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Module 1 - Introduction To Credit and Collection

The document provides an introduction to credit and collection. It defines key terms like credit, creditor, and debtor. It describes the basic elements of credit as obtaining something of value in exchange for a promise to pay, involving a definite sum of money that is payable at a future date or on demand. It also outlines the functions, classifications, and 5Cs (character, capacity, capital, collateral, conditions) of evaluating credit. The document concludes with a brief history of credit development in the Philippines and the basic functions of credit and collection departments.

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Allan Cris Ricafort
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3K views

Module 1 - Introduction To Credit and Collection

The document provides an introduction to credit and collection. It defines key terms like credit, creditor, and debtor. It describes the basic elements of credit as obtaining something of value in exchange for a promise to pay, involving a definite sum of money that is payable at a future date or on demand. It also outlines the functions, classifications, and 5Cs (character, capacity, capital, collateral, conditions) of evaluating credit. The document concludes with a brief history of credit development in the Philippines and the basic functions of credit and collection departments.

Uploaded by

Allan Cris Ricafort
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 23

INTRODUCTION TO

CREDIT AND COLLECTION


Allan Cris Ricafort
5 Mar 2022
2 n d S e m , AY 2 0 2 1 - 2 0 2 2
MEANING OF CREDIT

• from the Latin word credo meaning to believe, to trust


• securing something of value, whether tangible or
intangible, in return for a promise to pay at some
determined future date
• creates obligations and rights to both debtor and
creditor

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CREDITOR VS DEBTOR

• Creditor is an entity or person that lends money or


extends credit to another party.
• Debtor is an entity or person that owes money to
another party.

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BASIC ELEMENTS OF CREDIT

1. It is the ability to obtain a thing of value


2. A promise to pay
3. Definite sum of money
4. Payable on demand or future time

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FUNCTIONS OF CREDIT

1. Economic function
• Medium of exchange
• To make capital available
2. Social function
3. Business promotion

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CLASSIFICATIONS OF CREDIT
Common Forms of Credit Transactions:

1. Charge Account consists of granting of credit on the


mere signature of the customer/credit or authorized
representative.
2. Secured Charge Account refers to the extension of
credit and aside from signature of the customer/
client, additional collaterals are required

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CLASSIFICATIONS OF CREDIT
Common Forms of Credit Transactions:

3. Installment Accounts the account is payable in


installments, usually monthly.
4. Straight Loans loans in the form of money or
equivalent usually granted by banks and other
financing institutions.

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CLASSIFICATIONS OF CREDIT
Classification of credit according to the use it is availed of:
1. Consumer Credit - when the property or service thus
acquired is used for the personal benefit of the credit
grantee.
2. Industrial Credit - when it is used for business.
3. Trade Credit - when the thing purchased is to be used
in connection with the business of the obligator

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THE 5Cs OF CREDIT

1. Character. This refers to a borrower's reputation or


record concerning financial matters.
2. Capacity. This reflects the ability to repay a loan or
other financial agreement.
3. Capital. This consists of the person’s real and
personal property which can be a strong foundation
for credit approval.

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THE 5Cs OF CREDIT

4. Collateral. This is something of value, the debtor’s


assets as pledge.
5. Conditions.This may include stability of employment,
local business conditions or economic conditions
during time of loan application.

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HISTORY OF THE DEVELOPMENT
OF CREDIT IN THE PHILIPPINES

o In the earlier times, years before the last world war, credit
was synonymous with debt with all its negative
connotations.
o To the rich and poor alike, it was more of a stigma to avail of
credit and to have no debt was viewed as a status symbol.
o Credit transactions then attracted mostly people with not so
good credit standing.
o In 1932, there was already an Association of Credit Men, Inc.,
taking care of the credit needs of the metropolitan areas.

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HISTORY OF THE DEVELOPMENT
OF CREDIT IN THE PHILIPPINES

o After World War II and during the process of rehabilitation,


business began to pick up.
o Credit was needed because there was a big market but
people simply did not have the cash to buy.
o Good credit risk customers started to drop and this was
further deteriorated by cut throats competitions in credit
sales.
o To make matters worse for the credit men, our legislature
thru the years pass laws after laws, favoring debtors and
neglecting creditors.

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SAMPLE LAWS

o Usury Law (CA No. 2655)


o Two Installments Default Rule under Civil Law (Art.
1484, R.A 386)
o No Deficiency Judgment Rule in Foreclosure of Chattel
Mortgages
o Our Laws on Bouncing Checks
o Our court procedures in replevin cases

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ANECDOTE OF “COMPADRENG NATANSO”

To many who are engaged in credit selling or other forms


of credit extensions, they are often natatanso.

Nowadays, millennials / Gen Zs call it “nabudol”.

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• Many companies, banks and other financing institutions
are now saddled with tremendous receivables.
• The credit function is usually assumed by the sales staff,
and that credit extension is only considered as incident
to sales.
• The creation of Credit and Collection unit becomes an
important need for any firm engaged in credit
extensions.

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BASIC FUNCTION OF CREDIT AND COLLECTION

To maximize profits and minimize bad debts losses


through proper credit evaluation of each application
and through efficient and consistent
collection follow-ups.

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MAXIMIZING SALES

• Credit plays an important role in attracting more sales.


• It is a reality that only about 10% of the entire Philippine
population may be considered as can afford to buy on
cash basis durable goods which are medium or high-
priced.

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MAXIMIZING SALES

• The credit department must be a business-better, not in


the manner of the sales department tactics, but by its
fair action and friendly attitude which pave the way for
the sales department.
• Chief functions of the credit department –bind more
closely the customers to the institution.

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COOPERATION WITH OTHER DEPARTMENT

• Another essential factor in effecting maximum profits


and minimum losses is cooperation with other credit
departments and other credit men.
• Credit men are dependent upon other credit men for
information and cooperative action.
• All credit managers are interested in the same goal,
namely, to raise the standard of credit and thereby
remove as much of the risk from credit as possible.

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CREDIT DEPARTMENT AS A PROFIT CENTER

• Top management are treating the credit department not


merely as a cost center, but as a profit center as well.
• The credit management is tasked with the job of
subjecting the investment in receivable to the test of
profitability.
• Old approach -“What can credit do for sales.”
• More important -“What can credit do for profits.”

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CONTRIBUTION OF CREDIT DEPARTMENT
TO OTHER AREAS

1. Support to Sales Effort – management should


encourage the credit department to provide a
balance to the sales effort.
2. Customer Counseling – wise counseling may lead to
saving many customers and preserving profitable
sales.

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CONTRIBUTION OF CREDIT DEPARTMENT
TO OTHER AREAS

3. Contribution to Finance – Securing prompt


conversion of receivable into cash and aid in the
preparation of cash budget.
4. Task Force Assignments – credit men can be in the
forefront of new managerial developments.

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END OF THIS MODULE.

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