Guaranteeing Credit
experience of the people under whose shoulders rest
A good man is willing to guarantee his neighbor's
debts. Only someone who has lost all sense of
decency would refuse to do so. If someone does this
favor for you, don't forget it; he has risked his good
name for you. There are some ungrateful sinners who
abandon those who stand behind them, and they
cause them loss of property. Guaranteeing loans has
ruined many prosperous men and caused them
unsettling storms of trouble. Influential people have
lost their homes over it and have had to go wandering
in foreign countries.
A sinner who hopes to make a profit by
guaranteeing a loan is going to find himself involved
in lawsuits. So, help your neighbor as much as you
can, but protect yourself against the dangers
involved. -Sirach 29: 14-20
• Credit management - is the science of
evaluating the creditworthiness of a person
and its grant.
• Collection management - is the art of
collecting what has been granted in credit to
persons and maintaining continued patronage
and goodwill in the process.
Bad credit can never be eliminated but maybe
minimized. As long as people are managing it, they
are bound most often than not to commit negligence,
either by commission or omission in its grant or
enforcement. This is so because discipline is not
ironclad like science, particularly in its enforcement
being an art. But how does one become artful in a
collection? One need not be very educated,
intellectual, and learned. An ordinary educated
person in the arts, socio-economic discipline may
become artful; or, to our way of thinking a no-
nonsense credit and collection practitioner. This goes
without saying that the person's personality fits into
dealing with persons/debtors of varied cultures,
habits, idiosyncrasies, practices, regarding its
extension and enforcement.
Many a creditor or debtor when confronted with
cashflow or illiquidity problem put the blame on
socio-economic-political factors never their own acts
of negligence. Bad credit is traceable to negligence
in credit and collection management brought about
by the absence or under education, training, and
the management of the credit and collection
operation. They may be educated in their chosen
academic field but maybe want the demands and
expectations for a no-nonsense credit and collection
performance. Compounding this situation is the
disregard by creditors of how the credit and
collection function is looked at in relation to the sales
operation of a company. Generally, in cases of
conflict between the sales and credit and collection
operations, the latter is most often than not sacrificed
for a sale. But wait when a credit is uncollected the
credit and collection operation is blamed for sales'
witting or unwitting negligence, in not being able to
collect its sale. There is a misplaced bias for sales
over credit and collection operation.
It must be remembered that "a sale is never sale'
unless collected. There is also the lack of a
collegially developed capacity bias credit and
collection policy. Experience will attest to the
practice of most creditors/lenders or sellers to just
come up with credit policies that are practically
based on the “character" of the person applying for
credit. No one in this world was born without
integrity and character. Everyone has integrity and
character; it's the circumstances of an individual's
upbringing, education, work, culture, and discipline
in using, enforcing one's credit that spell the
difference between a good and bad debtor. Under a
capacity bias credit granting paradigm the emphasis
is on the cashflow of the credit applicant, buttressed
by good character, capital and acceptable condition
or risk. Last but not least, there must be a positive
exchange of value for the credit granted. The sales-
marketing and credit and collection people must be
trained and immersed in this paradigm so that
collection may be effective and efficient.
Collection is an art to be developed in a person,
particularly the salespeople supported actively by the
credit and collection personnel. Collection out of
court is not limited to the routinary efforts of sending
collectors, statements of account and collection
letters or attorney's demand letter. It's much more
than that in the sense that there are many laws to
comply with or avoid in order to collect extra-
judicially or legally without complication.
Efforts have been exerted to provide the
fundamentals of the laws directly related to credit
and collection transactions. Many collectors do not
CREDIT
know how to identify debtors and their defenses in
delaying and/or not paying their credit. More so, the
strategies and tactics to use in their collection efforts.
The various forms of collection negotiation as well
as handling angry debtors are wanting in collectors.
These are the arts of the trade which one must be
immersed in to be artful in the discipline.
If extra-legal collection efforts fail, of necessity legal
collection efforts ensues. There is much to be desired
and good room for improving the knowledge, skills
and art of the credit and collection man/woman on
how to able to collect, legally working closely with
the attorney. There are rules provided in the law to
reduce the time of litigating a case in court which the
credit and collection person must know and
understand so he may be able to work better with the
attorney on the case.
Most credit and collection operation of a company is
not evaluated or audited whether or not it has attained
the goals, objectives set by management unlike the
sale marketing operation which is scrutinized and
given sanctions, penalties, and rewards in applicable
cases.
There are ways to evaluate, appraise and audit credit
and collection operation which are not use by
companies vis-à-vis sales operation with the end in
view of synergizing their relationship and operation.
The culture, psychology, credit and collection
practices, idiosyncrasies of debtors and creditors
alike must be part and parcel of the education and
training of the sales-credit and collection persons if
their operations hopes to attain their goals.
Finally, for the education and development of credit
consciousness and discipline in the no-nonsense use,
enforcement of one's credit guides have been put in
this book so that the reader may not only be
creditworthy but progressive by their use,
enforcement of their personal credit for the
attainment of their temporal growth, security, and
progress as well as the country in general.
PRINCIPLES, CONCEPTS, USES,
FUNCTIONS OF CREDIT
• It's rooted in trust in an individual.
• As to its use or function, it is the ability of a
person to obtain goods or services under the
promise of future payment.
• Credit used generically may mean many
things to different people. It is a power,
ability, and capacity to repay one's financial
obligation. Debt on the other hand is the
outstanding unpaid balance of credit obtained
from another. Purchasing power must not be
confused either with credit because
purchasing power comes about only by one's
tangible use or availment of credit and the
actual payment of that debt adds or increases
one's purchasing power.
• Credit may be a boon or bane depending on
the skills with which it is managed in credit
transactions. All credit extension is as sound
as the promises under which it was granted.
The vulnerability of credit is generally
caused by the imprudent use by an individual
or person of his/her credit and the weaknesses
of the credit operation of a business
enterprise due to the unwitting or witting
negligence of commission or omission by the
credit and collection rank and file due to lack
of education, training, and experience on the
discipline.
• Credit per se must be viewed from its totality
because credit in business cannot be
considered apart from its use in the political
economy.
• It's government that creates the climate for
favorable or unfavorable credit environment
due to its administrative and supervisory
powers over the economic life of the country.
• When the government flexes its powers over
the economy thru the mechanisms of the legal
and liquidity reserves, interests ceiling rates,
public debts, rediscounting windows for
commerce and industries and fiscal deficits,
necessarily the credit available for commerce
and industry or its effect on business will be
 substantial. The ways and methods of
government use of its managerial, fiscal
power over the economy will either expand
or contract economic activity.
CREDIT: TOOL FOR SOCIO-ECONOMIC
DEVELOPMENT AND GROWTH
THE IMPORTANCE OF CREDIT TO
BUSINES/COUNTRY
The value of credit management to a business and to
the national economy lies in its vast power to help
ensure an uninterrupted flow of money and
resources. One cannot pay when one cannot save or
collect enough to pay with.
CREDIT AND COLLECTION FUNCTIONS:
1. Facilitates the movement of goods and
services through the channels of trade to the
consumers.
2. Sustains and promotes production.
3. Establishes rules for credit and collection
transactions.
4. Leads to efficient collection of accounts
receivable.
5. Contribute as a profit center to the attainment
of a company's desired profit targets, either
by itself or in cooperation with a company's
sales and marketing units.
6. Helps in teaching debtors good credit habits
and practices.
7. Can serve as a tool in attaining personal and
business goals.
WHY IS CREDIT IMPORTANT TO THE
COUNTRY?
1. Credit is an agent of production - Credit
makes possible the availability of funds for
productive purposes. This is amply
demonstrated in the many socially oriented
loans and credit programs of the national
government and the private sector.
2. Credit develops the salability of goods and
services - Economic development in the
Philippines and in the other market-oriented
economies of the world would stagnate
without credit. Because of credit, goods and
services will move faster and in greater
quantities between and among people and
nations.
3. Credit is a liquidity medium - Credit, to a
large extent, has a direct relationship with
money as a medium of exchange, because
credit has the effect of increasing the total
amount of money in circulation and liquidity
in a country. More money, as long as it is in
correct proportion with the gross national
product and supported by sufficient foreign
exchange reserves, increases the purchasing
power of people.
4. Credit is a medium of capital formation -
Business today grows and continues to grow
by relying on credit for the accumulation of
capital.
5. Credit complements the monetary system
- This is best exemplified by the Bangko
Sentral's credit instruments such as its
certificates of indebtedness (CBCIs), various
government securities and bonds and similar
instruments issued by the private sector.
6. Credit is a tool for the redistribution of
wealth - Credit makes it possible for
someone without financial resources to
acquire goods and services necessary to earn
or save to acquire wealth.
7. Credit helps in the creation of business -
Credit makes possible the organization of
business firms by providing vital funds
necessary for the start-up of any
business/economic enterprise.
8. Credit motivates higher business
standards and practices - Credit makes it
possible for the consumer to acquire more
goods and avail of more services. Credit,
therefore, contributes to improving business
standards by providing manufacturers,
sellers, and lenders with the initiative to
improve the quality of their products or
services in the hope of boosting sales.
9. Credit Increases Purchasing Power - The
additional liquidity provided by loan or credit
to debtors, correspondingly increases their
purchasing ability.
10. Credit makes it possible to attain growth
and progress - More economic activities can
 be made by using credit judiciously,
prudently.
WHAT ARE THE NEGATIVE IMPACT OF
CREDIT ON PEOPLE?
1. Can be a wedge between people.
2. May motivate for unwise and/or conspicuous
consumption.
3. May lead to speculation / over expansion.
4. Credit causes dependence on others.
5. Lack of credit is one bit reason for
stagnation/retrogression of people.
CATEGORIES OF CREDIT
1. Consumer Credit.
a. Retail credit
b. Personal credit
2. Mercantile or commercial.
3. Commercial, development, investment bank
credit.
4. Rural, thrift bank credit.
5. Cooperative, credit union or savings and
loans and micro-credit.
6. Government credit.
7. Foreign credit.
MACRO-ECONOMIC FACTORS AFFECTING
CREDIT AND COLLECTION OPERATION
A good credit and collection professional needs a
good understanding of the macro-economic factors
that influence liberal or restrictive credit and
collection operation. The professional credit
professional must not have a parochial view in the
exercise of his/her functions, responsibilities. The
professional credit and collection man and woman
must know, understand, and act within a much wider
horizon and playing field, because his performance
is part and parcel of the bigger picture-the national
economy.
Among the basic and very important socio-economic
factors a credit and collection professional must
know and understand are:
1. Population as it impacts on the sales,
marketing and liquidity arena of commerce
and industry.
2. The gross national product reflects the
economic performance of the country.
3. The savings potential of the population to
determine their disposable income and to
determine what sector of the population must
be extended or not liberal or restrictive credit.
4. The public sector debt (deficit) which has a
direct bearing in the availability of macro-
credit; and, as stimulus for socio-economic
activity, as well as its effect on the cost of
money.
5. The debt service of the country as it directly
impacts on public sector ability to stimulate
the economy.
The banking sector's level of non-performing
loans and assets which greatly influence the
availability and cost of credit to the private
sector.
1. The nation's (and regional) buying and credit
practices for the sales and credit
professionals to be able to develop programs
of selling and marketing; and, credit and
collection strategies.
2. Interest ceiling rates which determine the
cost of money:
3. Consumer price index which indicates the
market environment for sellers and buyers in
their interplay in the open market through
credit.
GOVERNMENT MECHANISMS TO
ADMINISTER CREDIT:
1. Increasing or decreasing the legal/liquidity
reserve requirements of banks and other
financial institutions.
2. Issuing government credit instruments such
as; bonds, government securities, treasury
bills and the like.
3. Selective credit controls such as;
rediscounting facilities given to Board of
Investment registered industries and
companies.
4. Legal and moral persuasion such as; the 5-
day banking week and uniform clearing
procedures for checks, debt instruments;
5. Legal action or outright coercion by the
secretary of finance, BSP Monetary Board.
WHAT KIND OF A CREDITMAN ARE YOU?
The management of the credit and collection
function particularly in the Philippines is viewed as
a staff or non- productive overhead in relation with
the sales operation. Very few recognized its influence
or contribution to the attainment of more good,
collected sales leading to profit maximization. If at
all, acceptance of the role of the credit manager in
companies is accorded passive acceptance only for
its role in the corporate administrative levels.
While managers in production, sales, finance, human
resources and similar positions aspire to be in the
upper echelons of management like vice presidency,
the credit and collection manager is looked at as a
mere staff manager not worth giving a higher degree
of confidence or higher responsibility in the
company.
For the credit and collection officer to be recognized
in his company he must endeavor more seriously to
improve himself/herself professionally, be provoked
and dare to accept challenges within the organization
to be recognized like his peers within the
organization.
In my more than 50 years in the credit and collection
service industry very few exceptional credit and
collection persons have attained higher
responsibilities in their company. To those who were
able to rise in the hierarchy of their company they
have dared to improve themselves via further
schooling, accepted challenges not only in their
credit and collection realm, but in other operating
units of their organization.
Those who are left behind and are satisfied with their
status quo are most often than not fall under the
following categories of credit and collection
personality.
• "MATHEMATICIAN" CREDITMAN
One who is generally impressed by the financial
reports submitted or obtained from the credit
applicants. They fail to appreciate and recognize the
element of relativity or the fact that the figures in the
financial reports are historical, quantitative figures,
which must be subjected to qualitative evaluation to
appreciate the value of the figures as reflected in the
financial report.
Take as example companies which have filed petition
for suspension of payments preparatory to
rehabilitation. Generally, most have positive
networth at the time of filing their petition. There is
a school of credit managers who practice the
quantitative extension of credit up to 10% of a credit
applicant's networth or 20% of the working capital.
Example:
Comparative Consolidated Financial Statements
A "Mathematician Creditman" may extend a 10% of
the networth or 20% of the working capital or
Php300,000.00 credit line to both companies. A more
detailed analysis of the financial statements will
show the difference in the companies' current ratios,
vis-à-vis the degree of pressure; the quality of the
receivables and inventory, relating them to sales;
and, in the operating results.
If the trend of operations for both companies
continues company A may not be rehabilitated
whereas company B will be rehabilitated To extend
the same credit line to both companies does not
recognize the companies financial strength and
weakness which is foolish of the credit manager.
The other school of "Mathematician Creditman"
practices the extension or rejection of an order on
whether the credit applicant has a 2:1 current ratio or
better. This again is a quantitative method of credit
extension that fails to recognize the influence on
payment performance exerted by the receivables
quality or inventory. If current assets are inflated by
delinquent, uncollected or slow paying receivables or
by overvalued, sluggish inventory, the 2.1 ratio
losses its apparent significance.
Both of these quantitative methods of credit
extension will deny credit to customers in deficit,
many of whom may be regular discounters of bills
and who may be actual or potential quality customers
in the future.
Credit extension decision anchored on mathematical
calculation demean or does not speak well of a credit
manager. Anyone who has mathematical skills may
replace the credit manager.
Mathematical approach to credit extension in the
long run doesn't bring out the best in the credit
manager.
• "GAYA-GAYA PUTO MAYA"
(FOLLOWER) CREDITMAN
This credit manager will extend credit to a customer
up to 25% -50% of the amount extended by the
recognized leaders of the credit manager's industry
(business).
The rationale for this kind of credit extension is the
perception that the industry leader's credit and
collection operation have outstanding credit and
collection operation. This way of credit extension by
the "Gaya-Gaya Puto Maya" credit manager most
often than not do not consider profit margin, capacity
to absorb loss, whether the amount involved is too
much for his company, whether there is security or
collateral given and similar factors secured by the
leader or model in the industry.
Anchoring one's credit extension decision based on
what big competitors extend is a haphazard "oido"
kind of credit decision and implied admission that the
credit manager does not know any better, because
you may have been a wrong choice for credit
manager for your company.
• "HISTORIAN" CREDITMAN
This credit manager generally based his credit
extension decision on the past performance of the
customer without giving serious consideration about
the exigencies of socio-political, economic factors
locally or internationally. Credit managers are not
paid to recall history or for that matter current
performance. Instead his value generally lies in
anticipating the future because every current credit
decision is future oriented. Credit granted now will
be paid in the future. While past and present is
important- it is just an aspect of the perspective
needed to make a good value judgment as to how the
customer will perform in the future.
• "SENTINEL" CREDITMAN
Many a credit manager unwittingly practices this
mode of managing their department operation
generally due to lack of education, training or
experience and challenges met in the demanding role
of their position. The credit department is an ally of
the sales department in boosting, cultivating more
good or even fairly marginal accounts resulting to
more profitable sales volume. Manager of companies
do not wittingly select and fit their choice of credit
manager into the demands, expectations of the sales
force to have an ally, so much so that it results to
unnecessary conflict and friction between these two
departments.
• "NECESSARY EVIL" CREDITMAN
This kind of a credit manager will invariably pose no
objection in having some losses in the management
of his receivables, conscious of the fact that not all
credit transactions can be collected. So he provides
for a bigger than generally acceptable level for
allowance for uncollected receivables.
Every credit manager must aspire for perfection as a
goal even if it may not be attainable. Perfection may
mean acceptable bad debt loss; and of equal
importance no loss of profitable sales due to
incompetence, unartful credit and collection actions.
A NONSENSE CREDIT AND COLLECTION
MANAGEMENT OPERATION
Credit and collection management encompasses the
whole range of activities and responsibilities from
the planning, development and formulation of a
capacity bias credit and collection policies and
procedures. Proper and expeditious recording of
credit transactions until the completion of the
collection processes either out of court and/or thru
the courts and the critical evaluation, analysis of the Synergistic cooperation is the raison-d-itre" of
results of its operation. business for all operating units to cooperate
positively with each other to attain overall business
It's the expectation and goal of management of any
objectives. The sales and credit, collection operations
business organization to be generally in liquid and
must endeavor to develop a positive symbiosis
profitable condition.
because their success or failure directly affects their
To attain these objectives management must set stakes in the business organization.
conditions for:
1. Maximization of sales via credit.
2. Rationalize or control the amount of assets
invested in receivables.
3. Control costs of credit and collection
operation.
4. Develop credit consciousness, discipline
among its people and customers.
The accounts receivable may be rationalized or
controlled by the mechanisms of:
1. Credit limits, terms, or periods.
2. Adjustment in the volume of credit sales due
to socio-economic factors in the economy.
3. Competitive and strategic considerations.
The costs and expenses of credit and collection
operation maybe controlled via the following:
1. The correct number of personnel as well as
the salaries, wages of the rank and file in the
credit and collection operation.
2. Costs of funds tied up in receivables.
3. Bad debt losses.
4. Costs of credit information.
5. Depreciation expense.
6. Charges and fees of outside assistance in the
credit and collection efforts particularly for
distressed or bad accounts receivable
collection.
Controlling costs and expenses for the credit
operation must not be on a 'false economy" mode
where needed and necessary expenses such as for;
no-nonsense educational training programs for the
rank and file is avoided to the detriment of a no-
nonsense collection efforts. A low percentage of bad
debt is not a convincing proof of good credit
management. Losses may be made low by sacrificing
good sales which may give profit over and above the
anticipated loss therefrom. Have a reasonable bad
debt loss, proportionate to a maximum sales volume.