Credit & Collection Midterm

• Credit


  The word "credit" has been derived from the Latin word "credo" which means "I believe" or "I trust", which signifies trust or confidence reposed in another person
• John G. Stumpf: '"In Financial Services, if you want to be the best in the industry, you first have to be the best in riskmanagement and credit quality. It is the foundation for every other measure of succes. There's almost no room for error."'
• Credit (in economics)


  Trusting in the solvency of a person or making a payment to a person to receive it back after some time or lending money and receiving of deposits, etc.
• Nature/Characteristics of Credit


  • Confidence
  • Capacity
  • Security
  • Goodwill
  • Size of credit
  • Period of credit
  • Risk of nonpayment
  • Timing
  • Security
• Functions of Credit


  • Economy in the use of money
  • Easy exchange and remittance
  • Helpful to production
  • Promotion of trade especially foreign trade
  • Expansion of bank credit
  • Financial accommodation to industries
  • Benefits to consumers
  • Credit to the government sector
  • Stability
• Classification of Credit


  • Public and private
  • Secured and unsecured
  • Purpose
  • Time period
• Public Credit


  Includes all grants of credit to governments: National, provincial, municipal, and its instrumentalities
• Private Credit


  Refers to all grants of credit to non-governments: Individuals, partnerships, corporations, and other private institutions
• Secured Credit


  The most acceptable security or collateral is land with a title, other forms of assets which are acceptable are stocks, bonds, houses, machines, crops, and other valuable properties
• Unsecured Credit


  Loans are granted without security, e.g. Character loans-small loans which are granted to borrowers on the basis of their character
• Types of Credit by Purpose

  • Commercial credit
  • Agricultural credit
  • Investment credit
  • Consumer credit
• Types of Credit by Time Period

  • Short-term credit
  • Medium-term credit
  • Long-term credit
• Innovative Credit Products


  • Debit cards
  • Credit cards
  • Housing loans
  • Auto loans
  • Personal loans
  • Educational loans
  • Loans against securities
  • Consumption loans for the purchase of durables
  • Hybrid loan products
• Credit Providers


  • Banks
  • Credit unions
  • Utility companies
  • Pawnshops
  • Government agencies
  • Licensed moneylenders
• Banks


  An organization licensed to take deposits and extend loans. Banks are financial institutions where people and organizations can borrow and invest money
• Credit Unions


  A nonprofit financial institution that's owned by the people who use its financial products. Credit unions are an alternative to banks in that they provide financial products and services, but the money is normally put back into the local community
• Pawnshops in the Philippines

  Allow you to borrow money using your jewelry, gadgets, vehicles, or appliances as collateral
• Licensed Moneylender


  Any individual or organization who has obtained a credit license
• Credit Score


  A number between 300–850 that depicts a consumer's creditworthiness. The higher the score, the better a borrower looks to potential lenders
• FICO scores range from 300 to 850: 800+ is exceptional, 740 to 799 is very good, 670 to 739 is good and represents the median credit score range, 580 to 669 is below average, 579 or less is poor
• Dave Ramsey: '"Your Credit Score is not a measure of success. It's only an indication that you have debt."'
• Loan Considerations


  Now that you've improved your credit score and made yourself eligible for better loan options, you don't have to settle for the lender that first lent to you. You can, and should, explore your options on the market
• 5 Cs of Credit

  • Character is the applicant's credit history
  • Capacity is the applicant's debt-to-income ratio
  • Capital is the amount of money an applicant has
  • Collateral is an asset that can back or act as security for the loan
  • Conditions is the purpose of the loan, the amount involved, and prevailing interest rates
• 6 Cs of Bad Credit

  • Complacency
  • Carelessness
  • Communication
  • Contingencies
  • Competition
  • Cluelessness
• Credit management is defined as your company's action plan to guard against late payments or defaults by your customers
• 3 Key Objectives of Credit Management

  • Safeguarding customer risk
  • Settlement of outstanding balances
  • Improving cash flow
• Credit Risk


  The possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations
• Essential and Best Practices in Managing Credit Risk

  • Know your customer
  • Analyze non-financial risks
  • Understand the numbers
  • Structure the deal
  • Price the deal
  • Present the deal
  • Close the deal
  • Monitor the relationship
• The credit department is arguably the most unpopular department in a company because customers want unlimited credit in order to delay cash payments, while the credit manager must exercise some prudence in only granting credit where invoices are likely to be paid
• Credit risk


  Possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations
• Credit risk


  • Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection
• Essential and Best Practices in Managing Credit Risk

  • KNOW YOUR CUSTOMER
  • ANALYZE NON-FINANCIAL RISKS
  • UNDERSTAND THE NUMBERS
  • STRUCTURE THE DEAL
  • PRICE THE DEAL
  • PRESENT THE DEAL
  • CLOSE THE DEAL
  • MONITOR THE RELATIONSHIP
• Credit department


  Arguably the most unpopular department in a company
• Reasons why the credit department is unpopular

  • Customers want unlimited credit in order to delay cash payments
  • The credit manager must exercise some prudence in only granting credit where invoices are likely to be paid
• Two types of risk in granting credit

  • The risk of granting too much credit to a customer that cannot pay
  • The risk of denying credit to a customer who can pay
• Organizational structure of credit and collection department

  The nature of a business and its size will determine the structure and staffing of the credit and collection department. Unlike most other company operations, the credit department tends to remain fairly constant in size and scope of activities during periods of changing business conditions
• Reasons why the credit department tends to remain fairly constant in size and scope

  • Increased support needed for full-volume sales in good times
  • Increasing delinquencies when economic times are difficult
• Organizational structure of credit and collection functions

  • The credit function may report to the treasurer or chief financial officer
  • The collections function may report to the controller
• Centralization vs. Decentralization


  In a centralized structure, the credit function is controlled and administered from a principal or central location. In a decentralized structure, the credit function may report to a principal location (headquarters) with credit personnel located at remote offices
• Credit and collections team members

  • Credit manager
  • Credit clerk
  • Collections manager
  • Collector
  • Skip tracer