventually have enough working capital
to buy inventory without using its line of credit.”

How to calculate the interest on a line of credit
Interest on a line of credit is calculated on a daily basis. So if the annual posted interest rate
is 5%, to find the daily rate, you need to do this calculation:
5% annual rate / 365 days in a year = 0.01369863% per day
Going back to the example of a Php200,000 line of credit repaid in full 60 days later, the
following calculation would tell you how much interest you’d need to pay:
Php200,000 X 0.01369863% = Php27.40 of interest payable each day
Php27.40 X 60 days = Php1,644
If you pay back half the amount after 30 days, the interest calculation should be adjusted as
follows:
Php200,000 X 0.01369863% = Php27.40 of interest payable each day
Php27.40 X 30 days = Php822
Php100,000 X 0.01369863% = Php13.70 interest payable each day
Php13.70 X 30 days = Php411
Total interest payable for 60 days = Php1,233
Sources of Consumer Credit
We all have short-term or long-term needs for money or credit. You'll want to familiarize
yourself with your options when your needs for credit arises.
Commercial Banks
Commercial banks make loans to borrowers who have the capacity to repay them. Loans are
the sale of the use of money by those who have it (banks) to those who want it (borrowers)
and are willing to pay a price (interest) for it. Banks make several types of loans, including
consumer loans, housing loans and credit card loans.
• Consumer loans are for installment purchases, repaid with interest on a monthly
basis. The bulk of consumer loans are for cars, boats, furniture and other expensive
durable goods.
• Housing loans may be for either residential mortgages, home construction or home
improvements.
• Credit card loans may be available in the form of cash advances within prearranged
credit limits.
Savings and Loan Associations (S&Ls)

Savings and loan associations used to specialize in long-term mortgage loans on houses and
other real estate. Today, S&Ls offer personal installment loans, home improvement loans,
second mortgages, education loans and loans secured by savings accounts.
S&Ls lend to creditworthy people, and usually, collateral may be required. The loan rates on
S&Ls vary depending on the amount borrowed, the payment period, and the collateral. The
interest charges of S&Ls are generally lower than those of some other types of lenders
because S&Ls lend depositors' money, which is a relatively inexpensive source of funds.
Credit Unions (CUs)
Credit Unions are nonprofit cooperatives organized to serve people who have some type of
common bond. The nonprofit status and lower costs of credit unions usually allow them to
provide better terms on loans and savings than commercial institutions. The costs of the
credit union may be lower because sponsoring firms provide staff and office space, and
because some firms agree to deduct loan payments and savings installments from members'
paychecks and apply them to credit union accounts.
Credit unions often offer good value in personal loans and savings accounts. CUs usually
require less stringent qualifications and provide faster service on loans than do banks or
S&Ls.
Consumer Finance Companies (CFCs)
Consumer finance companies specialize in personal installment loans and second mortgages.
Consumers without an established credit history can often borrow from CFCs without
collateral. CFCs are often willing to lend money to consumers who are having difficulty in
obtaining credit somewhere else, but because the risk is higher, so is the interest rate.
The interest rate varies according to the size of the loan balance and the repayment schedule.
CFCs process loan applications quickly, usually on the same day that the application is made,
and design repayment schedules to fit the borrower's income.
Sales Finance Companies (SFCs)
If you have bought a car, you have probably encountered the opportunity to finance the
purchase via the manufacturer's financing company. These SFCs let you pay for big-ticket
items, such as an automobile, major appliances, furniture, computers and stereo equipment,
over a longer period of time.
You don't deal directly with the SFC, but you are generally informed by the dealer that your
installment note has been sold to a sales finance company. You then make your monthly
payments to the SFC rather than to the dealer where you bought the merchandise.

Life Insurance Companies
Insurance companies will usually allow you to borrow up to 80 percent of the accumulated
cash value of a whole life (or straight life) insurance policy. Loans against some policies do
not have to be repaid, but the loan balance remaining upon your death is subtracted from the
amount your beneficiaries receive.
Repayment of at least the interest portion is important, as compounding interest works

against you. Life insurance companies charge lower interest rates than some other lenders
because they take no risks and pay no collections costs. The loans are secured by the cash
value of the policy.
Pawnbrokers
Recently made famous by reality shows, pawnbrokers are unconventional, but common,
sources of secured loans. They hold your property and lend you a portion of its value. If you
repay the loan and the interest on time, you get your property back. If you don't, the
pawnbroker sells it, although an extension can be arranged. Pawnbrokers charge higher
interest rates than other lenders, but you don't have to apply or wait for approval.
Pawnbrokers' chief appeal? They rarely ask questions.
Loan Sharks
These usurious lenders have no state license to engage in the lending business. They charge
excessive rates for refinancing, repossession or late payments, and they allow only a very
short time for repayment. They're infamous for using collection methods that involve
violence or other criminal conduct. Steer clear of them. They are illegal, after all.
Family and Friends
Your relatives can sometimes be your best source of credit. However, all such transactions
should be treated in a businesslike manner; otherwise, misunderstandings may develop that
can ruin family ties and friendships.
And, if the IRS catches wind of an intrafamily "loan," it can "impute interest" on the loan—
which would be income to the lender, but not deductible to the borrower. Being caught up in
an IRS audit can also blight family relationships.
Tax Disadvantages of Consumer Credit
Interest paid on your personal auto, credit cards, education and other consumer loans is no
longer deductible on your tax return.
Interest allocable to business use of property may be deductible. Consult our Controlling Your
Taxes article for more information.
In addition, there is only a certain amount of qualified residence (mortgage) interest that is
deductible. Qualified residence interest is the interest paid or accrued on acquisition loans or

home equity loans with respect to your principal residence and one other residence, usually
your "vacation home."
The total amount of acquisition loans is limited to $1 million and the total amount of home
equity loans is limited to $100,000. Interest on any debt over these limits is considered to be
personal, consumer interest that is not deductible.
What is Microfinance?
Microfinance refers to the financial services provided to low-income individuals or groups

who are typically excluded from traditional banking. Most microfinance institutions focus on
offering credit in the form of small working capital loans, sometimes called microloans or
microcredit. However, many also provide insurance and money transfers, and regulated
microfinance banks provide savings accounts.
Microfinance aims to improve financial services access for marginalized groups, especially
women and the rural poor, to promote self-sufficiency.
Microfinance and Financial Inclusion
Low-income people are neglected by their financial systems because they are considered
uneconomical to serve or too difficult to reach. According to the World Bank’s Global Findex,
1.7 billion adults globally are financially excluded, living without formal credit or savings.
Microfinance seeks to address the needs of the unbanked by fostering economic justice and
financial inclusion for all.
Benefits of Microfinance
Access to essential financial services can empower individuals economically and socially by
creating self-reliance and economic sustainability in impoverished communities where
salaried jobs are scarce. The benefits of microfinance include:
Small loans enable entrepreneurs to start or expand micro, small and medium enterprises.
Savings help families build assets to finance school fees, improve homes (e.g., install power
or running water) and achieve goals.
Insurance products can offset the cost of medical care.
Money transfers and remittances allow families to easily send and receive money across
borders.
How do I get approved for microfinancing?
While approval is ultimately the lender’s decision, there are some steps you can take to
increase your chances of receiving microfinancing.

• Write a business plan. Lenders want to see that you take your business seriously
and have a plan; they want to work with people invested in their success. Every
successful business plan includes a company overview, introduction, mission
statement, market and industry analysis, marketing plan, and operations plan.
• Maintain good credit. Even though you currently may not have much money, a good
credit score makes an excellent impression. Carefully review your report, ensuring it
doesn’t contain any false information. If it does, send out disputes accordingly.
• Give a personal guarantee or collateral. Your personal guarantee is your legal
promise to repay the loan. Collateral, such as your house, is something lenders can
use if you don’t repay the loan. If you’re confident your business will succeed,
providing a guarantee or collateral makes sense.
• Invest some of your own money. A business owner who makes a personal
investment in their company along with a microloan shows they’re serious about
their business’s success.
Microfinancing interest rates can vary wildly compared to traditional bank interest rates, but
they’re usually higher for two primary reasons:
• Microfinancing borrowers are a higher risk. Microfinancing is designed for low-

income borrowers, who are a higher risk to banks. As standard lending logic follows,
the higher the investment risk, the higher the interest rate and compensation for the
lender. Banks and other lenders want to be compensated for the potential of not
receiving their money back. High interest rates, which can suffocate small businesses,
ensure the lender receives some return on investment.
• Microfinancing is more expensive for the bank. While the risk-reward ratio of
lending to a low-income individual is part of the deal, microfinancing scenarios are
usually more expensive for the bank, especially in foreign investment cases. For
example, loan officers often have to travel to businesses in low-income areas instead
of potential borrowers visiting their local bank branch to inquire about loans.
What’s the difference between microfinance and microcredit?
While they may sound similar, there is a crucial difference between microfinance and
microcredit: Microfinance encompasses a broad offering of financial services for low-income
communities, while microcredit specifically means small loans for people below the poverty
line. In other words, microcredit is a subset of microfinance.
• Microcredit is loans offered to unemployed individuals who lack collateral and credit
history. This capital can give new, low-income entrepreneurs the injection needed to
get started. The goal of microcredit is to empower less advantaged communities
across the developing world to start their own businesses and enter the economy.
• Of course, microfinance also embodies all these elements. It also includes a broad
range of other financial services, including checking and savings accounts,
microinsurance, and business education.

GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS)
History
The Government Service Insurance System (GSIS) provides social security coverage to
employees in the public sector. It officially started its operations on 31 May 1937 with life
insurance program as its only business. and It was transformed into a more comprehensive
social insurance scheme in 1951 with the addition of old-age, invalidity disability and
survivorship benefits. Milestone legislation passed through the years including Republic Act
(RA) 8291 otherwise known as the Government Service Insurance Act of 1997, enhanced and
improved the GSIS administered social security program for government workers.
GSIS also administers the Employees' Compensation Program, which provides for work-
related social security benefits for the public sector, and the General Insurance Fund, which
provides non-life coverage for all properties with government insurable interest.
Membership coverage is compulsory for all government employees receiving compensation,

irrespective regardless of employment status, who have not reached the compulsory
retirement age of 65 at the time of election or appointment to the government service. Under
RA 8291, the following are not GSIS members: Uniformed personnel of the Armed Forces of
the Philippines, the Philippine National Police, the Bureau of Jail Management and Penology,
and the Bureau of Fire Protection; Contractual, casual and other employees who have no
employer-employee relationship, and Barangay and Sanggunian officials who are not
receiving fixed monthly compensation.
As of September 2022, GSIS has a total of 2,533,221 members and pensioners broken down
as follows: 1,971,853 active members and 561,368 old-age and survivorship pensioners. In
2021, GSIS's total assets increased by Php 94.06 Billion or 6.55% from Php1.44 Trillion in
December 2021 increasing the assets of GSIS to Php 1.53 Trillion.
Mission
GSIS is committed to provide social security and financial benefits to all government
employees and their qualified dependents, satisfy the non-life insurance needs of the
government, maintain and strengthen the viability of the fund, and build an enduring
partnership with its stakeholders.
Vision
By 2022, GSIS will have a longer actuarial life with sustained member benefits and responsive
service to its stakeholders
Core values
Professionalism Love of Country Integrity Service Excellence Spirituality Innovation

Teamwork Mutual Respect
GSIS offers various loans to assist members with their financial needs: Consolidated Loan,
Policy Loan and Emergency Loan. Members and pensioners may apply for these loans using

their GSIS eCard through the GWAPS kiosks located in all GSIS branches, selected government
agencies and Robinsons Malls.
GSIS offers various loans to assist members with their financial needs:
Consolidated Loan, Policy Loan and Emergency Loan. Members and pensioners may apply for
these loans using their GSIS eCard through the GWAPS kiosks located in all GSIS branches,
selected government agencies and Robinsons Malls.
• Consolidated Loan
The Consolidated loan (Conso-loan) combines five different loan products into one—Salary
Loan, Restructured Salary Loan, Enhanced Salary Loan, Emergency Loan Assistance, and
Summer One-Month Salary Loan. Members availing of a conso-loan for the first time receive
a one-time automatic condonation from the outstanding penalties or surcharges incurred
from these loans.
• Policy Loan
The Policy loan is a loan program which a member may avail from his/her GSIS life insurance
policy. The loan, bearing an 8% interest rate, may be paid either through monthly
amortization or deduction from a member’s existing life insurance policy contract.
• Emergency Loan
The Emergency loan provides assistance to GSIS to members affected by natural calamities.
Social Security System
History
The Social Security System (SSS) administers social security protection to workers in the
private sector. Social security provides replacement income for workers in times of death,
disability, sickness, maternity and old age. On September 1, 1957, the Social Security Act of
1954 was implemented. Thereafter, the coverage and benefits given by SSS have been
expanded and enhanced through the enactment of various laws. Republic Act (RA) No. 11199,
otherwise known as the “Social Security Act of 2018” or the SSS Law, became effective on 05
March 2019.
The SSS is a government financial institution in the Philippines. Its principal office is at East
Avenue, Quezon City.
Mission
To manage a sound and viable social security system which sahll promote social justice and
provide meaningful protection to members and their families against the hazards of
disability, sickness, maternity, old age, death and other contingencies resulting in loss of
income or financial burden.

Vision
A viable social security institution providing universal and equitable social protection
through world-class service.
Core values
Trust Empowerment Teamwork
SSS Cash Loan
A cash loan granted to an employed member or a currently-paying self-employed or

voluntary member. It is intended to meet the member's short-term credit needs.
Qualifying Conditions
An employed member or a currently-paying self-employed or voluntary member
For one-month loan: 36 monthly contributions, six (6) of which should have been posted in
the last twelve (12) months prior to the month of application.
For two-month loan: 72 monthly contributions, six (6) of which should have been posted in
the last twelve (12) months prior to the month of application.
If employed, the member’s employer must be updated in the payment of contributions and
loans. The member must also be updated in the payment of other loans with SSS.
Amount and Terms of Loan
A one-month loan is equivalent to the average of member’s last twelve (12) Monthly Salary
Credits (MSC), or the amount applied for, whichever is lower.
A two-month loan is equivalent to twice the average of the member’s last twelve (12) MSCs
posted, rounded to the next higher MSC, or the amount applied for, whichever is lower.
The loan shall be charged an interest rate of ten percent (10%) per annum until fully paid,
based on diminishing principal balance, and shall be amortized over a period of 24 months.
Important Reminders
If the loan is not fully paid at the end of the term, interest shall continue to be charged, as well
as penalties, on the outstanding principal balance until fully paid.
In case of default, the arrearages/unpaid loan shall be deducted from the member’s future
long-term benefit claim (e.g. Retirement, total disability & death).
The loan can be renewed after payment of at least fifty percent (50%) of the original loan
amount and at least fifty percent (50%) of the loan term has lapsed.

References
• https://www.wolterskluwer.com/en/expert-insights/understanding-the-types-and-
sources-of-consumer-credit
• https://www.investopedia.com/terms/f/financialintermediary.asp
• https://www.studocu.com/ph/document/bukidnon-state-university/business
• https://www.gsis.gov.ph/the-gsis-vision-and-mission/

Assessing Learning
Name: ________________________________________________ Score: ______/100

Section: ______________________________________________ Date: _____________________
Module Activity # 2
General Direction: Write the questions and your answers in a yellow paper.
Essay. ( 30pts)
1. Differentiate financial institutions from financial intermediaries. Give examples.

_____________________________________________________________________________________________________
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2. What are the different sources of credit? Discuss each briefly with examples.
_____________________________________________________________________________________________________
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3. What microfinance is? What is the difference between microloan and microcredit?
_____________________________________________________________________________________________________
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_____________________________________________________________________________________________________
II. Find and define 30 words. (70pts)

Unit III. The Major Documents Used in Credit Transactions and
Credit Management
Overview
This unit will give the students vital points in the major documents used in credit transactions
and credit management. They will be provided with detailed discussions on the topic
aforementioned above. At the end of the unit, higher-order thinking skills activities will be
given to assess their retention of the topic discussed.
Learning Objectives

1. Identify and present the different classes and kinds of credit instruments;
2. Define the role of collateral in credit process;
3. Conclude and portray the importance of credit management, credit manager,
investigation and appraisal;
4. Formulate a credit policy and present it in front of the class.
Lesson Proper
Introduction
People talk a little regretfully of the good old days when everybody was honest and a man’s
word was as good as his written bond. They forget that now the area of dealings has increased
greatly. Perhaps, man has become more selfish too, on account of the increase in the struggle
for existence; hence almost always some record of transactions is kept in black and white.
Banks, in some countries like Great Britain, used to issue notes without check from
Government. These bank notes were of the nature of promissory notes. This led to over-issue
of such notes without sufficient security and resulted in frequent bank failures. This practice
was too dangerous to be allowed to continue and the government had to prohibit it. Hence
today only the Central Bank of a country is allowed to issue notes.
These notes are accepted by the people because of their faith in the stability of the
government, and are almost as good as money. Therefore, for purposes of our study, we may
exclude them from the list of instruments of credit. By instruments of credit ate meant those
documents which make possible credit transactions. Let us study the main types of credit
instruments.
TYPES OF CREDIT INSTRUMENTS
1. Promissory Note
The simplest form of a credit instrument is the promissory note. A promissory note (or pro-
note for short) is a written promise from a buyer or a borrower to pay a certain sum of money

to the creditor or his order. It is what we call IOU (I owe you), i.e., an acknowledgment of debt
and an obligation to repay.
A typical promissory note is as below:
The words “value received” indicates that the document is the result of some purchase or
loan. Interest must be mentioned; otherwise the pro-note is not good in law. Such a document
can be used for any kind of transaction, personal or commercial.
2. Bill of exchange
A bill of exchange is used in internal as well as foreign trade. It is an order by a seller to a
buyer or by a creditor to a debtor to pay a certain sum of money to himself or to bearer or to
another person named therein. The seller or the creditor who draws the bill is called the
‘drawer’; the purchaser or the debtor on whom the bill is drawn is called the “drawee.” The
seller may order the payment to be made to a third person called the “payee”.
Specimens of inland and foreign bills of exchange are given below:

In place of the payee’s name any of these forms may be used:
1. Pay to bearer,
2. Pay to Dr. J. D. Varma or order, or
3. Pay to my order.
When the bill of exchange begins with “On demand”, instead of “thirty days”, it is a “demand
bill’ or “sight bill’.
The drawer sends ‘he bill to the drawee who “accepts” it by signing it and putting his office
stamp on it. The bill now becomes a negotiable instrument and can be bought and sold in the
market. The drawer can now discount it and change it into cash on paying a commission,
called discount, at some firm or bank. It may pass through several hands before it ultimately
matures or falls due for payment, when the drawee pays his debt by honoring the bill.
If the drawee is not very well known, he secures the services of an Accepting House to sign
and accept the Bill. Such houses or firms specialize in providing guarantees and charge a
commission for their services. To perform such services the Accepting Houses have to keep
themselves well informed of the financial position of the merchants on whose behalf they
accept bills.
Advantages of a bill of exchange:
A bill of exchange thus performs the following important functions
(i) “Neither the exporter nor the importer has to go without his money while the goods are in
transit.—(Sayers) The exporter gets his money from a bank and the importer does not have
to pay immediately. He pays it after he has sold the goods, and has funds in hand.
(ii) Funds lying idle in banks are invested in Bills of Exchange and are profitably employed.
Banks particularly favour this form of investment, because money is not locked up for long
and can be withdrawn easily. It is said that a good bank manager knows the difference
between a bill and a mortgage. The bills discounted set up a regular stream of money flowing
in and out.

(iii) Gold and silver are saved from being transported between countries. Exports are made
to balance against imports through the bill market without movement of gold.
(iv) While the buyer pays in his own currency, the seller is paid in his own. Exchange Banks
undertake the whole work and individuals are saved from all bother and inconvenience.
3. Check (Cheques)
A cheque is the most common instrument of credit and almost works like money. It is a
written order on a printed form by a depositor (drawer) to his bank to pay a sum of” money
to himself or to somebody else, whose name is entered on it, or to the bearer, i.e., the man
who holds it (i.e., drawee). No bank ordinarily refuses to pay money for a cheque, provided it
is correctly filled in, and there is enough money in the drawer’s account with the bank. A
specimen cheque is given below. The counterfoil with the drawer serves as a record of the
payment.
Cheques are of the following kinds:
• Bearer Cheque:
Any one, who happens to have the cheque, can get it cashed. In this case, the bank need not
worry as to who presents it at the counter. If a bearer cheque is lost, the finder can cash it
unless the bank is notified in time to stop the payment. The drawer runs the risk of losing his
money, and not the bank.
• Order Cheque
The word “bearer” after the payee’s name is crossed out, as in the cheque form below, and
the word “order” written instead. It is a safer form of payment, because the bank is
responsible for paying the money to the right person. The person who presents the cheque
at the counter has to prove his identity, before the proceeds of the cheque can be paid to him.
• Crossed Cheque
This is the safest form of payment as it cannot be cashed .it the bank counter. The payee
cannot get the proceeds of the cheque in cash, lie can only get the sum transferred to his own
or (after endorsing) to somebody else’s account. A cheque is “crossed” by drawing two
parallel lines across its face or in a corner and writing the words “& Co.” between them. The
specimen given above is crossed. If it is crossed “Payee’s A/c.”, then cash cannot be obtained
from the bank; the amount of the cheque can only be credited to the payee’s A/c.
• Post-dated Cheque
Such a cheque is a way of making payments sometime in the future. If you have to pay a
hundred rupees to a friend after a month, you may draw a cheque in his favors and put down
the future date. It can be cashed only on or after that date.

• Blank Cheque
It means an unlimited offer because the signature is put, whereas the space for the amount is
left blank to be filled in by the drawee. Such cheques are usually handed over in romances or
films! Nobody ordinarily signs a blank cheque.
4. Bank Drafts
A cheque can also be used to remit funds to another place. But as the account is held in a
different place, from where the cheque is presented, the latter branch of the bank normally
gets in touch with the former before making the payment. To avoid this botheration, a
banker’s draft is used.
A bank draft is a cheque drawn by a bank on its own branch or on another bank requiring the
latter to pay a specified amount to the person named in it or to the order thereof.
5. Clearing House
One great advantage that follows from the use of cheques is that we do not have to carry a
pocketful of notes or coins for our purchases. In countries, where people have developed the
banking habit, rarely is a purchase paid for in cash, unless it is a very small sum. The people
who are paid in cheques do not get them cashed but just pay them into their accounts at their
bank. Thus, if both the persons have a common bank, a mere change in their bank balances
completes the transaction.
When there are several banks in a locality and the two persons have accounts with different
banks, the process is not so simple. Every bank receives during the course of the day cheques
on other banks in favor of its customers. To send cash back and forth from one bank to
another every day would be very troublesome. To avoid this trouble, the device of a Clearing
House is used.
The representatives of the local banks meet at a fixed place after the working hours and
balance their claims against one another. When simple book entries have cancelled most of
the obligations, a small balance may be claimed by one bank from the other.This is usually
settled through a cheque on the Central bank.
ROLE OF COLLATERAL
Collateral has long occupied a central position in the financial sector thanks to the role it plays
as a mechanism for reducing exposure to credit risk arising from an asymmetry of
information between creditors and debtors, but by more securely binding borrowers to their
repayment schedules. Collateral also sends a positive signal to creditors, helping to alleviate
problems that may arise from adverse selection and moral hazard. In addition, collateral cuts
lenders’ exposure to losses, reduces the systemic risk, thus remains an important factor in
judging a borrower’s overall creditworthiness.
Good-quality collateral has the four characteristics of:
(i) having an easily ascertainable value that is sufficient to cover the loans that it is
securing;
(ii) retaining its value through the entire period of the loan;
(iii) being readily for foreclosure or of having its ownership easily transferred; and
(iv) being liquid.
Unfortunately, if lenders continue to depend on traditional forms of collateral, this
may generate an increased risk of problems within the financial sector, including for
banks themselves since businesses, especially SMEs, have only limited access to the kind
of real estate collateral that banks demand, their ability to access credit may be restricted.
Moreover, for players in the new economy, such as IT startups, company value is
overwhelmingly in the form of intangible assets, and under the current lending paradigm
it is very hard to secure loans against these. At the same time, banks’ insistence on
receiving only traditional types of loan security may further add to their exposure to risk
because industries that are closely linked to real estate markets and that are able to use
this as collateral typically see an unusually high rate of businesses entering and exiting
the market, while at the macroeconomic level, collateral taken in the form of real estate
typically also accelerates procyclical swings within the financial system.
5 Common Types of Collateral for Business Loans
1. Real property, like a home or commercial property

2. Inventory
3. Cash
4. Unpaid invoices
5. Blanket Liens
1. Real Property
Using real estate assets or home equity as collateral when applying for a small business loan
is a common approach. That commonality, and desirability for lenders, comes down to a few
factors: Real estate is valuable; it retains its value over time, even after liquidation; and it’s
widely available.
On that last point: Many business owners have access to home equity, which makes real
property a natural and easy first choice for securing a small business loan. That’s especially
the case since the U.S. housing market recovery from the post-bubble collapse.
There are some important caveats, though. Using real property as collateral can have serious
effects on your overall finances or net worth if the loan defaults, and a lender seizing your
family home can be especially devastating. Before you offer up any real property to secure
your small business loan—or any of your business or personal assets, for that matter—it’s
important to understand all risks involved.
Don’t forget that “real property” extends beyond real estate. You can use equipment, cars,
boats, motorcycles, planes, and so on as collateral; they all fall under the “real property”
umbrella.

2. Inventory
Another type of loan security is inventory. Of course, this type of collateral is only viable if
you’re a product-based (rather than service-based) business.
However, inventory doesn’t always tick all the boxes that make for a useful collateral
source—more specifically, your lender won’t always deem your inventory equal to the value
of your loan, especially when taking depreciation into account. To vet your inventory’s
current and projected worth, a lender might send out a third-party auditor to value your
inventory in person.
One approach to using inventory as collateral is inventory financing. In this scenario, a

business owner requests a loan to purchase items that’ll later be put up for sale (aka, their
inventory!). This inventory acts as built-in collateral in case you’re not able to sell your
products and, eventually, default.
Take note, though, that the value of your inventory is key to inventory financing, just as it is
in any other form of small business loan that considers inventory as collateral. So some
lenders might not view inventory financing as fully secured lending. If the borrower can’t sell
their inventory, the lender might have trouble doing so as well, forcing them to sell at a loss.
For this reason, inventory financing could be difficult to secure with some lenders.
3. Cash
Lenders also favor cash, in the way of a business savings account, as collateral. And you can
probably understand why—a bundle of cash ensures that the lender will quickly and easily
regain their losses if you default on your loan. They won’t need to go through the hassle of
selling an asset.
Generally, you would apply for a savings secured loan (otherwise known as a “cash-secured
loan”) from the same bank that holds your account. And because the bank can liquidate your
account the moment you default on your loan, it’s very low risk from the lender’s perspective,
which should ensure that the borrower gets an optimal interest rate.
From the borrower’s perspective, however, putting up your savings account is obviously
high-risk, because you could lose your entire savings.
4. Invoices
If you’ve invoiced your customers but they’re slow to pay, you’ll more than likely experience
some difficulties in running your daily operations—you might need the cash tied up in those
invoices to replenish inventory, for instance, or pay your employees.
As a fix, some lenders will agree to accept collateral based on these outstanding business
invoices—a process called invoice financing. This is a good option for business owners that
don’t have a strong credit score, because lenders determine a borrower’s viability mainly
through the worth of those outstanding invoices.

Although the borrower might give up a bit of the total cash value of the invoices, she receives
the flexibility and security that comes with an immediate cash infusion. With this new capital
in hand, you can focus on building inventory, filling orders, paying staff and vendors, and
generating new business.
5. Blanket Liens
The final type of collateral we’ll cover here isn’t a tangible asset, like the previous four types
of collateral are. A “lien” is actually a legal claim that’s attached to a business loan, and it
allows the lender to sue the business and collect their assets in the event of a default. The
assets can be specified, or not.
As you can probably guess, a “blanket” lien is the most comprehensive of its kind—and the
most favorable for the lender. Blanket liens give a lender carte blanche to seize every asset
and form of collateral a business owns in order to satisfy its debts.
Although blanket liens provide plenty of protection for lenders, they can be onerous for
borrowers. The clearest risk here is that blanket liens expose you to the possibility of losing
everything you own.
Also, liens can make securing a new loan in order to satisfy other debts more difficult. Lenders
want to be in the “first lien position,” which means that they’re paid off first in case they need
to liquidate your assets.[1] If an existing lender has filed a lien on your assets, any additional
lenders you work with are bumped down a spot, and they’ll only be paid after the first lender.
Of course, the likelihood that a lender in the second or third lien position would be fully repaid
in case of default is much lower—and the overall risk involved for the lender a lot higher. So,
the presence of a blanket lien could make subsequent loans from new creditors extremely
expensive—or impossible to get.
Credit Management
The Credit Management function incorporates all of a company’s activities aimed at ensuring
that customers pay their invoices within the defined payment terms and conditions. Effective
Credit Management serves to prevent late payment or non-payment. Getting it right
reinforces the company’s financial or liquidity position, making it a critical component in any
business. This Wiki tells you all about the importance of good credit management, the
benefits and how to create a robust platform.
Is credit management the same as collections?
Credit management and collections are not the same things. However, they are closely related
to one another and are often managed by the same department.
In some cases, companies may control their own credit management but outsource their
collection process.

This could be because they haven’t got the resources to focus on both, or because they believe
a professional collections service is simply better at recovering their invoices and debts.
The main components of credit management
1. Assessing and approving new clients
A good credit management system can quickly and effectively assess a customer’s financial
situation.
Balancing these two competing requirements isn’t easy.
If the assessment process takes too long, there is a risk that the potential customer will find
a new supplier. If it isn’t done to a high enough standard, there is a risk your business will
take on bad debts.
2. Setting payment terms
This is the practice of deciding when invoices should be paid.
Companies often need to strike a balance between offering terms suitable for their industry
and the cash flow issues and risks that longer terms bring.
3. Extending credit to existing customers
Extending credit covers multiple scenarios, including issuing credit notes and offering
financing options to your customers.
It is often necessary if you want to retain business. And financing can bring extra benefits
such as higher sales volumes and customer loyalty.
Credit terms can vary according to the credit or payment history of specific customers. Credit
management decisions are critical when considering offering these services.
4. Tracking customer credit
An important function of credit management is the ability to monitor and prioritize your sales
ledger.
This area may crossover into the realm of collections. For example, it might involve dunning,
which is an important part of establishing the status of late payments.
The Credit Manager, Credit Investigation and Appraisal
Credit managers are responsible for overseeing the credit granting process for a company.
Their job is to optimize company sales and reduce bad debt losses by maintaining the credit
policy. They do this by assessing the creditworthiness of potential customers and conducting
periodic reviews of existing customers.

Credit Manager Responsibilities:
• Evaluating the creditworthiness of potential customers.

• Creating credit scoring models for risk assessments.
• Approving and rejecting loans based on available data.
• Calculating and setting loan interest rates.
• Negotiating the terms of the loan with new clients.
• Ensuring all loans and lending procedures comply with regulations.
• Maintaining records of all company loans.
• Monitoring loan payments and bad debts.
• Reviewing and updating the company’s credit policy.
Credit Manager Requirements:
• Bachelor’s degree in accounting, business administration, finance, or a similar field.

• Proven work experience as a credit manager.
• Advanced knowledge of accounting software.
• Good understanding of lending procedures.
• Advanced mathematical skills.
• Excellent analytical skills.
• Good communication skills.
• Good interpersonal skills.
• Detail orientated.
• Ability to deal with stressful situations.
Credit Investigation
• Knowledge of a customer’s creditworthiness is essential before taking any lending

related decision.
• This helps reduce the risk of default.
• This information is required at all the times especially at inception/ renewal of credit
facilities and is to monitored constantly during the course of banking relationship.
• This information does not only include specific financial information about the
existing potential customer but also non-financial data such as business / marketing
strategy, management quality, technology employed etc.
• In addition, information should also be obtained about the industry, competitors,
customers, suppliers and regulatory and economic environment as these factors can
significantly impact the creditworthiness of a customer.
Credit Appraisal
Credit Appraisal is the process by which a lender/banker appraises the technical feasibility,
economic viability and bankability including creditworthiness of the prospective borrower.
It is a very important step in determining the eligibility of a loan borrower for a loan.
“A good thing, well begun, is half done”

Just like every bank charges different rates for different loans from different customers, in
the same way, each bank has its own set criteria that one must satisfy to qualify as a certified
borrower of money/assets from the bank.
All banks have their own rules to decide the credit worthiness of their borrowers.
Creditworthiness of a customer lies in assessing if that customer is capable of repaying the
loan amount in the stipulated time, or not. Here also, every bank has its own methodology to
determine if a borrower is creditworthy or not. It is determined in terms of the norms and
standards set by the banks. Banks employ their own unique objective, subjective, financial
and non-financial techniques to evaluate the creditworthiness of their customers.
What are Credit Scoring and Credit Rating?
Bankers talk about credit scoring and credit rating in the same breath. Therefore, it is
important to clarify the difference between credit scoring and credit rating.
These are two entirely distinct concepts and are to be employed in distinctly different
scenarios. Credit scoring is a statistical technique that combines several pre-determined
characteristics to form a single score to assess a borrower’s credit worthiness.
The score allocated to any application is the sum of the appropriate weights given by the
values that the included characteristics take for that application.
Thus, any two identical applications will always receive the same score. Credit rating, on the
other hand, is based more on the experience and judgment of the credit officer and uses
financial indicators as key. The objective of scoring is to replicate manual analysis and
approval of loans at a lower cost, with greater speed, while the use of credit rating is reliant
on manual analysis by credit officers to supplement the rating provided by the tool.
Credit scoring uses a retail lending approach to credit screening/decision making and is
recommended for smaller ticket size loans, where adequate reliable financial data about the
borrower is not available.
Credit Rating, on the other hand, is a more appropriate tool for larger, mid-segment or
corporate loans which have relevant financial data/ business plans that provide the basis for
further credit analysis and information.
References
• https://www.economicsdiscussion.net/banks/various-types-of-credit-instruments-
explained/1895
• https://www.krungsri.com/en/research/research-intelligence/ri-collateral-2021
• https://www.fundera.com/blog/5-types-of-collateral

Assessing Learning
Name: ________________________________________________ Score: ______/100

Section: ______________________________________________ Date: _____________________
Module Activity # 3
I. Using the internet, find pictures of the different credit instruments

(preferably Philippine Setting). Give their uses and functions in bullet forms.
Use short bondpaper. (Times New Roman, 12, single spacing) (60pts)
II. Essay (40pts) Use yellow paper.
1. What is credit investigation? Credit Appraisal? When do we perform them?

2. What are the common types of collaterals business loans?
3. Why credit management is important?

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For Classroom Discussion Only

JONAS EMMANUEL C. NAVARRO, LPT, MBA

This module will provide a detailed discussion on credit and

This module will help the learner to become an effective credit

Professional 7: Credit and Collection| 1

At the end of the unit, the students should be able to:

1. Describe the emergence and challenges faced by the credit economy;

I. THE EMERGENCE AND CHALLENGE OF THE CREDIT ECONOMY

Professional 7: Credit and Collection| 2

The Growing Need and Demand for Money

Professional 7: Credit and Collection| 3

The fall of feudalism and the rise of mercantilism.

The rise of specialization. The birth of capitalism.

III. THE BIRTH OF CREDIT: ITS MEANING, NATURE, FOUNDATION AND

Definition of Credit and Credit Transactions

Other Meanings of Credit

Basic Elements of Credit

An individual's creditworthiness can be measured in a number of different ways. Although

According to Michael Wolfe, the elements of Credit are the following:

Professional 7: Credit and Collection| 5

Main Functions of Credit

1.Economy in the use of money

2.Easy exchange and remittance

4.Promotion of trade especially foreign trade

5.Expansion of bank credit

6.Financial accommodation to industries

8. Credit to the government sector

1.It is a two – party contract.

Professional 7: Credit and Collection| 7

4.It involves futurity.

IV. ADVANTAGES AND DISADVANTAGES OF CREDIT

V. CLASSES AND KINDS OF CREDIT

a. Consumer credit is used by individuals to help finance or refinance the purchase of

Professional 7: Credit and Collection| 8

b. Commercial credit is a kind of credit extended by one businessman to another

a. Short-term loans – payable within one year.

b. Medium-term loans – payable within two to five years

c. Long-term loans – payable for more than five years

According to Form of Credit

Professional 7: Credit and Collection| 9

The Credit Card System

The Cost of Using The Credit

Professional 7: Credit and Collection| 10

Truth in Lending disclosures

VI. FIVE (5) C’S OF CREDIT

Professional 7: Credit and Collection| 11

Understanding the 5 Cs of Credit

The five-Cs-of-credit method of evaluating a borrower incorporates both qualitative and

Professional 7: Credit and Collection| 12

Improving Your 5 Cs: Character

Improving Your 5 Cs: Capacity

Professional 7: Credit and Collection| 13

Improving Your 5 Cs: Capital

Improving Your 5 Cs: Collateral

Professional 7: Credit and Collection| 14

Improving Your 5 Cs: Conditions

Professional 7: Credit and Collection| 15

Name: ________________________________________________ Score: ______/100

1. What is credit? Its characteristics? Classifications? Discuss it all comprehensively.

II. Find and define words. (40pts)

Professional 7: Credit and Collection| 16

At the end of the unit, the students should be able to:

Name: __________________________________________ Score: /100

Name: __________________________________________ Score: /100