CREDIT AND COLLECTION

LESSON 4
By: Lea B. Morenes
Instructor
CHARATERISTICS OF CREDIT

1.It is a two-party contract.

2.It is elastic.
3.The presence of trust of faith.
4.It involves futurity.
CHARATERISTICS OF CREDIT

1. It is a two-party contract.
-two parties are involved in the
agreement- the debtor or the party
requesting a loan and the creditor or the
source of credit.

- to be legal, the contract must be

in writing, specifying the amount, time of
payment, interest and other terms agreed
upon by both parties
CHARATERISTICS OF CREDIT

2. It is Elastic.
- can be increased or decreased
by the creditor.

- loan limit or elasticity depends

upon the capacity of the debtor and
appraised value of his collateral.
CHARATERISTICS OF CREDIT

3. The presence of trust of faith.

- this is also a risk factor of credit.

- the debtor’s ability to pay is

dependent on his assets and will to recall
maturity date for prompt payment, which
measures his willingness to settle
obligations.
CHARATERISTICS OF CREDIT

4. It involves futurity.
- Maturity date for settlement of
obligation is a future time.

- the creditor puts his trust in the

debtor’s ability and willingness to fulfill
an obligation when it falls due.
FOUNDATIONS OF CREDIT

1.Confidence
2.Proper facilities
3.Stability of monetary standard
4.Government assistance
5.Credit risk
FOUNDATIONS OF CREDIT

1. Confidence.
- the creditor must trust the debtor’s personal
character as a measure of the latter’s capacity to pay.

- the creditor must have confidence in the

debtor’s willingness and capacity to settle an
obligation.
FOUNDATIONS OF CREDIT

2. Proper facilities
- in a credit contract, legal facilities must exist
to make the agreement valid. These are the credit
information and credit document.
 - Credit information includes data about the debtor
that are a gauge of his paying capacity which can be
gathered through a credit investigation.

- Credit document is the written agreement signed

by both parties identifying principal loan, interest, and
maturity date or other supporting papers to determine the
debtor’s credit rating.
FOUNDATIONS OF CREDIT

3. Stability of monetary standard

- the purchasing power of money is
considered when extending credit.

- more stable of the value of money, the

greater is the possibility of approving credit.
FOUNDATIONS OF CREDIT

4. Government assistance
- regulations protecting both parties are highly
considered for credit transactions.

- when evaluating, debtors are given more

protection since they cannot be imprisoned for non-
performance of obligation, that is, if they are insolvent
or do not have any asset or property. In this case, the
creditors take the risk.
FOUNDATIONS OF CREDIT

5. Credit risk
- this is the possibility that the debtor
may not fulfill his promise for payment.
Credit risk shall be borne by the creditors.
5 C’S OF CREDIT

1.Character
2.Capacity
3.Capital
4.Collateral
5.Conditions
5 C’S OF CREDIT

1. CHARACTER
- refers to the personality of
the debtor, including his mental
and moral attitudes that
determine his credit rating.
5 C’S OF CREDIT

2. CAPACITY
- this signifies the person’s
willingness and capacity to pay.
- this is measure of his
income level as basis of his
paying capacity.
5 C’S OF CREDIT

3. CAPITAL
- this consist of the
person’s real and personal
property which can be a strong
foundation for credit approval.
- serves as liquid assets in
case of non-payment.
5 C’S OF CREDIT

4. COLLATERAL
- this is something of value
or the debtor’s assets that can be
used as pledge.
- the collateral protects the
creditor in the event of the
debtor’s inability to discharge his
loan obligation.
5 C’S OF CREDIT

5. CONDITIONS
- this may include local
business conditions or economic
conditions during the time of loan
application.
- when a business or economy
is facing periods of recessions or
depression, fulfilling the loan maybe
impossible, so creditors may not
consider the application.
END OF SLIDE

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