CREDIT AND CREDIT MANAGEMENT

The Social Aspect of Borrowing

The ability of a business enterprise

to obtain borrowed funds for use in its operation

is the main social feature of borrowing .

Todays trends on business transactions

THE NATURE OF CREDIT

CREDIT- Simply as a means by which something of value is obtained for a promise to pay

for it at some future time. It signifies power and obligation on the part of the debtor. Moral and right on the part of the creditor and expectations of the fulfillment of the promise.

AS A POWER

the ability of the debtor to obtain goods or services on the strength of his promise to pay for the future time.

CHARACTERISTICS OF CREDIT

1. RISK - The possibility of the debtor to pay or not to pay his accounts.

2. TRUST Without trust no credit transaction

3. TIME OR FUTURITY The date agreed upon for payment.

CLASSES AND KINDS OF CREDITS

1. CONSUMER CREDIT - the most common type of credit or most called as personal credit.

2. Bank Credit and Mercantile Credit – credit created by a bank by adding the proceeds of a loan to a

depositor’s account.

3. Investment Credit – utilized by a business organization for the purchase of fixed

For those necessary for undertaking business operations with five (5) major sources such as ;1. Funds for individuals and estates2. banking institutions and like SSS and the GSIS.

4. Agricultural Credit – for in the General Banking Acc. This includes loans intended for the

acquisition of fertilizers .

5. Export Credit- when the exporter sells his goods abroad on the bases of deferred payment.

TRUTH IN LENDING ACT

DESIGNED PURPOSELY TO

PROTECT CITIZENS FROM THEIR UTTER LACK

OF AWARENESS OF THE TRUE

COST OF CREDIT.

ACT NO. 3756 , known as the

“TRUTH IN LENDING ACT”

This law requires each creditor to make known to the borrower or buyer in writing the following.

1. The cash price or delivered price of the property service to be required.2. The amount, if any, to be credited as down payment of trade – in. 3. The difference between the amounts set forth in 1 and 2. 4. The changes, individually, which are paid or be paid by such person in

connection with the transaction but which are not incident to the extension of credit.

5. The total amount to be finance;6. The finance charge expressed in terms of

person and centavos;7. The percentage that the finance charge

bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation .

THE CREDIT POLICY

• No business is too small to ignore the importance of the credit function.

• Whatever credit policy a compay may choose to adopt is doubtless circumscribed or influenced by its objectives .

• However ,by large, a sound credit Policy is one geared toward maximum sales and at the same time intended to reduce losses to the minimum.

The Credit DepartmentResponsible for the proper and thorough evaluation

of the credit rating of prospective customers desirous of availing the use of credit.

Basis of Credit

Two important and complimentary questions to determine the credit rating of an applicant.

1. Can the customer pay his debt when it becomes due?

2. Will he pay it when due? There are five broadened C’s to avail credit namely

1. character -desirable qualities of a person – good character

2. capacity - ability to pay3. capital - assets of an individual4. collateral -property

acceptable to the creditor as security5. conditions – stability of a place or

country.

CREDIT ANALYSIS

SINE QUA NON

Determination of proper credit rating. There is a pressing and compelling need to conduct a proper and thorough analysis and evaluation of credit risks of applicants for credit. It is necessary and important that sources of information to be tapped to the fullest extent and placed under careful scrutiny to arrive at a correct diagnosis. Thus credit manager must coordinate with the services of the credit investigator, appraisers , salesmen and even hire the services of independent and expert appraisers to analyze correct market value.

SOURCES OF CREDIT INFORMATION

A. INTERNAL SOURCES

a. Debtor’s previous credit record with the business firm. b. Credit man’s personal knowledge of debtor’s character and reputation. c. Personal contacts with debtor

1. Through correspondence.2. Through personal visit by credit man or his representatives.3.Reports of Salesmen.

d. Analysis of debtor’s financial statement. e. Audits of surveys of the business.

B. FROM EXTERNAL SOURCES;

a. Mercantile agenciesb. Trade referencesc. Banksd. Newspapere. Court casesf. Reports from competitors of the borrower

( in case of a business firm)

CASH FLOW ANALYSIS AND FINANCIAL STATEMENTS

CASH FLOW ANALYSIS – Inflow and outflow of cash. A flow of net working capital or for a flow of more liquid current liabilities . Cash is only one of the current assets and is part of the working capital. CASH FLOW EVALUATION – refers to the analysis of the projected sources and application of funds to determine the available cash to meet future obligations. a. Sources and uses of cash on a monthly or annual basis. b. A repayment scheme on the accommodation applied for c. A disclosure of pertinent assumptions used in the forecast

FINANCIAL STATEMENTS - a report summarizing the financial condition or financial results of an organization on any data or for any record. Financial statements of the individual firm are the most important source of financial data.

There are three fundamentals of financial statements 1. The balance sheet - which depicts the financial

condition of the business firm at the end of a specified period .2. The profit – and –loss statement – summarizes

the financial operation over period of time. 3. The reconciliation of the capital accounts which

summarizes changes in them from one balance sheet to another. Pointing out changes

resulting from revaluation of assets or investment of funds. Financial statements must be religiously scrutinized to

help provide as basis for a sound credit decision.

IMPORTANT QUESTIONSIMPORTANT QUESTIONS TO AVAIL CREDITSa. Who is the borrower?b. Why did he come to the financial institution if he is not a customer?c. How much credit is required?d. What is the purpose of the loan?e. How will the specific credit solve the problem?f. Why does he think he will?g. When will the loan be repaid?h. Where will the funds come to repay the loan?i. What financial institution is available?j. What will the loan mean to the borrower and the lending institution from a standpoint?k. Where has the borrower had credit before if he is not a customer?

CREDIT FILE - every firm or institution must keep such file that is systematically arranged bearing the name and addresses of customers and information that would be most helpful in the evaluation of credit rating.

COLLECTION PROCEDURE The collection department is the one in-charge to obtain money due to the company. It is a wise and sound policy that money should be collected without in any way offending the customer.

SENDING STATEMENTS PROMPTLY The first step in the collection procedure

preparing a list of customers whose accounts are past due. From said list , statements must then be prepared covering individual customers and sent promptly if no reply is receive from the customers a follow –up letter would be in order but it should be couched in diplomatic language and must know and ask if the letter was received by the customer.

THE END Prepared by :

MC GREGOR M. AGUILAR