CHAPTER 1: INTRODUCTION TO CREDIT

Credit Management

The process of evaluating a borrower's credit-worthiness before extending credit, and managing the recovery of outstanding debts.

Credit

An arrangement where a borrower receives money, goods, or services with a promise to repay at a later date, often with interest.

Importance of Credit

Ensures an uninterrupted flow of money and resources for businesses and the national economy.

Credit Functions

Facilitates trade movement, sustains production, establishes rules for transactions, and contributes to profits.

why is credit important to the country

Credit as an Agent of Production, helps develop the salability of goods and services and acts as a liquidity medium.

important socio economic factors

Population Impact, gross national product , saving potential of the population, public sector debt (deficit)

Mathematician Creditman

A credit manager who bases decisions on financial ratios.

Historian Creditman

A credit manager who relies on past performance of customers for decision-making.

Credit Policies Objective

To maximize sales, minimize costs and bad debt losses, and achieve income objectives.

Credit Risk Evaluation

The process of assessing the debtor's ability to repay credit based on personal, economic, and security factors.

Present Value Analysis

A method to evaluate credit policies by estimating cash flows and opportunity costs.

Prepayment Terms

Payment arrangements requiring payment before or at the time of delivery of goods.

Cash Discount

A reduction in the amount due offered by a seller to encourage timely payment.

Collateral Policy

Credit extension should not be motivated solely by the collateral offered.

Delinquent Accounts Management

Strategies to manage accounts that are overdue or in default; cause, cure, and collect

Educational Approach in Collection

Teaching debtors about credit and collection policies to prevent delinquency.

Assertive Personality Debtors

Those who make firm decisions quickly and want to get to the point of collection.

Emotionally Unassertive Debtors

Individuals who take time to make decisions and build relationships before committing.

Negotiation Styles in Collection

Different approaches used by debtors and collectors based on personality and goals.

Collection Strategy

A plan of action to effectively recover owed money from debtors.

Types of Credit

Different forms of credit such as installment credit, revolving credit, and open credit.

Credit Score

A numerical representation of a borrower's creditworthiness based on credit history.

Secured Credit

Credit backed by collateral that the lender can seize if the borrower defaults.

Unsecured Credit

Credit that is not backed by collateral and relies on borrower's promise to repay.

credit and collection principles and practices

credit is earned and privilege not a right

term of sale granted by other sellers

the length of credit period offered by other sellers to a customer

location of customer and transportation facilities

the longer the goods are in transit the slower is the rate of turnover; longer credit period is needed

competitive strategy in credit term

the seller within the industry may extend their credit period to the general target market

character of the merchandise

factors like high profit yielding are considered in extending short or long credit period

sectoral differences in income level

credit period are based on the level of income

cash with order/ cash in advanced

payment is made before the order is processed

cash before delivery

shipment is not made until payment is received

cash on delivery

payment is collected upon delivery

proximo term

payment in the month following shipment

consignment

merchandise is shipped to the buyer but title remains with the seller

receipt of goods

allow the buyer to calculate the cash discount period from the receipt of merchandise instead of the involve date

cost of credit

administrative cost, cost of financing the accounts receivable, and credit losses due to delinquent or bad accounts

present value analysis key steps

identifying direct and indirect cash flow; determining opportunity cost; computing of the present values; choosing the alternative

acceptable payment

cash, checks, payment in kind, and payment from surety or guarantee payment bond; joint and several obligor

payment from surety or guarantee payment bond

a third party (surety) guarantees the payment if the debtor fails to fulfill their obligation

pari-passu arrangement

by the same priority; marshalling assets are entitled to receive out of the same fund or asset

chattel mortgage

conditional sale of personal property as security

2 factors in checking the creditworthiness and evaluation

confidentiality and completeness

3 major phases in credit investigation and evaluation

gathering, analysis, and dissemination of credit information

elements of credit

trust or confidence, risks, period or term of payment, exchange of value

risk

can cause a creditor sleepless nights

basis of credit

6C: character, capital, capacity, condition, collateral, connection

current ratio

measures adequacy of working capital

quick-acid test ratio

measure the ability to meet short term obligation

cash flow to current debt service

measure the ability to generate enough cash to service short term debt requirement

debt to equity ratio

measure how much debt was incurred in relation to the owners investment

credit scorecard

tool used by creditors to evaluate credit applicants

fair risk

character + capacity + insufficient capacity/capital

doubtful risk

Capacity + capital + Impaired Character

limited risk

character + capacity - capital

dangerous risk

capacity + capital - character

marginal risk

character + Capital - capacity

poor risk simple

capital - character - capacity

very bad risk

character - capacity -capital

fraudulent risk

Capacity - character - capital

impact of unpaid loans

can cause financial difficulties, broken relationship, and loss of trust

types of account collection

includes current, delinquent or bad account receivables

challenges in debt collection

a tedious, frustrating and sometimes exasperating process

importance of collection

ensures business and individual maintain cash flow and financial balance