Credit and Collection

• Today, credit investigators have a more difficult task because fraud is rampant and it's hard to determine creditworthy debtors
• Credit information must be disclosed to all interested parties. It is intended not only to assist a prospective credit in reaching a decision in a genuine credit problem but to warn other creditors about the poor credit score of a borrower
• The first and cardinal principle in credit investigation

  Respect the confidential nature of the information received
• The work of a Credit Investigator may be divided into four (4) major phases
• Elements of Credit


  • Trust or Confidence
  • Risk
• Credit risk is composed of

  • Personal
  • Performance
  • Economic
  • Risk
  • Security Factor
• Discerning, prudent assessment of the debtor's and co-debtor's financial management quality is the most important aspect in arriving at a credit decision
• Capacity refers to the debtor's existing physical, economic, financial and political situation in his place of residence/business
• Leverage ratio measures adequacy working capital
• Credit scorecards


  Mathematical models which attempt to provide a quantitative estimate of the probability that a customer will display a defined behavior with respect to their current or proposed credit position with a lender
• Character + Capacity + Insufficient Capital = Limited Risk
• Character + Capacity + Capital + Conditions = Good Credit Risk
• Capacity + Capital - Character = Dangerous Risk
• Skip is a situation wherein the creditor can no longer trace the borrower
• Successful skip tracing requires experiences, more than knowledge of the gag or gimmick to be used to obtain information. It requires skills and impersonation
• Among properties owned by debtors (accused) is generally easier than locating their present whereabouts are places, offices, institutions to check a person's properties
• There is an assurance that risks will be eliminated if a creditor will establish a standard operation in evaluating borrowers before lending them money
• Credit risk diversification


  The potential benefit of a reduction in total credit risk, achieved by holding a well-diversified portfolio of loans or other assets
• Exchange of value refers to the length of time within which the debtor must pay the credit
• Cash flow to current debt services - measures ability to generate cash from operations to meet short term debt
• Total Liabilities/Shareholders Equity
• It measures ability to meet short term liabilities
• Current Assets/Current LIabilities
• Earnings before interest and taxes/Interest Payments
• Total Liabilities/Total Assets
• It monitors the rate at which the company replaces inventory
• Net Income/Sales
• Monitors the rate at which the company replaces inventory
• Sales/Average Total Assets
• Character + Capital + Insufficient Capacity = FAIR RISK
• Capacity - Character - Capital = FRAUDULENT RISK
• Character + Capital - Capacity = MARGINAL RISK
• Capacity + Capital + Impaired Character = DOUBTFUL RISK
• Capital - Character - Capacity = POOR RISK
• Character - Capacity - Capital = VERY BAD RISK
• Character


  The credit applicant's integrity and personal character
• Condition


  The debtor's existing physical, economic, financial and political situation in his place of residence/business
• Collateral


  Security for the credit obtained
• Capital


  The property a credit applicant owns in his name whether movable or immovable
• Capacity


  Ability of the borrower to earn enough to repay credit obtained