Credit and Collection Prelim Reviewer Flashcards

Vocabulary flashcards generated from the Credit and Collection Prelim Reviewer covering credit types, negotiable instruments, letters of credit, credit process steps, the 5 Cs of credit, financial ratios, and collection methods.

Credit

An agreement to receive money, goods, or services now and repay later, usually with interest.

General Acceptable Credit

Credit accepted as payment for goods or services within a country.

Limited Acceptable Credit

Credit accepted only in specific situations or contexts.

Demand Loan

A loan with no fixed maturity date where payment can be demanded anytime.

Time or Term Loan

A loan with a definite maturity date.

Short-term Loan

A term loan payable within 1 year.

Medium-term Loan

A term loan usually payable in 1 to 5 years.

Long-term Loan

A term loan payable after 5 years or more.

Direct Loan

A loan where the borrower receives the exact amount stated in the promissory note.

Discount Loan

A loan where interest is deducted in advance from the loan.

Overdraft

Allows withdrawal of money beyond the available bank balance, up to an agreed amount.

Consumer or Personal Credit

Credit used for personal needs or purchases.

Mercantile or Commercial Credit

Credit used by businesses to finance purchases such as inventory.

Bank Credit

Short-term credit given by banks for business working capital.

Investment Credit

Long-term funds used mainly to obtain fixed capital.

Secured Loan

A loan backed by valuable assets as security.

Unsecured Loan

A loan with no collateral, based on the borrower's integrity, ability, and willingness to pay.

Agricultural Credit

Loans used to develop or improve agricultural land.

Industrial Credit

Credit used for manufacturing, buildings, equipment, or machinery.

Self-Liquidating Loan

A loan that is paid from the income generated by the borrowed money.

Non-Self-Liquidating Loan

A loan paid from the borrower's other earnings.

Commercial Credit Instrument

A written document showing a promise or order to pay money.

Promissory Note (PN)

A written and signed promise to pay a specific amount at a certain time or on demand.

Maker (Promissory Note)

The person who borrows and promises to pay.

Payee (Promissory Note)

The person or institution who lends the money and receives payment.

Convertible PN

A Promissory Note that can be converted into company shares or equity.

Bill of Exchange

A written order directing another person to pay a specific amount of money to a specified person or bearer.

Drawer (Bill of Exchange)

Issues the order to pay in a Bill of Exchange.

Drawee (Bill of Exchange)

The person directed to make the payment in a Bill of Exchange.

Payee (Bill of Exchange)

The person who receives the payment in a Bill of Exchange.

Acceptor

The drawee who accepts the Bill of Exchange.

Sight Draft

A draft payable immediately upon presentation.

Time Draft

A draft payable at a future date.

Inland Bill

A bill of exchange drawn and payable within the same country.

Foreign Bill

A bill of exchange drawn in one country and payable in another.

Documentary Bill

A bill of exchange that comes with shipping or commercial documents.

Clean Bill

A bill of exchange that has no supporting shipping documents.

Trade Bill

A bill of exchange drawn by a seller on a buyer for a sale of goods.

Accommodation Bill

A bill of exchange issued to help another party obtain credit.

Check

A written and signed order directing a bank to pay a specific amount from the drawer's account.

Bearer Check

A check payable to whoever holds the check.

Order Check

A check payable only to the person named on the check.

Crossed Check

A check that must be deposited into a bank account.

Postdated Check

A check that has a future date and can be used on or after that date.

Stale Check

A check presented more than 6 months after its date.

Antedated Check

A check that has a date earlier than the actual issue date.

Banker's/Cashier's Check

A check issued and guaranteed by a bank.

Blank Check

A check signed but with the amount or payee left blank.

Traveler's Check

A prepaid check used as a safe alternative to cash when traveling.

Personal Check

A check drawn from a personal bank account.

Rubber/Bouncing Check

A check returned unpaid due to insufficient funds.

Negotiation

Transfer of an instrument to another person.

Endorsement

Signing the instrument to transfer it to another person.

Presentment

Showing the instrument to demand payment or acceptance.

Dishonored

State when payment or acceptance of an instrument is refused or cannot be obtained.

Letter of Credit (LC)

A bank's written promise to pay a specified amount when the required documents meet the LC terms.

Applicant (Letter of Credit)

The buyer/importer who requests the Letter of Credit.

Beneficiary (Letter of Credit)

The seller/exporter who receives payment under a Letter of Credit.

Issuing Bank

The bank that issues the Letter of Credit.

Advising Bank

The bank that informs the beneficiary about the Letter of Credit.

Confirming Bank

A bank that adds its own payment promise to a Letter of Credit.

Irrevocable LC

A Letter of Credit that cannot be changed or cancelled without the parties' consent.

Revocable LC

A Letter of Credit that can be changed or cancelled without the beneficiary's consent.

Standby LC

A Letter of Credit used as a guarantee if the applicant fails to fulfill an obligation.

Red Clause LC

A Letter of Credit that allows an advance payment before shipment.

Credit Investigation

The process of gathering, developing, and analyzing relevant information about the borrower to aid in making a sound credit decision.

Direct Credit Investigation

Credit investigation where information is obtained through direct contact with the borrower or other sources.

Indirect Credit Investigation

Credit investigation where information is obtained through outside sources or credit reporting agencies and records, without direct investigation of the borrower.

Credit Assessment

Determining the creditworthiness of the borrower based on gathered information.

Credit Evaluation

Analyzing the information gathered to arrive at a sound credit decision.

Character (5 Cs of Credit)

The borrower's integrity, honesty, reputation, and willingness to fulfill financial obligations.

Capacity (5 Cs of Credit)

The borrower's ability to repay the loan from generated cash flow and financial income.

Capital (5 Cs of Credit)

The amount of net worth or personal money/assets invested by the borrower/management into the business.

Collateral (5 Cs of Credit)

Hard or soft assets offered by the borrower as a backup security to guarantee loan repayment in case of default.

Conditions (5 Cs of Credit)

External environment, economic trends, industry factors, and the loan's specific purpose or interest rate structure.

Days Sales Outstanding (DSO)

Measures how many days it takes a business to collect its credit sales. Calculated as: $\text{DSO} = \frac{\text{Average Accounts Receivable}}{\text{Net Credit Sales}} \times 365$

Accounts Receivable (AR) Turnover

Measures how many times a business collects its average receivables during a period. Calculated as: $\text{AR Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}$

Collection Effectiveness Index (CEI)

Measures how effective a business is in collecting its receivables. Calculated as: $\text{CEI} = \frac{\text{Beginning AR} + \text{Credit Sales} - \text{Ending AR}}{\text{Beginning AR} + \text{Credit Sales} - \text{Ending Current AR}} \times 100$

Current Ratio

Measures the ability of a business to pay its short-term obligations. Calculated as: $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$

Quick Ratio

Measures the ability to pay short-term debts using quick assets, without relying on inventory. Calculated as: $\text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}}$

Debt-to-Equity Ratio (D/E)

Measures how much debt a business has compared with the owner's equity. Calculated as: $\text{D/E Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}}$

Credit Appraisal

The process of evaluating a borrower before approving credit to determine if they can repay.

Credit Inspection

The process of checking the borrower after credit has been given to see if the loan is being properly used and payments are being made.

Credit Utilization

Refers to how much of the available credit a borrower is currently using.

Credit Recovery

The process of recovering money from borrowers who have failed to pay or whose accounts are already overdue or in default.

Ordinary Credit Collection

The regular process of collecting payments before or when they become due.