CHAPTER ONE

Introduction to Credit

Guaranteeing Credit

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 caused 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 law
suits. So help your neighbor as much as you can, but protect yourself against the dangers involved.

-Sirach 29: 14-20

INTRODUCTION

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 the discipline is not ironclad like science, particularly in
its enforcement being an art. But, how does one become artful in collection? One need not be a
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 experience of the people under whose shoulders rest the management of the credit
and collection operation. They maybe educated in their chosen academic field but maybe wanting
in the demands and expectations for a no-nonsense credit and collection performance.

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Compounding this situation is the disregard by creditors of how the credit and collection function is
looked at in relation with 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
"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 the 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 maybe effective and efficient.

Collection is an art to be developed in a person, particularly the sales people 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 with credit
and collection transactions. Many collectors do not know how to identify debtors and their defenses
in delaying and/or not paying their credit. More so, the strategies, 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

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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

What is Credit?

It's rooted on trust in an individual.

As to it's use or function; it is the ability of a person to obtain goods or services under a
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 maybe 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.
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 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.

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 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 grow 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 resource 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

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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 make 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?

 Can be a wedge between people;

 May motivate for unwise and/or conspicuous consumption;
 May lead to speculation / over expansion;
 Credit causes dependence on others;
 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 need a good understanding of the macro-economic factors
that influences 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
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wider horizon and playing field, because his performance is part and parcel of the bigger picture-
the national economy.are;

Among the basic and very important socio-economic factors a credit and collection professional
must know and understand

1. Population as it impact on the sales, marketing and liquidity arena of commerce and industry;

2. The gross national product which reflect the economic performance of the country;

3. The savings potential of the population to determine their disposable income and which determine
to 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 it's effect on the cost of money;

5. The debt service of the country as it directly impact on public sector ability to stimulate the
economy:

1. The banking sector's level of non-performing loans and assets which greatly influence the
availability and cost of credit to the private sector;
2. 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.
3. Interest ceiling rates which determine the cost of money;
4. 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.

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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.

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 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 maybe regular discounters of bills and who maybe actual or potential quality
customers in the future.
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 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.

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"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 results of its operation.

It's the expectation and goal of management of any business organization to be generally in
liquid and profitable condition.

To attain these objectives management must set conditions for;

a.) maximization of sales via credit;

b.) rationalize or control the amount of assets invested in receivables;

c.) control costs of credit and collection operation;

d.) develop credit consciousness, discipline among its people and customers;

The accounts receivable may be rationalized or controlled by the mechanisms of;

a.) credit limits, terms or periods;

b.) adjustment in the volume of credit sales due to socio-economic factors in the economy:
c.) competitive and strategic considerations.

The costs and expenses of credit and collection operation maybe controlled via
the following;

a.) the correct number of personnel as well as the salaries, wages of the rank and file in the
credit and collection operation; b.) costs of funds tied up in receivables;

c.) bad debt losses;

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 d.) costs of credit information;

e.) depreciation expense;

f.) 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.

Synergistic cooperation is the "raison-d-itre" of business for all operating units to cooperate
positively with each other to attain overall business objectives. The sales and credit, collection
operations must endeavor to develop a positive symbiosis because their success or failure directly
affects their stakes in the business organization.

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 Review questions and topics for discussions:

1.) What do you understand or know about credit?

2.) Can business thrive without credit? Why?

3.) What can credit do or how does it work?

4.) Cite, discuss what credit can do for the country or to an individual/company?

5.) Has credit any effect on people or companies?

6.) How many categories of credit are there?

7.) What macro-economic factors have effects on the use or enforcement of one's credit or
on company's credit operation?

8.) What are the management tools or mechanisms used by government to administer credit
in the country?

9.) Is there such a thing as no-nonsense credit and collection use of credit? Discuss ways
and means to attain no- nonsense credit administration.

10.) How many kinds of creditmen do you know? Discuss each one.

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Credit Period/Term

Arrangement between buyer and seller which specify the conditions required in payment for goods
or services are known as terms of sale. These terms indicate if credit is to be part of the sales
transaction, the length of time for which credit is to be extended and other stipulation such as
discount available. Most business transactions in the Philippines involve a title transfer prior to the
requirements of payment from the purchaser. Such business deals actually constitute commercial
credit transactions.

Factors that determine the length of time to extend for the repayment of the credit granted by a
given line of business or for a given creditor are dependent on the following considerations.

1.) Rate of turnover of the goods or service, is the period of time from the purchased of
the goods on credit and its conversion to receivable or cash is called turnover period.

The length of the credit period varies inversely or on the opposite with the rate of stocks' turnover
on the type of the goods involved that the higher the rate of turnover or conversion, the shorter is
the credit period; and, the lower the rate of turnover, the longer the credit period.

2.) Location of Customers and Transportation Facilities.

The longer the goods are in transit the slower is the rate of turnover or conversion which necessitate
larger quantity of purchases to have more merchandise on hand, therefore a longer credit period is
needed.

3.) Term of Sale Granted by Other Sellers

The length of credit period as well as the prompt payment discount offered by other sellers to a
customer are to a large extent determined by the terms of sale granted such seller's sources of
supply. The same term may thus be extended or modified.

4.) Competitive Strategy

In a very competitive market for a merchandise or service the generally extended credit term by
the sellers within the industry may result to extending their credit period to the general target
market.

5.) Character of the Merchandise

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Perishable or standardized for current or immediate use or brief marketing period and narrow profit
margin are the factors considered in extending short or long credit period. Whereas, for new or
seasonal merchandise and high profit yielding merchandise longer credit period is extended.

6.) Quantity Involved

Generally, credit period for large shipments is stricter than on smaller ones due to the lesser price
for seller.

7.) Classes of Customers

There is a marked length of credit periods for consumers, manufacturers, middlemen and retailers.

8.) Nature of the Credit Risk

When the credit is inferior, the credit period is shorter than when the risk is of a high order.

9.) Sectoral Differences in Income Level

The credit period or term for farmers, overseas workers, white or blue collar debtors or for those
who are low income ("aliping saguigilid"); middle income ("aliping namamahay") and high
income ("maharlikas") vary from each other.

10.) The Biases/Prejudices of the Credit Manager

For as long as people are people and are the ones who decide and implement the setting up of
credit lines/limits and periods, there is always a tendency to be subjective in the evaluation and
appreciation of the real objective functions of credit and collection operation. Most often, the
subjective credit manager insist that his main function is the avoidance or minimization of bad debts.
This narrow concept of the credit function leads to a shortened credit period, co-extensive with the
prompt payment rebate or added discount to improve the cash discount by including a quantity
discount only to those who pay within the period granted.

11.) Prompt Payment/ Rebate or Cash Discount

Generally granted to motivate, induce a purchaser/debtor to pay within a shorter period of time
than up to the whole length of the credit period granted. Its a payment for a credit before its due
date.

Its advantages are;

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a.) Faster recovery of the money induced by the prompt payment discount which give the
reinvestment of the money in the business for further or increase business for the creditor;

b.) Reduces credit and financial risks as well as bad debt losses; c.) Reduced collection costs;

d.) Promotes and maintain goodwill between creditor-debtor due to lesser causes for friction.

PRE-PAYMENT TERMS

Prepayment terms require payment by the customer before or at the time the merchandise is
delivered. Although such terms are standard in a few product lines, in most industries their use
implies unwillingness on the part of a seller to extend credit. Prepayment terms include the following
types of payment arrangements.

Cash with Order (C.W.O.) or Cash in Advance (C.I.A.) - This term are the most severe
from buyer's standpoint and result in the seller's assuming little or no risk. In most industries their
use is largely confined to customers who have no credit standing, particularly where goods are non-
standard in nature, orders from customers in this group are not processed until the advance
payment has been received.

Cash before Delivery (C.B.D.) - C.B.D. terms are only slightly less severe than cash with
order arrangements. Under this term, merchandise may be prepared and packed by the seller, but
shipment is not made until payment is received.

Cash on Delivery (C.O.D.) - Under C.O.D. term, merchandise is shipped but is not released
to the customer until the carrier company has received payment for the full invoice amount. Should
a C.O.D. shipment not be accepted by the buyer, the seller risk the loss of freight charges in both
direction, preparation and packaging costs and possibly, deterioration of the product. Sellers are
often willing to assume these risks in the interest of sales volume and C.O.D. term is used extensively
where credit has not been established and where the merchandise is standard.

According to the carrier classification policies, payment must be in the form of currency, bank
cashier's check, unless otherwise directed by the seller.

Proximo term is another type of arrangement that specifies payment in the month following
shipment. (Proximo, abbreviated prox., is Latin for "next" or "next following"). Net 10th prox.
arrangements require payment of all the previous month's invoices on the 10th of the following
month. It is evident that such an arrangement is identical to terms of 10 days E.O.M., although
under proximo terms billings anew usually made at the time of shipment rather than once monthly.
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Like E.O.M. terms; proximo arrangements may give identical discount and net credit periods, for
example, 2% 10th prox. However, proximo term often contain a discount period shorter than the
net period. Thus, terms of 2% permit a discount for payment on the 10th of the following month,
with the full amount due on the 30th or 20 days later.

Anticipation discounts are sometimes allowed under proximo term, meaning that a deduction may
be taken from the face of the invoice when the bill is the end of the net credit period; but, after the
cash discount period. Anticipation privileges may be specifically stated in the terms of sale or they
may be practiced as a matter of industry practice.

SPECIAL DATING PAYMENT TERMS

Buyer in some industries receive extraordinary long credit period through various dating
arrangements.

Seasonal Dating - Where demand for a product is seasonal, sellers encourage off season
purchases by granting terms which postpone payments to coincide with buyers' selling seasons. The
customer benefits from having the goods on hand without any immediate investment of his own
funds. The seller gains the advantages of more constant sales, leveling out production and reducing
storage problems.

Seasonal dating usually is accomplished by the seller's dating the invoice as of the beginning
of the active season, from which date the regular terms are computed. Summer wear, for instance,
is shipped in January on terms of 2% 10,net 60, but the invoice is dated May 1. The discount period,
therefore, extends to May 10 and the net credit period terminates July 1. Purchases during the
active season are billed under terms of 2% 10, net 60 without dating provisions. Occasionally, sellers
do not have a formal dating program but accomplish the same purpose by extending the credit
period of their regular terms an additional 10, 60 or 90 days during preseason months. For example,
a customary practice in the men's clothing industry is the extension of net 60- day terms by an
additional 60-days, for which the customer pays interest at the rate of 12 per cent per annum.

Receipt of Goods (R.O.G.) - Terms of this type permit the buyer to compute the cash
discount period from the date on which the merchandise is received rather than from the invoice
date. Thus, a distant buyer desiring a discount is not required to send his remittance before
examining the shipment, as may happen when the discount period commences from the invoice
date. The net credit period however, is always calculated from the invoice date and not from the
date of arrival. R.O.G. terms are common in the sugar industry and are also used by firms in other
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lines for gas or oil products between islands. A seller who employs R.O.G. terms places himself on
a more nearly equal basis with competitors located nearer the buyer.

Extra Dating - Extra dating arrangements, found primarily in the textile industry, extend the
discount period to coincide with a relatively long credit period. Terms of 2%/10, 45 extra extend
both the discount period and the net credit period to 60 days from the date of the invoice. They
might be written 2%/45, net 60, but this form is not used in practice. Since "extra" term have
identical discount and net credit periods, buyers are not induced prior to maturity. Deductions of
this nature, therefore, are in reality trade discounts rather than cash discounts.

Sometimes "extra" terms are expressed as 3% /10; 2%/10, 60 extra which indicates that 3%
may be deducted from the price if payment is made within 10 days, but only 2% is deductible if
payment is made by the end of 70 days. The extra 1% is in effect an anticipation discount.

Consignment - Consignment terms add a warehousing feature to payment provisions.

Merchandise is shipped to the buyer's premises under an agreement that title remains with the
seller. The customer is authorized to withdraw goods from stock as he sells them and remits to the
consignor the proceeds of sales either at the time of withdrawal or at a specified time thereafter.
Consignees are generally retailers, distributor or commission houses rather than manufacturers.
Consignment terms are particularly suited to the introduction of new product lines, when the
customer is reluctant to invest his own funds in an inventory of the new items. They are also used
in the distribution of goods through a buyer whose credit standing does not justify regular terms
for the amount involved and who lacks the resources to purchase under C.O.D. or sight draft (3.D.);
or bill of lading (B.L.) payment arrangements.

Extreme care must be exercised by the seller in preparing consignment contract. Unless they
are properly drawn, consignment agreement may be regarded by the courts as constituting
unrecorded conditional sales and the seller may have difficulty protecting title to the merchandise
as against the purchaser's other creditors. For this reason, the advice of an attorney should be
obtained.

Among the legal requirements of consignment contracts are the following:

1. Merchandise on consignment must be segregated from other inventory or clearly labeled as

belonging to the seller;

2. Proceeds from the sale of consigned stocks awaiting remittance to the consignor must be
segregated from the consignee's regular funds, preferably in a separate bank account or in trust;

3. Insurance coverage must be provided by the seller;

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4. Reports of sales and inventory remaining on hand, as well as remittance, must be made at
specified intervals.

Companies marketing nationwide should also seek the advice of an attorney to determine
whether consignment arrangement constitute absolute sale or not.
The different terms used for special dating payment terms have been developed to serve the
competitive needs of business. Generally they perform their function although question at
times arises as to whether it is desirable or necessary to continue their use. It will be
appropriate and prudent for companies or businesses to evaluate the continued terms,
practices with the end in view of avoiding risks and more effective, efficient collection.

CASH DISCOUNT
The offering of cash discounts is motivated by fear that unstable economic conditions would
affect the seller's ability to collect before the credit term or it may serve as an incentive for
debtor to pay in advance.
Credit men are divided in their views concerning the economic justification of cash
discounts under current conditions. The practice is staunchly defended by some, but
regarded by other as an economic anachronism. The very fact that the question arises
so frequently indicates that there is reasonable doubt that the pricing system
employing cash discounts actually accomplished its purposes. Nevertheless, the use
of cash discount terms is firmly established in current business practices within most
industries at the manufacturing and wholesale levels.

VIEWPOINT OF THE SELLER

A cash discount is a premium which the seller is willing to pay for certain benefits that
accompany prompt collection of his funds. Obviously, this premium is paid by the seller when
the discount is earned, but by the buyer when he is unable to pay within the discount period.

Relation to Interest Rates. Cash discount rates have little or no relation to current
interest rates; actually the cost is so high compared with normal interest charges that it must
be regarded largely as the price the seller pays for obtaining other benefits. The following
table shows the interest rates equivalent to cash discount terms as premiums for the use of
money:

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 Anticipation of discounts are more nearly equivalent to interest rate, since they are
usually calculated at the rate of 6 per cent per annum for the number of days between the
payment date and actual due date.
To calculate these equivalent, first compute the number of days between the cash
discounts period and the net credit period. This represents the additional time the seller gains
in the use of funds when the buyer remits within the discount period. Then divide 360 days
by this period of time convert the rate to an annual basis and multiply the quotient by the
rate of discount.- Thus, for terms of 1/2%/10, net 30, 360-20= 18; 18 x 1/2% = 9%

Discounts, Rebates, Effective Tools for Prompt Collections or

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 The cash discount is to some extent a subterfuge, in that it must in some way be recovered
in the selling price. Consequently, prices in industries which use discount terms are inflated by the
amount of the discount, since in computing prices it is generally assumed that most customers will
take advantage of the discount. Therefore, the advantage of lower cost usually referred to by the
buyer is not as real as it might seem. In fact, it can be assumed that net terms would result in lower
prices, a system of pricing without discount allowances is more favorable to the buyer because: (1)
it permits a quick, accurate cost calculation and comparison of prices from various suppliers; (2) it
does not penalize him if he is unable to pay within the discount period; (3) it may reduce his capital
requirements, since net terms are likely to coincide more closely with his own average collection
period and (4) it results in clerical and accounting conveniences. Despite these arguments, the
larger, financially strong buyers are inclined to favor discounts terms, because they gain a
competitive advantage over those in their line who cannot earn discounts or who would find it
difficult to do so.

Bank Financing Bank financing permits a buyer to take advantage of discounts which he may
otherwise be unable to earn. Naturally it is to the advantage of any company to maintain good
banking relations, but this is particularly important when purchases are on discount terms. The
establishment of bank credit will insure financial assistance when needed, so that income
represented by earned discounts is not lost.

When transactions are on net terms, the buyer is less likely to require bank financing a
greater portion of the marketing period. In this case, the supplier rather than the customer may
need bank assistance. doe bos baisilas

ACCEPTABLE PAYMENTS

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 Generally all credit or debts must be paid for within the credit term generally in cash. There
are occasions however that cash is not offered as payment but some other form of settlement or
payment is offered or made. In which case, it is important to be aware and appreciate some other
kind and form of payment specially for delinquent or bad accounts. Among these payments are;

1. CASH

Philippine currency or foreign currencies maybe accepted from the debtor or from a third person in
favor of the debtor. If it's a foreign currency, it is imperative to determine the authenticity,
genuineness and legal tender qualities of the currency as well as the acceptable prevailing exchange
rate between the foreign currency as against the Philippine peso. The exchange rate to use must
always be the prevailing buying rate of the banks as of the date of conversion.

2. CHECK

Checks owned by the debtor and/or the co-debtor; or, for that matter by other person offered in
payment for the account of the debtor that does not affect or prejudice your money claim may be
accepted in payment for the debt.

As much as possible only current dated check for an obligation by the debtor must be accepted.
However, there are instances where post dated checks may be accepted. In these cases, be certain
to know whose signature(s) are on the said check for future reference in case of any legal action to
undertake against the drawer and signatories thereon, if the check is dishonored.

3. PAYMENT IN KIND OR SERVICE

In collecting payment for delinquent or bad accounts receivable the probability of being offered
payment in kind or service is great if you consider that these accounts are generally illiquid. In cases
of payment of this nature it is a business decision based on pragmatism whether or not to accept
such kind of payment.

The matters to take into consideration are the following:

a. Is the debtor really so distressed that cash payment is not really possible?

b. Pricing of the thing or service;

c. Saleability or need of the thing or service;

d. Tax consideration;

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e. Possibility of an expeditious turn around from the payment to liquid cash.

4. Payment from Surety or Guaranty Payment Bond

Claim for performance or payment from surety or guaranty payment bond must always be preceded
by a formal notice of claim against the surety or bonding company within the period explicitly
provided in the bond.

Be certain that there is no reason or alibi that may have been done or used by the surety or bonding
company to delay, if not totally avoid paying on their joint and several obligation under the surety
or guaranty payment bond.

Extension of time to pay, adding additional condition or material change in the nature of the
obligation will generally affect collecting against a surety or guaranty payment bond due to novation.

5. Joint and Several Obligor (Debtor)

An experienced creditor will always include the joint and several debtor(s) in all the notices, demand
for payment as well as in any material alteration of the credit obligation to avoid and prevent
unwitting novation of the main credit obligation.

COLLATERAL POLICY

Credit extension must never be motivated by the collateral offered by the credit applicant.
Because, if that be the rationale then the going concern paradigm of business operation losses its
meaning and purpose. It must be borne in mind that credit is an instrument for economic
development and the development of creditworthiness of the credit availor.

The economy to have dynamism must not be burdened by the "pawnshop mentally" that
have plagued the banking industry which now stymies the availability of credit brought about by
their acquired assets or ROPOAS emanating from inordinate negligence of granting and enforcing
credit.

Ways to Fortify or Secure Credit

There are many ways to secure or fortify a credit granted. It is important for the creditor to
realize that, historically, the Philippine financial system has always been in dire need of loanable
funds. It is for this reason that our financial market has been dubbed, rightly or wrongly, a
"pawnshop, banking/financial market."

Any and all agreements to secure or collateralize a loan or credit is an accessory contract.
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 Among the popular methods used to secure credit are the following:

1. "Joint and several," (solidary) obligation

Jointly and severally literally means that a person who agrees to be bound under such a mode,
answers personally and directly for the obligations created under the contract.

It also means "in solidium" or "one and the same" in the obligation created.

This partakes of requiring a generally acceptable and creditworthy third party to be bound in joint-
solidary status with the principal debtor, who will automatically be bound to pay the obligation
whether or not he benefited from the credit or loan granted/proceeds thereof. A creditor will not
want to have a third party -joint and several obligor from whom they cannot collect.

A demand for payment or performance from the principal obligor - debtor also necessitates a
demand against the co-obligor.

2. Real Estate Mortgage

This refers to the conveyance of a real property as a security for the payment of money or the
performance of some other act, condition to become null and void upon payment or performance
of the obligation created.

The property to be conveyed must be owned, and have a free disposal of the same by the party
mortgaging the same or is duly authorized to do so.

Things to Check on Real Estate Mortgage

a. Verification of the authenticity and genuineness of the torrens certificate of title in the name of
the owner- mortgagor, with the Register of Deeds and Land Registration Authority. This must
include the positive verification of liens and encumbrances thereon.

b. Appraisal, location and all the ancillary tasks to determine the value, use and worthiness of the
property.

c. Check the real property declaration and tax liabilities of the land with the local assessor's and
treasurer's office.

d. Verify the inherent limitations of the alienability of the land, particularly those granted to private
individual from the public domain (such as those granted under free, sales, lease patents with the
DENR, DAR, including those granted through the National Housing Act and similar agencies).

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e. The contract of real estate mortgage must provide an attorney-in-fact provision with right of
substitution in favor of the mortgagee as a practical step in case of extra-judicial foreclosure. The
mortgage contract must expeditiously be registered timely with the Register of Deeds of the place
where the property is located.

f. The mortgaged property must be owned by the person mortgaging. A third party's real property
may, however, be mortgaged by the mortgagor, provided that, he has a valid, genuine and effective
special power of attorney authorizing him to do so.

In this regard, due care and prudence must be exercised to determine that the person who owns
the real property in fact gave and executed the special power of attorney in favor of the one
mortgaging the same; and that, he knows that it will be mortgaged to secure a credit/loan for the
benefit of the principal obligor/debtor. As much as possible, determine the genuineness and
authenticity of the signatures with the principal maker of the power; or the attorney and/or the
notary public who notarized the document. Request the notary to authenticate the signatures on
the power of attorney. Authentication may be made by signing anew on the document notarized
beside their signatures.

g. After registration of the mortgage contract, it is wise and prudent to officially furnish the parties
to the contract with a copy of the mortgage to inform them of the transaction involving the property
and to discuss any last minute reaction of the property

owner.

3. Pari-passu Arrangement

It literally means; by the same priority. This is used by creditors who, marshalling assets are entitled
to receive out of the same fund or asset without any precedence of each other except as to the
direct proportion of their financial exposures in the credit granted.

This is a new method of securing large amounts of credit and is resorted to in special cases,
particularly in housing loan syndication/consortium for big infrastructure projects.

The requirements of registration are substantially the same except in registration with the different
governmental agencies.

4. Chattel Mortgage

A conditional sale of personal property as security for the payment of a debt or the performance of
some other obligation specified; the condition being that the sale shall become null and void upon

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the seller/mortgagor paying to the purchase/mortgagee a sum of money or doing some other act
named.

Any and all personal or movable property can be the subject of a chattel mortgage. Due care and
prudence must be exercised to ascertain and determine the legal and lawful ownership of the
property mortgaged because only property factually owned by the mortgagor can be mortgaged;
except, when there is a special power of attorney granted the mortgagor to mortgage a personal
property of another. All chattel mortgage contracts must have an affidavit of good faith and express
provision on the address of the chattel mortgaged.

5. Pledge

A contract whereby a personal property is delivered to the creditor or a third person as a security
for the performance of an obligation.

It is an accessory, real and unilateral contract upon the fulfillment or payment of the debt, the
property with its fruits and accessories shall be returned to the debtor.

Its requisites are:

a. It is constituted to secure the fulfillment of a principal obligation.

b. The pledgor must be the absolute owner of the thing pledged.

c. That the person or owner of the thing pledged has the free disposal of his property and in the
absence thereof, that he be legally authorized to do so.

d. The thing pledged must be placed in the possession of the creditor or of a third person by common
agreement.

The sale of the thing or property pledged for non-performance or non-payment of the obligation
erases further liability to the principal debtor and/or pledgor even if the proceeds of the sale of the
pledged property is less than the debt claim. Collection of deficiency is not allowed.

6. Surety

A contract or an agreement whereby a party called the surety guarantees the performance by
another party called the principal or obligor of an obligation or undertaking in favor of a third party
called the obligee. It includes official recognizance, stipulations, bonds or undertakings issued.

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The surety undertakes to pay if the principal does not pay. A surety is the insurer of the debt. He is
conclusively deemed an original promissor without a need of exhaustion of collection efforts against
the principal. Hence, he is equally liable.

7. Guaranty

A contract whereby a person, called the guarantor, binds himself to the creditor to fulfill the
obligations of the principal debtor in case the latter fails to do so. He is only liable if the principal
cannot pay. The guarantor's liability is secondary. The guarantor cannot be held liable until and
after exhaustion of all efforts to collect from the debtor is undertaken.

8. Assignment

An assignment of credit or right is fundamentally a contract of sale. It has for its subject matter the
credit or a right assigned; for consideration, the price paid for the right; and for the consent, the
agreement between the parties regarding the credit or right to be assigned and the price to be paid
thereof. It is perfected in the same manner as in a contract of sale.

An assignment of credit is, in a real sense, a contract of purchase and sale. In an assignment of
credit or a right, there is a definite third person who is obliged, whereas in sales, it is the whole
world which is obliged to respect the title of the buyer.

Being a real contract of purchase and sale, an assignment of credit, or right, transfers the ownership
of the same to the assignee from the moment the document evidencing such credit or right is
delivered to the assignee. Assignment may either be with or without recourse.

9. Escrow Arrangement

An agreement whereby a deed or a contract, which may be coupled with monetary consideration,
is delivered to a mutually acceptable stranger or third party with an obligation for the latter to deliver
unto the party in whose favor the deed or agreement is made, upon the occurrence or performance
of certain condition or obligation.

It is the performance of the obligation imposed therein or the happening of a condition imposed,
that makes the contract valid in favor of the grantee.

10. Letter of Credit

A written instrument from a bank directed to another bank requiring that the latter bank allow the
bearer of the letter of credit (LC) to buy commodities or service or to want money (either to procure
the same or to pass his promise, bill or other engagement for it). The writer of the LC undertakes

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to give the money for the goods or service or to pay the bank to which the LC is addressed by
exchange or to give such satisfaction as required.

A letter of credit (LC) is basically a request directing someone to pay or give credit to, a third party
and promising to repay or guarantee the same. It is an absolute undertaking to money advanced
or the amount for which credit is given upon the faith on the instrument.

A person has sold goods to the one in whose favor the letter of credit was drawn taking his note
therefore. The undertaking of the writer of the letter of credit is collateral to the promise of the
vendee, as security and is not liable to any contingencies except that of gross negligence in securing
the debt by which the loss may be thrown upon the vendor.

11. Trust Receipt Facility

An arrangement by virtue of which a banker or a creditor advances money to a person for the
purchase of goods; the former taking full title of the goods at the very beginning and continuing to
do so until he is paid; or, if the good has been sold, until the proceeds ne bof the sale are turned
over to him by the buyer or his successors-in-interest.

It may also mean a security transaction to aid importers, wholesalers and retailers of goods who do
not have sufficient funds or resources to finance the importation of merchandise and, who may not
be able to acquire credit except through utilization as collateral of the merchandise or goods
imported.

12. Hold-out Agreement

A recent credit development that disallows any withdrawal from the debtor's deposit with the
creditor, banking or financing institution during the duration of the credit granted. It allows the
creditor a charge or debit to the account for any unpaid balance of mot the obligation.

13. Surety Bond

It is substantially the same as a suretyship, except that bonds are issued by non-life insurance and
bonding companies. It must be borne in mind that not all insurance and bonding companies are
capable of fulfilling their obligations under the bonds. It is, therefore, imperative that only those
companies who are duly authorized by the office of the Insurance Commission and/or Supreme
Court have acceptable financial capacity to underwrite and pay shall be used.

It must be remembered that a bonding company's liability is co-terminus with the fulfillment or
payment of the obligation by the principal, and if there be any changes, extension and the like in

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the obligation, its consent and conformity be secured prior to such amendment, changes and the
like.

Claims on bonds are generally filed within 15 to 30 days from expiry thereof, otherwise, it cannot
be held liable.

14. Trusteeship Arrangement

A trustee is a person to whom confidence is reposed as regards property for the benefit of another
person.

The trustee is given the possession or custody of the property without power to dispose the property
as distinguished from an administrator who is given the incidental power of disposal.

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