Lesson 1

• Creditor's viewpoint


  Willingness to accept the debtor’s promise based on trust and confidence
• True

  
  

  True or False : As business opportunities decline, the need for credit also declines
• Such increase in demand for the product will definitely be influenced by consumer’s desire and their ability to fulfill their desire
• Elements of Credit


  • Trust
  • Futurity
  • Risk
• Trust


  First consideration in granting credit, based on trust and confidence
• Futurity


  Element of time in credit transactions, payment is after a specified lapse of time
• Risk

  Due to the uncertainty of payment or possible reduction of payment in credit transactions
• Characteristics of Credit


  • Bilateral or a two-party contract
  • Personal contract
  • Pecuniary contract
• Bilateral or a two-party contract


  Every debtor has his corresponding creditor; creditor his corresponding debtor.
• Personal contract


  Debtor’s character is the primary basis, including willingness and ability to pay
• Pecuniary contract


  In order to protect the rights of both parties, the debtor must know the exact amount of his obligations and the creditor must also know the extent of his claims.
• Cases where credit transactions arise


  • Deferred payment for goods and services
  • Money loans
  • For services rendered where individuals receive their wages or salaries after rendering their respective labor and talents or sometimes workers may render their services after receiving their money ahead of time
• Advantages of Credit


  • Allows the immediate use of goods and services
  • Shopping convenience
  • Provides a temporary solution to unexpected financial difficulties
  • It is an agent of production
  • Credit gives fluidity to wealth
  • Credit supplements the monetary system
• Disadvantages of Credit


  • It costs money
  • It encourages overspending
  • It ties up future income
  • It may result in losses
  • Liberal credit can lead to over-expansion or over-speculation
  • The government that borrows heavily may have to curtail important projects when most necessary
• Classifications and Kinds of Credit


  • As to Maturity: Time Loan - Short-term, Medium-Term, Long-term; Call/Demand Loan
  • As to Source: Public, Private
  • As to Payment of Interest: Ordinary, Discount
  • As to Method of Release/Repayment: Lump-sum, Installment
  • As to Source of Repayment: Self-liquidating, Non-self-liquidating
• Classifications and Kinds of Credit - As to Maturity

  • Time Loan - Short-term, Medium-Term, Long-term; Call/Demand Loan
• Classifications and Kinds of Credit - As to Source


  • Public, Private
• Classifications and Kinds of Credit - As to Payment of Interest


  • Ordinary, Discount
• Classifications and Kinds of Credit - As to Method of Release/Repayment


  • Lump-sum, Installment
• Classifications and Kinds of Credit - As to Source of Repayment


  • Self-liquidating, Non-self-liquidating
• Repayment(Self-liquidating)


  will come from the income derived from the use of the principal
• Non-self-liquidating Repayment


  Repayment will come from the personal income (salary) of the debtor
• Purpose of loans


  • Agricultural
  • Commercial
  • Industrial
  • Real Estate
  • Personal or Consumer
• As to Security


  • Secured
  • Unsecured
• Agricultural

  Granted to finance ____ such as for irrigation system, acquisition of seeds, fertilizers and others
• Commercial


  Used to finance short-term working capital needs such as payment of maturing accounts and purchase of inventories
• Industrial


  Granted to finance long-term capital needs such as expansion expenditures and acquisition of fixed assets
• Unsecured


  • 
    
  • Credit issued without collateral, also known as character or clean loan
• Purpose : It is important that the purpose for which the loan will be used be productive to enable the borrower to repay the obligation incurred. It should also be useful to the community so it will contribute to the economic development of the region. Speculative loans are frowned upon
• Type and Size of Loan : Lending involved risks, hence the need to diversify the loan portfolio as a means of spreading the risks. Due consideration should be given to the amount involved because the larger the amount, the greater the aggregate risk
• Maturity : It must always be kept in mind that the longer the time, the greater the risk. Maturity of the loan should therefore be patterned to the duration of the financing needed by the borrower
• Security : To reduce the risks involved in lending, collaterals such as real estate, shares of stocks, receivables, machineries and equipment, inventories and others should be required
• Interest : Several factors should be considered in establishing the rate such as the cost of funds and the account relationship of the borrower with the lender
• Loan Liquidation


  Repayment of the loan should be discussed thoroughly with the borrower and carefully considered when the loan is made to avoid possible trouble later. Failure to repay the loan on time impairs the liquidity of the lender’s loan portfolio and increases the risk
• The Cs of Good Loans: Character, Capacity, Conditions, Capital, and Collateral
• Character


  • Refers to the borrower’s payment habits and attitudes, that is, his willingness to pay
• Capacity


  • Refers to the borrower’s ability to pay as reflected in his cash flows
• Shortfalls in cash flow are common indicators of failing businesses and troubled loan relationships
• Thou shalt be sure that the company or person you are lending to has the capacity to repay the loan
• Capital


  The borrower’s net worth position relative to his outstanding debts, providing a cushion for losses and preventing bankruptcy