CREDIT

MANAGEMENT
 WHAT IS CREDIT?
• Means of exchange
• To get goods/services or money now with the
promise to pay for it later
• Credit = creditum (Latin) = trust
• Credit management
• Credit function that is planned, lead, organised and
controlled
• Obtain maximum profitability in an entity
WHAT IS CREDIT?
 CREDIT AGREEMENT
• Normal requirements for legal agreement
• National credit Act no 34 of 2005 (as amended)
considers the following as credit agreements:
– Credit facility
• Undertaken by supplier to supply goods/services and payment
is deferred
– Credit transaction
• Pawn/incidental credit transaction/installment agreement
– Credit guarantee
• Person undertakes to satisfy upon demand any obligation
 CREDITWORTHINESS
• Indication of a buyer’s willingness & ability to
fulfill obligations
• Summary of characteristics
• Seven C’s analysed to help supplier decide to
extend credit or not:
• Character
• Capacity
• Capital
• Collateral
• Climate
• Credit history
• Common sense
 ELEMENTS OF CREDIT
• RISK
– Receipt of money is uncertain
– Credit transaction may result in loss for entity
• TIME
– Time value of money / opportunity cost
– Changes of collection the money decreases as time goes
by
• COST
– Administration and management of credit costs money:
salaries of personnel, collection process etc.
 DIFFERENT TYPES OF
CREDIT
• Main categories:
• Private credit
• Individuals
• Enterprises
• Public credit
• National government
• Provincial government
• Municipalities
 PRIVATE CREDIT
•Consumer credit
•Business credit
•Financial credit
•Trade credit
•Export credit
PRIVATE CREDIT
 CONSUMER CREDIT

1. Open accounts, e.g. telephone account

2. Budget accounts, e.g. budget facility on credit card
3. Installment credit, e.g. hire-purchase agreement
(vehicles)
4. Revolving credit, e.g. clothing account at Edgars
5. Option accounts, choose payment period (30 days
interest free, or 6 months with interest)
6. Credit cards, bank and store credit cards
7. Personal loans, obtain from financial institution
8. Mortgage loans, finance property transactions
9. Bank overdraft facility, cheque account
CONSUMER CREDIT
 BUSINESS CREDIT

• Trade credit
– One entity to another
– Granted to manufacturers and resellers
– E.g. open-book accounts, installment agreements
• Financial credit
– Financing of capital requirements
– Motives:
• Transaction motive: daily expenses
• Precautionary motive: unexpected events
• Speculative motive: supplies at discounted prices
 EXPORT CREDIT

• Entity sells to another entity (foreign country) on

credit
• Challenges of export credit management:
• Distance between buyer and seller
• Time difference between buying & receiving of goods
• Exchange rate
• Regulations of countries
 EXPORT CREDIT

• Bills of exchange
• Letters of credit
• Cash with order
• Cash before delivery
ADVANTAGES & DISADVANTAGES OF
CREDIT
• Individuals
 Convenient
 Immediate use of goods or service
 Cope with financial emergencies
 Provides credit record

X Ties up future income

X Overspending
X Poor credit record
X Live above your means
ADVANTAGES & DISADVANTAGES OF
CREDIT
• Entities
 More sales
 Competitive position in market
 Improves customer relations

X Wait for money

X Late payments and credit losses
X Cost of credit
X Lack of operating capital
 CREDIT POLICY

• Guideline to base credit decisions on

• Aligned with business objectives
• Consider the following when formulating a credit
policy:
– Credit terms
• Time from invoice date?
• Incentives for paying on time? Penalties?
– Creditworthiness
– Collection policy
 CREDIT ASSESSMENT

• Types of assessment:
– New customer
– Existing customer
• Three phases:
1. Collect information
2. Analyse information
3. Make a decision on granting credit
CREDIT ASSESSMENT
 INFORMATION

• Reasons for collecting information

– Identify applicant & assess capacity or ability to repay
• Sources
– Direct
• Credit application form
– Indirect
• Public records, e.g. company’s information at Registrar
• Auditors of applicant
• Credit bureaus
 ANALYSING INFORMATION

• Seven C’s of credit

1. Character
2. Capacity
3. Capital (financial strength: 11 ratio’s)
4. Collateral
5. Climate
6. Credit history
7. Common sense
METHODS OF INFORMATION ANALYSIS

• Credit grading
• Grading form to assess various characteristics (individually)
from excellent to poor
• Credit scoring
• Points allocated to various characteristics
• Financial statements
• Financial ratios
 LEGAL TERMINOLOGIES

1. Contractual capacity
2. Consumers
3. Credit provider
4. National Credit Regulator
5. Debt counselors
6. Consumer Tribunal
 CAPITAL (FINANCIAL RATIOS)

• Current ratio = current assets/current

liabilities
• Acid test ratio = (current assets –
inventory)/current liabilities
• Debtors’ collection period =
Debtors/Average sales per day (annual
sales/365)
• Creditors payment period =
Creditors/Average purchases per day
(annual purchases/365)
 CAPITAL (FINANCIAL RATIOS)

• Debt ratio = Total liabilities/Total assets

• Debt-equity ratio = (Non-current
liabilities)/Equity
• Times interest earned = EBIT/Interest expense
• Gross profit margin = (Sales – COS)/Sales x
100/1
• Operating profit margin = EBIT/Sales x 100/1
• Net profit margin = Profit for the year/Sales x
100/1
 RIGHTS OF CONSUMERS

• Apply for credit

• Protected against discrimination
• Reasons where credit has been refused
• Documentation in official language as approved by
NCR
• Information in plain and understandable language
• Quotation and pre-agreement declaration
• Excluded from:
– Telemarketing
– Clientele list that is sold by credit provider
– Mass distribution of emails and sms’s
• Accept or reject credit quotation
 CREDIT BUREAUS

• Collects, stores and sells information

• Provides credit history about entities and individuals
• Information is readily available
• Not only negative information
• Mainly three bureaus used in RSA
CREDIT BUREAUS
 INTEREST AND COSTS CHARGED

• Interest and fees after default may not exceed

principle debt at the point of default

• Permitted charges:
– Interest
– Initiation fees
– Service fees (<R50 pm)
– Credit insurance
– Default administration charges
– Collection costs
 COLLECTION OF DEBTORS

• Aims to convert debtors into cash ASAP

• Requirements
 Retain goodwill
Correctly and consistently executed
Keep record of action taken
Easy to understand and apply
Cost effective
Rapid action
PHASES IN COLLECTION PROCEDURE

• Reminder phase
– Second account statement
– Stickers and highlighters to draw attention
• Follow-up phase
– Ongoing contact with consumers NB!
– Reasons why in default
• Drastic phase
– Credit collection agency
– Legal action started