CHAPTER 1: INTRODUCTION TO CREDIT
CHAPTER 1: INTRODUCTION TO CREDIT
Credit Management
- involves evaluating a borrower's credit-worthiness before extending credit, while collection management focuses on recovering outstanding debts.
Credit
- an arrangement where a borrower receives money, goods, or services now with the promise to repay the lender at a later date, often with interest.
THE IMPORTANCE OF CREDIT TO BUSINESS/COUNTRY
The value of credit management to a business and to the national economy lies in its vast power to help ensure an uninterrupted flow of money and resources. One cannot pay when one cannot save or collect enough to pay with.
CREDIT AND COLLECTION FUNCTIONS
1. Facilitates the movement of goods and services through the channels of trade to the consumers
2. Sustains and promotes production
3. Establishes rules for credit and collection transactions
4. Leads to efficient collection of accounts receivable
5. Contribute as a profit center to the attainment of a company's desired profit targets, either by itself or in cooperation with a company's sales and marketing units
6. Helps in teaching debtors good credit habits and practices
7. Can serve as a tool in attaining personal and business goals.
WHY IS CREDIT IMPORTANT TO THE COUNTRY?
1. Credit is an agent of production
2. Credit develops the salability of goods and services
3. Credit is a liquidity medium
4. Credit is a medium of capital formation
5. Credit complements the monetary system
6. Credit is a tool for the redistribution of wealth
7. Credit helps in the creation of business
8. Credit motivates higher business standards and practices
9. Credit Increases Purchasing Power
10. Credit make it possible to attain growth and progress
AMONG THE BASIC AND VERY IMPORTANT SOCIO-ECONOMIC FACTORS A CREDIT AND COLLECTION PROFESSIONAL MUST KNOW AND UNDERSTAND
1. Population as it impact on the sales, marketing, and liquidity arena of commerce industry.
2. The gross national product which reflect the economic performance of the country.
3. The saving potential of the population to determine their disposable income and which determine to what sector of population must be extended or not liberal or restrictive credit.
4. The public sector debt (deficit) which has a direct bearing in the availability of macro-credit; and, as stimulus for socio-economic activity, as well as its effect on the cost of money.
5. The debt service of the country as it directly impact on public sector ability to stimulate economy
Types of Credit Man
1. Mathematician Creditman
- Nagbabase sa financial ratios
2. Gaya-Gaya Puto Maya (follower) Creditman
- Sumusunod sa ginagawa ng industry leader
3. Historian Creditman
- Nagbabase ng decision sa past performance ng customer
4. Sentinel Creditman
- Merong lack of skills, education, training, etc
5. Necessary Evil Creditman
- Normal lang ang pagkakaroon ng bad debt losses. Alam na hindi lahat ng credit transactions ay maaring makolekta
CHAPTER 2: DEVELOPMENT (REVIEW) OF CAPACITY BIAS CREDIT AND COLLECTION POLICIES
CREDIT AND COLLECTION PRINCIPLES AND PRACTICES TO ADHERE AND ABIDE BY FOR BUSINESS
1. Credit is earned; and privilege, not a right
2. The financial security, sustainability of the creditor is the principal consideration rather than the attainment of sales or credit objectives
3. Credit must be granted only to person possessing the positive traits and attributes of trustworthiness, integrity, capability and capacity to earn, save and repay one’s financial obligations
4. The credibility, collectability and protection of the credit granted must take precedence over expansion or growth; and, must be given expeditious positive attention, action.
5. Financial soundness, operational effectiveness, efficiency and security of the creditor must be balanced against risks diversification, expansion and profitability.
6. Debtors must not be given credit much more than what they can reasonably, effectively, efficiently repay.
7. To balance risk of credit granting for growth and expansion, realistic credit limits and terms be set for the target market within the geographical areas of operation.
8. Credit must not be extended to one who is habitual delinquent
9. Each credit applicant must properly be credit investigated and evaluated.
10. Credit grant must not be mentioned and granted principally by reason of the collateral or security offered. It’s the collection of the credit granted arising from being a going concern, which develops positive capacity rather than the acquisition of the collateral or security.
12. The credit and collection and sales operations must be in positive synergy to attain overall objectives.
13. Decisiveness and expeditiousness in collection efforts on all fronts of collection venues be effectively undertaken within and without the creditor’s organization to prevent, avoid, and minimize bad debts.
14. A bad compromise is better and pragmatic than a long contentious, expensive litigation. A peso in collection is better than zero.
15. Don’t cry over spilled milk. Take your loss, write-off the bad account and learn from your negligence.
OBJECTIVES OF ESTABLISHING CREDIT POLICIES
· To maximize sales;
· To minimize costs and bad debt losses;
· To attain profit or income objectives.
· For control/incentive;
· For sustainability and growth.
Factors to consider in formulating credit and collection policies:
· Capital
· Competition
· Product or Service
· Kinds of Customer or Target Market
CREDIT PERIOD/TERM
The length of the credit period depends on several factors:
· Rate of turnover of the goods or service, is the period of time from the purchased of the goods on credit and conversion to receivable or cash is called turnover period
· Term of Sale Granted by Other Sellers
The length of credit period as well as the prompt payment discount offered by other sellers to a customer are to a large extent determined by the terms of sale granted such seller’s sources of supply.
· Location of Customers and Transportation Facilities
The longer the goods are in transit the slower is the rate of turnover or conversion which necessitate larger quantity of purchases to have more merchandise on hand, therefore a longer credit period is needed.
· Competitive Strategy
In a very competitive market for a merchandise or service the generally extended credit term by the sellers within the industry may result to extending their credit period to the general target market.
· Character of the Merchandise
Perishable or standardized for current or immediate use or brief marketing period and narrow profit margin are the factors considered in extending short or long credit period. Whereas, for new or seasonal merchandise and high profit yielding merchandise longer credit period is extended.
· Classes of Customers
There is a marked length of credit periods for consumers, manufacturers, middlemen and retailers.
· Quantity Involved
Generally, credit period for large shipments is stricter than on smaller ones due to the lesser price for seller.
· Nature of the Credit Risk
When the credit is inferior, the credit period is shorter than when the risk is of a high order.
· Sectoral Differences in Income Level
The credit period or term for farmers, overseas workers, white or blue collar debtors or for those who are low income (“aliping saguigilid”); middle income (“aliping namamahay”) and high income (“maharlikas”) vary from each other.
· The Biases/Prejudices of the Credit Manager
The subjective credit manager insist that his main function is the avoidance or minimization of bad debts.
Leads to a shortened credit period, co-extensive with the prompt payment rebate or added discount to improve the cash discount by including a quantity discount only to those who pay within the period granted.
· Prompt Payment/Rebate or Cash Discount
Generally granted to motivate, induce
a purchaser/debtor to pay within a shorter period of time than up to the whole length of the credit period granted. It’s a payment for a credit before its due date.
PRE-PAYMENT TERMS & SPECIAL DATING PAYMENT TERMS
Prepayment Terms
- requires payment by the customer before or at the time the merchandise is delivered. Although such terms are standard in a few product lines, in most-industries their use implies unwillingness on the part of a seller to extend credit.
Prepayment terms include the following types of payment arrangments:
1. Cash with order 9CWO) or Cash in advanced (CIA) – payment is made before the order is processed. Used for customers with no credit standing.
2. Cash before delivery (CBD) – Merchandise may be prepared and packed by the seller, but shipment is not made until payment is received. 3. Cash on delivery (COD) – payment is collected upon delivery before the buyer receives the product. Payments must be paid in cash or banks cashier’s check
4. Proximo term - is a payment arrangement requiring payment in the month following shipment, with "Proximo" (prox) meaning "next" or "next following" in Latin.
Special Dating Payment Terms
· Seasonal Dating - Where demand for a product is seasonal, sellers encourage off season purchases by granting terms which postpone payments to coincide with buyers' selling seasons. Seasonal dating is achieved by setting the invoice date at the beginning of the active season, from which regular terms are calculated.
· Receipt of Goods (ROG) - R.O.G. terms allow the buyer to calculate the cash discount period from the receipt of merchandise instead of the invoice date. R.O.G. terms are common in the sugar industry and used for gas or oil products between islands, helping sellers compete with those closer to the buyer.
· Extra Dating - Extra dating arrangements, common in the textile industry, extend both the discount and credit periods, often to 60 days from the invoice date (e.g., 2%/10, 45 extra). These terms offer identical discount and credit periods, making the deductions more like trade discounts than cash discounts.
· Consignment - Consignment terms add a warehousing feature to payment provisions, where merchandise is shipped to the buyer but title remains with the seller. Consignees are usually retailers, distributors, or commission houses. These terms are ideal for introducing new products or for buyers unable to use traditional payment methods.
CASH DISCOUNTS
Cash Discounts
- Cash discounts is a premium which the seller is willing to pay for certain benefits that accompany prompt collection of his funds. Obviously, this premium is paid by the seller when the discount is earned, but by the buyer when he is unable to pay within the discount period.
COST OF CREDIT
The cost of credit term must be given proper consideration. Among these are:
· Administrative cost in running the department
· The cost of financing the accounts receivable
· The credit losses due to delinquent or bad accounts
Generally, the costs of offering credit are:
· Credit evaluation costs, which consists of credit investigation and data processing
· Discounts in payment
· Investment in Receivables
· Collection Expenses
· Bad Debt Expense
PRESENT VALUE ANALYSIS OF CUSTOMER’S CREDIT
Present Value Analysis Key Steps:
1. Identifying direct and indirect cash flows associated with policy alternatives estimated and scheduled on a timeline method.
2. Determining opportunity cost based on the alternative use of the fund (short-term investment rate/borrowing rate)
3. Computing of the present values for the net cash flow of each of the alternatives
4. Choosing the alternative with the biggest net present value
Present Value Analysis (Formulas and Computations on PPT)
ACCEPTABLE PAYMENTS
1. Cash - A direct payment method using physical currency (coins and banknotes) or electronic transfers.
2. Check - A written order instructing a bank to pay a specific amount from the issuer’s account to the recipient.
3. Payment in Kind or Service - Settling a debt through goods, services, or labor instead of money.
4. Payment from surety or guarantee payment bond - A third party (surety) guarantees the payment if the debtor fails to fulfill their obligation.
5. Joint and several obligor (Debtor) - Multiple debtors are collectively or individually responsible for repaying a debt, meaning the creditor can demand full payment from any one of them.
COLLATERAL POLICY
- Credit extension must never be motivated by the collateral offered by the credit applicant. Because, if that be the rationale then the going concern paradigm of business operation losses its meaning and purpose.
Ways to Fortify or Secure Credit
1. Joint and Several Obligation - Jointly and severally literally means that a person who agrees to be bound under such a mode, answers personally and directly for the obligations created under the contract.
2. Real Estate Mortgage - This refers to the conveyance of a real property as a security for the payment of money or the performance of some other act, condition to become null and void upon payment or performance of the obligation created.
3. Pari-Passu Arrangement - It literally means; by the same priority. This is used by creditors who, marshalling assets are entitled to receive out of the same fund or asset without any precedence of each other except as to the direct proportion of their financial exposures in the credit granted.
4. Chattel Mortgage - A conditional sale of personal property as security for the payment of a debt or the performance of some other obligation specified; the condition being that the sale shall become null and void upon the seller/mortgagor paying to the purchase/mortgagee a sum of money or doing some other act named.
Any and all personal or movable property can be the subject of a chattel mortgage.
5. Pledge - A contract whereby a personal property is delivered to the creditor or a third person as a security for the performance of an obligation. It is an accessory, real, and unilateral contract upon the fulfillment or payment of the debt, the property with its fruits and accessories shall be returned to the debtor.
CHAPTER 3: CHECKING CREDITWORTHINESS AND EVALUATION
CHECKING THE CREDITWORTHINESS AND EVALUATION
The relationship that should exist must be based on two factors:
1. Confidentiality - means keeping sensitive information private and protected from unauthorized access or disclosure.
2. Completeness - is important for checking creditworthiness and evaluation. It ensures that lenders have all the necessary information to make accurate, fair, and responsible lending decisions.
THE CODE OF CREDIT INFORMATION EXCHANGE
1. The first and cardinal principle in credit investigation is to respect the confidential nature of the information received.
2. The name of the inquirer in whose behalf the inquiry is made should not be listieses without permission.
3. In answering inquiries, the source of the information should not be disclosed without permission.
4. Any betrayal of confidence stamps the offender unworthy of future consideration.
5. Each letter of inquiry should indicate specifically the object and scope of the inquiry.
6. When more than one inquiry on the same subject is sent simultaneously to banks, & should be indicated that information from their own files is insufficient as other checkings are being made.
7. All letters, including form letters should bear the manual signature of the inquirer to establish responsibility.
8. The recipient of a credit inquiry is negligent in his duty if he does not read carefully each letter of inquiry and answers truthfully to the best of his ability each specific question.
9. In answering inquiries, it is advisable to disclose all material facts bearing on the credit standing of the subject including the basis upon which credit was extended.
10. Indescriminate revision of files when there is no real need for information is wasteful and undesirable.
11. Where periodic revision of file information is made, it may be desirable to give your own experience in the letter of inquiry in order that duplication and unnecessary correspondence may be kept to a minimum.
12. In soliciting accounts, it is not permission nor the good faith of the soliciting inquirer to make inquiries from a competitor without truthfully disclosing the nature and object of the inquiry
CREDIT INVESTIGATION AND EVALUATION
The work of Credit Investigator may be divided into three major phases:
1. Gathering of credit information
2. Analysis of credit information; and
3. Dissemination of credit information
The investigation report should consist of:
1. Who is requesting for credit accommodation?
2. Amount and type of credit applied for
3. Purpose
4. Collateral (Security)
5. Sources and Mode of Payment
ELEMENTS OF CREDIT
1. Trust or Confidence
- Trustworthiness and creditworthiness are used interchangeably by credit and collection practitioners.
Trustworthiness implies confidence in the debtor’s integrity and in his ability to pay the loan or credit on - the stipulated and according to the terms agreed upon.
1. Risks
- This element can cause a creditor sleepless nights, especially when he begins having a second thoughts about his decisions to extend credit.
The analysis of a credit risk analysis involves 5 factors which are follows:
i. Personal Factor
ii. Economic Factor
iii. Security Factor
iv. Performance Factor
v. Risks Factor
2. Period or Term of Payment
- Period or term of payment refers to the length of time within which the debtor (with the agreement of the creditor) must pay the credit, whether this credit be in money, goods or services.
4. Exchange of Value
- For the credit transaction to have meaning and attain its purpose, there must be a possible exchange of value; temporal and/or moral; otherwise, the purpose of the credit granted will be meaningless. doomed for collection
BASIS OF CREDIT
Standard Basis of Credit:
· Character - The credit applicant’s personality, moral values, family, social, and business relationship must be scrutinized to determine whether or not he has the moral qualifications to enter into credit transaction
· Capital - Capital is the property the credit applicant own in his name whether moveable or immovable
· Capacity - is the ability of the credit applicant to earn enough to repay credit obtained
· Condition - Condition is a very intangible basis for extending credit. It refers to the debtor’s existing physical, economic, financial and political situation in his place of resident/business
· Collateral - Collateral are the other properties whether personally owned or owned by another person that the credit applicant is able to give able to give as security for the credit obtained
· Connection - You can sum up the meaning of connection in a simple Filipino phrase “Sino’ng kilala mo?
FINANCIAL FACTORS TO CHECK ON CREDIT APPLICANT
1. Liquidity Ratios
2. Leverage Ratios
3. Profitability Ratios
4. Efficiency Ratios
CREDIT SCORECARD
Credit Scorecard
- is an objective and structured tool used by creditors to evaluate credit applicants. Traditional credit evaluations, which rely on field investigations and sales assessments, often lead to biases and inaccurate decisions, sometimes resulting in delinquency or bad debt
- The credit scorecard should be simple to use and serve as a checklist during credit interviews, ideally in a manual format to maintain a personal touch.
A credit scorecard is a structured tool used to assess a credit applicant’s trustworthiness, financial capacity, and repayment ability. It helps balance credit extension with risk management, ensuring - informed lending decisions while minimizing potential losses
Specific Needs for Credit Scorecard
1. To determine the risks level or degree on the credit applicant
2. To evaluate the adequacy of risk cover or security or collateral
3. To assist in developing the credit transaction or payment modes for the transaction
4. To assist in determining the credit levels or amount to be granted, the credit term or period to be extended
5. As a source of auditing information for the credit transactions
Sample of credit scorecard for individual with capacity bias:
Sample of credit scorecard for individual with character attribute bias:
THE CREDIT EQUATION
Practical Combination of the Credit Equation
PROPERLY CHECKING ON DEBTORS
Among these sources or records of properties by persons are;
1. Assessor's office
2. Register of Deeds, Land Registration Authority, Bureau of Lands
3. Land Transportation Offices
4. Intellectual Property Rights Office
5. Patents Office
6. Stockbrokers
7. Sports or Leisure Club
8. Classified Advertisements
9. Real Estate Brokers
10. National Library for Copyrights
11. Barangay Records for Copyrights
12. Intellectual Property Office
CHAPTER 4: COLLECTION REPAYMENT
Loans - A financial agreement where a lender provides money or resources to a borrower with the expectation of repayment.
Repayment - The act of returning the borrowed money or resources within the agreed time.
Purpose of Loan - Helps individuals, businesses, and institutions during financial struggles.
Importance of Repayment - Maintains trust, financial stability, and avoids legal consequences.
Impact of Unpaid Loans - Can cause financial difficulties, broken relationships, and loss of trust.
Preventing Loan Disputes
· Clear Agreements: Define repayment terms before lending to avoid misunderstandings.
· Proper Documentation: Keep records of the loan to ensure accountability.
· Regular Follow-Ups: Check on borrowers and remind them of their obligation.
· Lending Limits: Avoid lending beyond what you can afford to lose.
· Mutual Respect: Borrowers and lenders should uphold honesty and fairness in transactions.
THE ART OF COLLECTION
· Definition of Collection – The process of recovering money owed from borrowers, ensuring financial stability.
· 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 businesses and individuals maintain cash flow and financial balance.
· Rewarding Outcome – Successfully collecting debts helps sustain financial operations and economic growth.
Skills and Qualities of an Effective Collector: · immense fortitude to manage difficult cases.
· Education and Experience: A collector’s success depends on knowledge, training, and experience.
· Understanding Debtor Behavior: Familiarity with debtor habits, excuses, and payment patterns helps improve collection efficiency.
· Use of Collection Tools: Applying legal frameworks, trade practices, and financial discipline strengthens collection strategies.
· Collection as an Art: The process requires both science (policies) and art (strategy and implementation) to be effective.
· Strengthening Financial Stability: Proper collection ensures businesses maintain a healthy cash flow.
· Account Receivables Management: Effective collection can recover large sums of money for companies.
FORCES OF COLLECTION
1. The Salesmen
Matters to Consider:
· He who made the made sale must collect
· A sale is never a sale unless collected
· Sales commission must be paid only on collected sales within the credit term
· Sanction and penalty for uncollected sales beyond the credit tem,
· Incentive for efficient collection of credit sales within the credit term must be given
2. The House Collectors
Matters to Consider
· Training, experience, personally
· Collection area knowledge and familiarity:
· Population or number of customers:
· Transportation facilities
· Habits, practices, idiosyncrasies of the customers in the collection area
Attributes to Look for in Collectors:
· Integrity, industriousness, resourcefulness, initiative, tenacity, perseverance,
· Good grooming neatness:
· Happy disposition, adaptability to situations
· Working knowledge, skills in arithmetic
· Businesslike, tactful, courteous, must have practical judgment specially in dealing with people-debtors
· Time consciousness and management
3. Attorney (Legal Counsels)
Things to Look for in an attorney:
· Education, training, experience
· Personality, positive character, attributes:
· References-clientele, adversaries in practice.
Things to provide for in the agreement with an attorney:
· Scope of service-actual/contingent expenses
· Remuneration package:
· Expenses, allowances:
· Time and payment of pecuniary benefit
· Control over amicable and compromise efforts;
4. Collection Agency
Things to look for:
· Length of service:
· People behind the company:
· Finances:
· Manpower complements
· Clientele, references,
· Areas of operation.
Things to provide for:
· Scope of services agreement-contingency or per case;
· Rates of fees and taxes and time of payment
· Reimbursable expenses,
· Withdrawal or Termination Mechanisms,
· Confidentially Clauses
5. Government
Accounts for write-off must be covered by an affidavit of non-collectibility of the collection company or the attorney who conducted the collection efforts out of or through court narrating the collection efforts undertaken as well as any checking on debtor’s properties short of going to court to collect.
DELINQUENT ACCOUNTS MANAGEMENT
1. Cause - Delinquency in accounts receivable doesn't happen without a reason.
2. Cure - There will always the ways of collecting delinquent/bad accounts receivable.
3. Collect - After pinpointing the cause and deciding on the cure, all efforts must be focused on collecting the receivable.
Effects of Delinquency in Receivables:
1. Delinquency ties-up working capital/illiquidity:
2. It disrupts and complicates business operations:
3. It reduces profit targets:
4. It slows down growth,
5. It causes personal and business failure
6. It prevents the build-up of reserves for seasonal or long-term demands,
7. The creditor (if not a bank or a financial institution) becomes the debtor's unwitting banker - generally interest-free.
Cause of Delinquency in Receivables
a. Internal Causes
- Absence or insufficiency of a credit report
- Absence of proper documents or simply the failure to register the debt documents in applicable cases:
- Poor or faulty accounting system;
- Unsystematic collection efforts - Family, business or other intra-social relationships between the creditor and debtor and their representatives and agents:
a. External Causes
- Over-obligation on the part of the debtor or getting into debt regardless of capacity to pay,
- Oversight (witting or unwitting):
- Bad paying habits and practices,
- Indolence (most debtors are too lazy to go and pay their creditors);
- Personal or business reverses or misfortunes;
- Dissatisfaction, whether founded or unfounded,
- Habits, practices and idiosyncrasies of the debtor
General Types of Debtors:
1. The Up-To-Date - A debtor who pays on time and who responds to available prompt payment incentives offered because of his sound financial position. 'A dog type of debtor"
2. Occasional delinquent - Most debtors become this type, because there is no perfect matching of their income and expenses. "A monkey type of debtor"
3. Habitual delinquent - This kind of debtor must be the target of strict collection efforts to prevent his account becoming bad. "A lizard or butiki type of debtor or a turtle type of debtor.
4. The changed circumstance - A debtor who, for health, social, economic or political reasons; by law, contract, accident or fortuitous event, suddenly cannot pay his obligation. "A chameleon type of debtor"
5. The premeditated delinquent - A debtor who, in the first place, should have been noticed and avoided. Need fast, drastic and decisive collection efforts. "A crocodile type of debtor"
General Categories of Debtor’s Defenses
1. Offensive or Aggressive - This kind of a debtor's defense is generally used by one who is a premeditated delinquent debtor. One who, from the inception or obtaining the credit, had no intention of paying at all.
2. Denying/Evasive - This debtor's defense is motivated by the debtor's inability to pay with good reason or to avoid payment without good reason.
3. Defiant - A defense generally used by a debtor who is either unscrupulous or a habitual bad debtor.
4. Plea for sympathy and compassion - A debtor who uses - this kind of a defense is either a victim of an accident or misfortune or has been placed in such an unfavorable health financial position that he cannot earn enough to pay back his debt.
Kinds of Delinquent Debtor
1. The Negligent - Does not bother about due dates of his debts,
2. The can’t 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,
3. The honest but confuses - One who did not understand in the first place the terms or conditions of the sale or debt obligation be entered into
4. Seasonal Delinquent - Fails behind in paying debts because hit business/cash flow slows down at certain periods of the year.
5. Honest late payer - Pays late because his own debtors-also pay him lave
6. Wittingly late - A debtor who uses supplier's credit which is generally interest free instead of a bank loan;
7. Chronically slow - A debtor who makes all creditors wait until they give more liberal payment terms.
8. The stretcher (Plastic Man) - A debtor who is temporarily over-extended or who intentionally delays paying
9. Habitual discounter - One who insist 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 (Mayabang) - A debtor who almost always says "Do you know when Lam?" and generally does not pay the debt unless put in an embarrassing situation or threatened with a court suit.
12. The "Vanishing" (Houdini) debtor - One who is not around come paying time, but is always around when borrowing.
Basic Collection Approaches
1. Education – At the onset of the creditor-debtor relationship it is always practical and a good collection management technique to indoctrinate the debtor about the credit and collection policies and procedures of the creditor.
2. Persuasion – It is sometimes referred to as "collecting by artful intimidation" since its effectiveness depends on the creditor's 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.
3. 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 person and/or business and thus, his inability to pay.
4. Coercion – Coercion must be applied only when really needed. Any form of coercion must be valid and legal. When coercion is decided upon, apply it promptly, decisely and to its full extent
TRENDS IN CREDIT AND COLLECTION OPERATION
The generally used and availed accounts receivable collection efforts are the following:
1. In-House Collection Force - The seller, (credit) company maintains the responsibilities connected with the recording, collection, financing and the like of receivables.
2. Factoring - A kind of a third party financing. In the country, the generally used factoring method is with recourse due to the quality the accounts receivable sold to the factor.
3. Organize a Subsidiary to Handle the Credit and Collection Operation - This method is generally used by companies with vast, nationwide consumer credit, installment selling operations like; vehicles, point of sale consumer goods or services like credit cards, insurance, HMOs, pre-need, cooperative, lending investor, micro-lender a similar organization.
4. Network With Reputable, Experienced, Reliable Credit and Collection Company - Establish a tie-up with a credit and collection company like - Bagco Credit, where credit information investigation, collection, training can be sourced and secured to complete a customers' credit applications and forwarded to a financial entity who will give decisions whether or not to grant credit.
5. Private Label Financing - A third party with whom the seller company agreed to operate and conduct the credit and collection functions of the company but, does it in the name of the seller. In this way, the customer will perceive that the credit is arranged through the seller.
TOOLS AND AIDS IN COLLECTING
A. Notice or Reminder
B. Letters
C. Statement of Account
D. Third Party Letters
E. Telegrams/Cables/SMS(Text Collection)
F. Telephone
- Your “telephone voice,” or the way you sound on a telephone, is a powerful collection tool. A pleasant telephone voice can help in convincing the debtor to come through with his payment. An irritating or insulting tone of voice may have the opposite effect
OBJECTIVES OF TELEPHONE COLLECTION
· Payment in full (PIF) on the first telephone contact is the primarily goal of all telephone collectors.
PIF takes several forms:
v Cash, check or money order paid immediately
v A firm promise to pay to pay the account in full on a specific date
· To find out the reasons for default and, if possible, to establish a firm date when a payment is to be made.
· To determine, through appropriate questioning whether future payment will be made promptly.
· To find out why the payment was not made, if such is the case
· To suggest to customers with serious money problem that the company may be able to provide guidance and help.
· To follow up continuously to see that customer promises are kept
STRATEGIES AND TACTICS OF COLLECTION
Strategy - A plan of action developed to achieve a goal or objective (either personal or organization).
Tactic - The behavioral maneuvering one undertakes to carry out the strategy.
Ways of Collection Strategy:
· Confrontation - This may be in the form of a threat or coercion. Confrontation generally does not work because it tends to incite hostility in both the creditor and debtor.
· Concession or Compromise - Concession or compromise in credit repayment refers to situations where a lender agrees to modify the original terms of a loan or debt to help the borrower repay it, usually due to financial hardship.
· Collaboration - The best way to collect from a debtor is to motivate the debtor to collaborate with you because it is in collaboration where both parties to a credit transaction can see the value of the proper and wise use of credit.
Collection Tactics:
· Double Teaming
· The Turn-Down
· The Bad Boss
· Highballing or Snowballing
· Fighter’s Stance
· Feigning Anger
· Placation
HANDLING ANGRY DEBTORS
· Allow time for debtor to vent his anger, frustration or violence,
· Be sure that there is a place with less or better yet, an area free of audience within which a debtor may release his emotions and feelings.
· Don't disturb or interrupt the angry debtor while venting or releasing his anger or frustration;
Stage 1. Establish the Point of Controversy
Stage 2. Exchange Information
Stage 3. Reach for a Give and Take Position
UNDERSTANDING DEBTORS’/CREDITOR’ PERSONALITY
Personality dimensions of Debtors/ Creditors and how to detect it
1. Assertive
· Firmness of handshake
· The directness of your response to your question
· The way a debtor volunteers his/her answer
· Wants to get down quickly to the details of your collection efforts
· Expeditiousness of making of decision to pay or not pay
2. Unassertive
· Take time to get to know you
· Long attention span
· Decides slowly
3. Emotional level of the debtors/collector
· Right brain person - emotional, creative and Carr about people
· Left brain person - unemotional see things in black and white and care about things.
Kinds of Debtors/Collector personality
1. Assertive - unemotional individual – practical
- He/She is careful in letting you in his residence, office, screen telephone calls, letters and talking with people.
Collection tactics:
- Don’t waste time and small talk, go straight to the point of collection
2. Assertive - Emotional Individual – Friendly
· Warm, friendly and open;
· Makes his own telephone calls;
· Meets you personally in his/her office, house;
· Greets everybody;
· A fan of spectators' sport;
· Not bashful to say no;
· Personal and assertive;
· Not so organized;
· Likable, fun to be with;
· Needs follow-up efforts;
Collection tactics:
Get him excited, present prositive benefits of his paying you his debt
3. Unassertive - Emotional Individual-Peacemaker
· Tends to set up reasons-barriers;
· Hesitates to give address, phone or contact numbers;
· Lived in his residence for quite a time already:
· Develops relationships with things as well as with people;
· Probably drives an old car or takes public transportation or rides with friends, relatives;
· Gets threaten by high pressure collector;
· Not business minded;
Collection tactics:
When dealing with peacemaker, go slowly with your negotiation Develop trust first before you deal with such debtor.
4. Unassertive - Unemotional Individual Chairman
· Generally a technical person;
· Surrounded by gadgets;
· Curious about information;
· Feels she/ne can manage many activities by generating massive amounts of information;
· Precise, punctual and accurate
Collection tactic:
Endeavor to develop a good rapport by talking about his interest.
Debtor’s/Collector personality negotiation styles:
1. Practical - is street smart and his only goal is to win irrespective of the means and who loses. Don't get affected by his win-win* advantage styles.
2. Friendly – gets so excited about things that he loses perspective. Sometimes referred as the Den Mother. He is likely to have monopoly of the collection negotiation which may fall down but didn't realize there vias a problem in the first place.
3. Peacemaker - generally turns into a pacifier or trouble shooter whose objective is to make the parties agree on a win-win* solution;
4. Chairman - Turns into executive type of a negotiator. Rigid and everything must be in place and always take refuge saying often; its the rule and principle of thing or trabaho lang pare retort.
Goals in collection negotiations
1. Practical/Street Smart - Victory oriented and plans to win come hell or high water in negotiation;
2. Friend/Mediator - To influence people views, attitude, practices and ways of doing things;
3. Peacemaker/Trouble Shooter – Agreement and goal oriented
4. Chairman/Rigid - want an orderly negotiation proceedings in the belief that it will produce a solution or collection.