Lecture 4.1 Credit

Credit

The power or ability to obtain money, goods and services at the present time in exchange for a promise to pay at a future determinable time

Borrower’s View

the borrower’s ability to obtain goods, services or money in exchange of a future promise to pay

Economist’s View

the exchange of actual reality against the future probability

Legalistic View

creates a legal right in favor of the creditor against the debtor who is under obligation to pay

Lender’s View

the trust and confidence of the lender on the borrower’s ability and willingness to pay

Credit as 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 future determinable time.

Credit as a Pecuniary Contract

-It is always expressed in terms of money.

-When you buy goods on credit from a retail store or borrow money from a bank or any financing institution, it is understood that such obligation shall be paid by money.

Credit as a Fiduciary Contract

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

Trust and confidence

This involves a lender’s belief in a borrower's willingness and ability to repay, and on risk assessment and historical data

In credit, Risk is always involved

There’s always the possibility of the obligation not being paid.

Credit always involves Futurity

Payment on credit is always done at a future date.

Futurity

This means a day or more after the credit is obtained.

Allows the possible production of goods

▪ Firms stand ready to finance their operation through credit, depending on their capacity.

▪ When business opportunities appear and businessmen forecast profitable market possibilities, they are willing to expand credit and vice versa.

Plays an important role in distribution of goods

-Since large quantities of goods move through the marketing channels, a great bulk of such goods is financed through credit.
-It provides a financial means for businessmen who take advantage of market opportunities in the domestic and foreign markets.

Promotes full employment

Credit allows consumer to buy goods and services beyond their ability to buy or what they can actually afford. This increase in consumption will automatically increase employment of labor.

Credit Risks

It refers to the possibility of non-payment of the obligation when it falls due.

Character

It is the aspect that an individual’s track record of managing credit and making payments indicates their “_____________” as relevant to the lender.

Capacity

▪ Signifies the ability of a debtor to pay his obligation.

▪ A debtor may be willing to pay his debt, but may not

have the cash which he has to pay when it falls due.

Capital

-the financial strength or net worth of the business

-it represents the overall pool of assets under the name of the borrower

Collateral

These are properties of value pledged to secure a loan. personal or real properties

Condition

Refers to the environment in the customer’s industry, economically, legally and politically in relation to growth.

CREDIT INFORMATION

It is important for the credit man to gather information about his prospective debtors. For every good credit decision, we must consider the basic and necessary part

Money

We must ensure that the account is financially profitable before we start any credit investigation.

Time

It’s considered because we all know that in every aspect of life, if we need to make decision quickly, we can just get only few sources.

Effort

Credit information changes very often; therefore, be sure that the information obtained is not

obsolete.

Accuracy

It is possible that the financial statement given by your customer is inaccurate or lacks pertinent details.

Reliable

It is also possible that some information were deliberately fixed by people for a price.

Application Form

initiates the relationship between the creditor and the debtor, also known as the best

source of data.

Personal Interview

A direct contact with the customer enables the creditor to assess the customer or debtor personally; and allows him the creditor to explain all the requirements of the company in the way the customer can understand it best.

General Mercantile Agency

It’s a specialized organization engaged in supplying information on the creditworthiness and financial strength of firms.

Special Mercantile Agency

it’s also known as trade agencies, the scope of coverage is limited to a single trade or limited to a number of allied trades.

Bank Credit Department

One of the best sources of credit information, includes, but not limited to, on how long did the bank have the account, the average account balance, and/or the information about the borrowing/s of the customer.

References

Indicated in the information sheets and obtained from the interview could give light on the prospective customer’s credit worthiness.

CREDIT REPORT

This includes:

–Financial Statements

–Ledger Experiences

–Comments of References

–Observations of the Reporters

Credit Score

a numerical representation of how responsible one is as a borrower and calculated based on information in the credit report

Credit Information Corporation

The credit score is compiled by the ____________ and its accredited credit bureaus in the

Philippines