CC MODULE 1

'credere'

'believe or to trust'.

What is commercial credit?

- a pre-approved amount of money that can be accessed by the borrowing company at any time to help meet various financial obligations. - commonly used to fund common day-to-day operations and is often paid back once funds become available. -can be offered in either a revolving or non-revolving line of credit.

What is mercantile credit?

-extended by one businessman to another businessman. - These transactions are called "merchandise credits" or "trade credits" because they are in the form of goods.

Education .

. At the onset of the creditor-debtor relationship it is always practical and good collection management technique to indoctrinate the debtor about the credit and collection policies and procedures of the creditor. During the relationship, it must be emphasized that prompt, up-to-date payment of the account is expected and is mutually beneficial.

5 C's

1. Character 2. Capacity 3. Capital 4. Collateral 5. Condition

◼ Characteristics of Credit

1. Credit is a Bipartite Contract. 2. Credit is a Pecuniary Contract. 3. Credit is a Fiduciary Contract. 4. In credit, risk is always involved. 5. Credit always involves futurity.

◼ Legal concept of credit

1. Creditor's viewpoint 2. Debtor's viewpoint

Basic Collection Approaches

1. Education 2. Persuasion. 3. Problem Solving Assistance. 4. Coercion.

Sound credit management principles revolve around three E's , such as:

1. Estimation 2. Enforcement 3. Evaluation

Type of Delinquent Borrowers

1. Fair Credit 2. Slow Credit 3. No Good Credit

Types of Mercantile Credit

1. Installment plan 2. Trade credit 3. Consumer credit 4. Car loans 5. Home (Housing) Loans

◼ Types of Debtors as to Paying Habits

1. Prompt Payers. 2. Delinquent Debtors.

Other Sources of Credit:

1. Retail stores 2. Grocery and Department Stores. 3. Credit unions 4. Individual money lenders 5. Insurance companies 6. Sales finance companies 7. Pawnshop.

Parties to a credit transaction

1. The Creditor. 2. The Debtor.

Types of Debtors

1. The cooperative debtor. 2. The chronic complainer. 3. The politician-type. 4. The uncooperative and indifferent debtor. 5. Paranoiac. 6. Belligerent or pugnacious type. 7. The elusive type.

Kinds of Delinquent Debtors

1. The negligent 2. The honest but confused 3. The cannot be bothered 4. Seasonal delinquent 5. Honest late payer 6. Chronically slow 7. Wittingly late 8. The stretcher 9. Habitual discounter 10. The tightrope walker 11. The braggart 12. The "vanishing" debtor

◼ Kinds of Delinquent Debtors

1. The negligent - he does not bother about due dates of his debts 2. The honest but confused - one who did not understand in the first place the terms or conditions of the sale or debt/obligation he entered into. 3. The cannot be bothered - a debtor who refuses to pay a - small balance of a debt until these add up to a substantial amount and then pays. 4. Seasonal delinquent - falls behind in paying debts because his business slows down at certain periods of the year. 5. Honest late payer - pays late because his own debtors also pay him late. 6. Chronically slow - a debtor who makes all creditors wait until they give more liberal payment terms. 7. Wittingly late - a debtor who uses suppliers credit which is generally interest free instead of a bank loan. 8. The stretcher - a debtor who is temporarily over - extended or who intentionally delays paying. 9. Habitual discounter - one who insists on a discount whether earned or not. 10. The tightrope walker - one who is usually on the verge of a financial crisis. 11. The braggart - a debtor who almost always says "do you know who I am?" and generally does not pay the debt unless put in an embarrassing situation or threatened with a court suit. 12. The "vanishing" debtor - one who is not around come paying time, but is always around when borrowing.

Foundations of credit

1. Trust and Confidence. 2. Credit Information. 3. Stability of Monetary Value. 4. Enforcement of Valid Obligations.

Sources of Credit Information

1. application form 2. Personal Interview 3. Ocular Inspection 4. Financial Statements. 5. The general mercantile agency 6. Special Mercantile Agencies 7. Personal Investigation 8. Public and Published Records 9. Credit Bureaus- 10. Bank Credit Department 11. Information from Reference 12. Credit Management Association of the Philippines -

Steps in Drafting the Promissory Note

1. date of 2. amount of the note. 3. Describe the note terms. 4. Write the interest rate. 5. State if the note is secured or unsecured. 6. Include the names of both the lender and the borrower 7. Write the complete mailing address 8. Each borrower should print and sign his name,

CREDIT

A legal agreement to receive cash, goods, or services now and pay for them in the future. It is based on the lender's or creditor's confidence in the borrower's or debtor's ability to make payments in the future. Credit is the power or ability to obtain money, goods or services at present time in exchange for a promise to pay with money upon demand or at a determinable future time.

Installment plan

A method of paying for something in which the buyer pays part of the cost immediately and then makes small regular payments until the debt is completely paid.It allows the purchaser to get an upfront purchase (buy now) and repay it in several "gives" spaced across a set schedule (pay later). Payment is calculated depending on: ✓ Overall installment balance ✓ Length of time to pay ✓ Interest rate (if any) ✓ Penalties (if any) Payments for an installment plan are considered as regular. Let us say the payment will be every month which is fixed for the entirety of the contract.

What is personal credit?

A type of credit wherein it is obtained for one's use.

Character

AKA HISTORY. quality of credit risk which makes the debtor pay or intend to pay when his debt is due.

Sources of Credit

Banks are the most common sources of credit. Most of the commercial including industrial and agricultural credits are obtained from the banks.

Credit is a Bipartite Contract.

Credit always involves two parties: the debtor who obtains the money, goods or services in exchange of his promise to pay at a future date; and the creditor who lends his money, goods or services for the right to collect on demand or at a determinable future time.

Credit is a Pecuniary Contract.

Credit is always expressed in terms of money. When you buy goods on credit from a sari-sari store or borrow money from a bank, it is understood that such obligation shall be paid in money.

Debtor's viewpoint

Credit is the obligation to pay a sum of money in the future

Creditor's viewpoint

Credit is the right to claim payment of a sum of money.

Trust and Confidence.

Creditors must have absolute confidence in the personal character and in the ability as well as the willingness of their debtors to accept, honor and settle their obligations.

Grocery and Department Stores.

Grocery stores as well as department stores generally carry well-known brands of products they sell to the consumers in efforts to enlist their patronage. Moreover, as an added inducement, the customers are given the privilege of buying goods on credit which is generally facilitated by the use of credit cards.

5. Home (Housing) Loans

Home (Housing) Loans A home loan is a contract between a borrower and a lender that allows someone to borrow money to buy a house, apartment, condo, or other livable property. A home loan is typically paid back over a term of 10, 15, or 30 years. Features of a home loan: ✓ The principal—this amount is typically the purchase price minus down- payment, minus closing costs and other related fees. ✓ The term—the term or how long that the entire loan will be paid. The term of a home loan can range between five to 30 years. ✓ The interest rate—the annual amount to be paid in addition to the money borrowed, shown as a percentage of the current principal balance. ✓ The repayment frequency—how often that the borrower makes payments. Borrowers usually pay back their mortgages on a monthly or bi-weekly basis.

Installment versus Revolving:

Installment credit is used for a specific purpose and is issued for a set period of time while revolving credit is an open-ended loan that may be used for any purchase. ✓ The disadvantage of revolving credit is the cost to those who fail to pay off their entire balances every month and continue to accrue additional charges.

Pawnshop.

Is one of the oldest credit institutions in the Philippines.

Importance of credit

It has been important among suppliers, manufacturers, wholesalers, retailers, individual consumers and to countries: 1. Credit is used as a substitute for money 2. Credit has the tendency to elevate the moral standards of the people 3. Credit induces or persuades people to save 4. Credit enables businesses to accumulate large capital and undertake large scale production 5. Credit allows wealth to be fully utilized 6. Credit helps in the expansion and contraction of the money supply

The elusive type.

It is hard for bill collectors to find them in their offices or in their homes. Many of them maintain two doors, one to gain entry - and the other as an exit without being detected by those who are waiting for them. They generally leave their homes Very early in the morning and come back late at night. In the office, callers are screened for obvious reasons. For those who can well afford, they are surrounded by cordon sanitaire.

The chronic complainer.

It is not uncommon for creditors to be the recipients of repeated but nevertheless baseless complaints from debtors for this or that grievance which generally the products of their fertile imagination. In some instances, they are the by-product of forced habits. They do not feel happy unless they are able to air certain grievance or complaints, fabricated, flimsy or otherwise.

Persuasion.

It is sometimes referred to as collecting by "artful intimidation" since the effectiveness depends on the creditors knowledge of the pertinent facts, figures, documents. It also depends on the "coercive" collection action the creditor has chosen to implement in case the debtor refuses to pay his debt. It must be borne in mind that persuasion, to be effective and acceptable, must be done with firmness and in the "friendliest" atmosphere possible.

Belligerent or pugnacious type.

Just as there are individuals who think that society owes them a living, so it is equally true that there are those who think that they are entitled to the use of credit regardless of their poor credit standing. How, these individuals were able to obtain the use of credit in the first place is very baffling.

Credit always involves futurity.

Payment on credit is always done at a future date. In actual accounting practice, futurity means a day or more after the credit is obtained.

Credit Information.

Proper facilities must exist for performing credit operations. Sources of credit information must be available to those granting credit if a correct and proper evaluation of credit rating is to be made which is the first criterion in the grant of credit. The grant of credit likewise entails the use of documents to evidence the existence of credit transactions between the creditor and debtor which seeks to establish their obligations to one another.

Types of personal of credit

Service Credit Retail or Consumers Credit Personal Loan Credit

Credit is a Fiduciary Contract.

Since credit is always based on trust and confidence, the debtor must always be able to merit the trust and confidence of the creditor. Without this, there can be no credit transactions.

The cooperative debtor.

Some debtors become delinquent not necessarily out of their own making nor to their liking. In some instances, such is brought about by circumstances beyond their own control - circumstances which conspire with one another as to make the settlement of existing obligations difficult, if not impossible.

Paranoiac.

Some people feel on top of the world even when their world is crumbling to pieces. They suffer from delusions of grandeur. Psychologists call them as the paranoid.

Coercion.

THIS must be applied only when really needed. Any form of THIS must be valid and legal. When THIS is decided upon, apply it promptly to its full extent.

Enforcement of Valid Obligations.

The government must stand ready to assist the creditor in enforcing payment of loan extended to the debtor. Our laws recognize and protect the enforcement of valid obligations arising from contracts freely and lawfully entered into by the contracting parties. While it is true that, as provided in our constitution, no individual is to be imprisoned for non- payment of a debt, nevertheless, our courts can order properties of the debtors attached for their refusal to honor and pay their indebtedness and have them sold at public auction to cover their obligations.

Goods on installment

The installment payment allows the debtor to own an item. The amount will be divided into a period of time from months to a couple of year.

◼ The Truth in Lending Act

The law requires creditors to furnish each customer the following information before the transaction is consummated: 1. The cash price of the property to be serviced or acquired. 2. The down payment, if any, or the trade-in price. 3. The difference between the amounts under 1 and 2. 4. The charges, individually itemized, which are paid or to be paid in connection with the transaction and which are not incidental to the extension of the credit. 5. The total amount to be financed. 6. The finance charge expressed in terms of pesos. 7. The percentage that the finance charge bears to the total amount to be financed which is expressed as a simple annual rate on the outstanding unpaid balance.

Stability of Monetary Value.

The money standard must be stable. If money is subject to frequent and wide fluctuations as to cause its purchasing power to become uncertain at any time after a contract is entered into by the contracting parties, the holders of surplus funds will necessarily feel reluctant to part with their funds or goods knowing that the purchasing power of the money that will be paid to them may not be equal to the value of what has been advanced whether in money, goods or services. Under such circumstance, many individuals may not even save a part of their incomes.

The Credit Process

The normal process of credit granting involves the following tasks or activities: 1. Determining the market 2. Development, formulation of good credit policies, procedures in consonance with the sales, marketing policies to attain goals, objectives; 3. Credit initiation; 4. Documentation; 5. Delivery; 6. Credit administration; 7. Problem recognition 8. Remedial management which include: a. Problem definition; b. Strategy development; c. Tactics or action plan implemented

The Debtor.

The party that asks for and receive present value in the form of goods or services from the creditor.

The Creditor.

The party that parts with present value in exchange for the other party's promise to pay for the same in the future, as promised.

installment plan

There are companies that can provide a 0% installment plan for purchases. This means that if the goods or services' worth is ₱120,000.00 then the monthly payment for 12 months would be ₱10,000.00. Provided however that the debtor will adhere to the terms and conditions. In case the debtor would not comply then a penalty could be imposed or interest will be computed or the goods will be retrieved.

Problem Solving Assistance.

There are occasions when a debtor wants to pay his debts but cannot do so because of problems. These problems may be directly related with the debtor's business or due to internal or external reasons affecting his business and thus, his inability to pay.

In credit, risk is always involved.

There is always the possibility of the obligation not being paid. For instance, the debtor was retrenched from his job or there may be other unforeseen events which may prevent him from paying his obligations.

1. Prompt Payers.

This group consists of individuals and business entities that are conscious of their financial obligations which they discharge promptly without the need of being reminded about them. Such individuals and business entities are those of proven probity and possessing high integrity and thus, they require minimal attention, if at all, from the collection department.

The politician-type.

This type of debtor does not deny the existence of his obligation which arose from previous transactions of his. Neither does he shun away from the presence of bill collectors.

The uncooperative and indifferent debtor.

This type of debtor does not pay on time, not because he cannot pay but rather because he finds it difficult to part with his money. The Tagalogs have a word for this kind of individual. He is "makunat" which in English is synonymous with "stiff" or hard.

THREE CATEGORIES OF Retail or Consumers Credit

a) Regular charge accounts b) Revolving charge account c) Installment plan

1. Estimation

a. All available resources of credit information must be tapped and utilized so that a proper estimation of the credit risk can be obtained. b. For individuals who buy for consumption, character and their ability to pay serve as important bases of credit; for business concerns, it is the net worth and condition of the business as well as the reputation for paying their bills. c. All credit information gathered and received must be kept in strict confidence. Only those who are authorized must have access to it.

Fair Credit

a. Careless borrower - merely needs reminding regularly b. Complainer - he has grievances after he falls behind c. Unforeseen problems - unemployment, shrunken income, medical expenses

2. Enforcement

a. Granting credit is but one phase of the credit function, collection is another. Collection of accounts should start from the moment they become due. There should be no room for uncertainty insofar as collection is concerned. b. The task and responsibility of every collection department is to get the money due the company. If the money can be collected without offending the customer, doubtless, this should be done c. Collection records must be kept and maintained and should indicate when notices were sent; dates when calls were made by collectors; payments made; balances due and actions taken, if any.

3. No Good Credit

a. Lives beyond his income. Credit passed unknown. b. Gypsy - in residence or employment c. Crook - directly attempting to defraud

2. Slow Credit

a. Poor management of his finances, over indebtedness b. Marital problems c. Coward - afraid to face his creditors

3. Evaluation

a. Sound credit management principles dictate that results must be evaluated against company policies and procedures. b. If a situation should arise in the future which preclude good-paying customers to discharge their obligations on time, policies and procedures may be modified without losing sight of company goals and objectives. c. Records must be periodically reviewed and kept up to date.

Insurance companies

are also sources of credit for policy holders. Such individuals can borrow from the insurance company an amount that is allowed by the insurance company.

Credit unions

are cooperative organizations that lend savings of their members to other members who are in need. This is one of the cheapest sources of credit since borrowing members pay a very low interest on loans.

Retail or Consumers Credit

are goods obtained mostly on retail and they fall under three categories:

Individual money lenders

are individuals who have excess funds and who usually lend such funds to others who are in need. They charge exorbitant interest for the use of money because of higher risk. They are also called loan sharks

Sales finance companies

are one of the biggest sources of consumer credit. They also extend credit facilities to industrial, commercial, and agricultural enterprises either by discounting or factoring commercial papers or accounts receivables.

Retail stores

are one of the biggest sources of personal credit.

Personal Loan Credit

differs from other forms of consumer credit in that cash or money is given as credit instead of goods and services. These are extended by banks, financial institutions, insurance companies, credit unions, pawnshops, loan associations, etc.

Capital

financial strength of business. To the creditor, it is the guarantee that a credit transaction entered can be redeemed. It can be determined by deducting the total liabilities from the total assets. This is the net worth of the business.

Trade credit

is a business to business agreement in which a customer can purchase goods on account without paying cash up front, paying the supplier at a later schedule. -Usually it ranges to 30, 60, or 90 days to pay, with the transaction recorded through an invoice. - be thought of as type of 0% financing, increasing company's assets while deferring payment for a specified value of goods or services to some time in the future. ✓ Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date. ✓ Trade credit can be a good way for businesses to free up cash flow and finance short-term growth.

Consumer credit

is a personal debt taken on to purchase goods and services. A credit card is one form of consumer credit. The term is usually used to describe unsecured debt that is taken on to buy everyday goods and services. It is not usually used to describe the purchase of a house, which is considered a long-term investment and is usually purchased with a secured mortgage loan. Consumer credit is extended by banks, retailers, and others to enable consumers to purchase goods immediately and pay off the cost over time with interest. Two classifications:

Service Credit

is a service obtained from professionals like lawyers, doctors, dentists, etc. These professionals usually charge professional fees especially if the client is acquainted with them and known to them.

4. Car loans

is a sum of money a consumer borrows in order to purchase a car. When taking out a loan, a borrower agrees to pay back the full loan amount, as well as any interest (a percentage of the loan amount, usually calculated on an annual basis), by a certain date, typically by making monthly payments. All car loans are for specific lengths of time, generally anywhere between 24 and 60 months, although some car loans can be for longer periods. This type of loan is also known as financing. Car loans generally include a variety of fees and taxes, which are added to the total loan amount. When a borrower takes out a car loan, he or she is agreeing to buy the car. Upon entering into the loan agreement, the borrower gains the right to drive the car, while also taking possession of the car's title (a document showing proof of ownership of a piece of property). Technically speaking, however, the borrower does not yet own the car; the lender owns the car until the borrower has finished paying off the loan.

Delinquent Debtors.

is not merely a poor prospect for further business. He is not prospect at all. He will shun the creditor, if only from a sense of personal embarrassment. Moreover, once he becomes that involved financially, he is all too likely to go from bad to worse as a credit risk. The job of the collection department is to catch him in time to get him back on the rails, at the same time restoring his potential as a future customer by restoring his confidence in himself to pay his obligations if he only tries hard enough.

Collateral

properties of value pledge to secure a loan. Loans secured by immovable properties are called mortgage while loans secured by movable properties are called chattel mortgage.

Condition

refers to the environment in the customer's industry, economically, legally and politically in relation to growth. The borrower has little or no control over these external factors but they may have significant influence upon the appraisal of credit risk.

Capacity

signifies the ability of a debtor to pay his obligations.

Credit Risk

the amount of potential for default that is inherent in a given debt investment or extension of credit. A lender or an investor in various types of bonds carries a degree of credit risk on any transaction conducted. Assessing the degree of risk involved is essential before completing any type of lending or investment transaction.

b) Revolving charge account

the credit is not paid in full within this period but divided into amounts which are to be paid in longer periods.

c) Installment plan

the creditor usually requires most of the time, a down payment. It allows the purchase of an item, which is to be paid in equal monthly payments. Installment credits are secured by a chattel mortgage on the merchandise sold on credit. In the event of default on three or more payments, the creditor may repossess the goods sold on credit. Only durable goods are sold on installment and the title to the items sold on installment passes to the buyer only after he has made his last installment payment.

a. Installment credit

used for big-ticket purchases such as major appliances, cars and furniture. ✓ The item purchased serves as collateral in case the consumer defaults.

b. Revolving credit

which includes credit cards, may be used for any purchase. The credit is "revolving" in the sense that the line of credit remains open and can be used to the maximum limit repeatedly, as long as the borrower keeps paying a minimum monthly payment on time.

Regular charge accounts -

you are charged with the amount of the goods you obtain on credit and you usually pay within 15 to 20 days after you are billed.