20 Questions
Match the following with their descriptions:
Credit and collections policy = Clear, written guidelines for supplying goods on credit and managing collections Credit policy = Guidelines and processes for executing corporate credit strategy Credit risk analysis = Assesses the effectiveness of a company’s credit policy and balances various interests Loan characteristics = The specifics of how an organization advances credit and lends to others
Match the following with their goals:
Credit and collections policy = Optimizing resources, reducing credit risk, and improving overall cash flow Credit policy = Ensuring new business aligns with credit risk tolerance and effectively collecting debts Credit risk analysis = Balancing various interests to achieve corporate credit strategy goals Loan characteristics = Assessing the effectiveness of a company’s policy and balancing various interests
Match the following with their focus areas:
Credit and collections policy = Customer qualification criteria and delinquency procedures Credit policy = Processes for executing corporate credit strategy Credit risk analysis = Assessing the effectiveness of a company’s policy Loan characteristics = Advancing credit and lending to others
Match the following with their functions:
Credit and collections policy = Managing daily operations and conforming to documented steps and procedures Credit policy = Effectively collecting debts to limit credit losses and safeguard assets Credit risk analysis = Balancing various interests to achieve corporate credit strategy goals Loan characteristics = Ensuring that new business aligns with credit risk tolerance
Match the following with their definitions:
Credit and collections policy = Document with clear guidelines for supplying goods on credit and managing collections Credit policy = Complete guidelines and processes for executing corporate credit strategy Credit risk analysis = Assessment of the effectiveness of a company’s policy and balancing various interests Loan characteristics = Specifics of how an organization advances credit and lends to others
Match the type of credit policy with its description:
Loose credit = Represents a greater willingness to extend credit to grow the business Flexible credit = Represents a willingness to extend credit depending on circumstances Tight credit = Generally means less willingness to extend credit to support revenue growth No credit = This is an unwillingness to extend credit, as a company is highly risk-averse
Match the components of a credit policy with their descriptions:
Credit application process = Part of the components of a sound credit policy that needs to be rigorously applied Types, limits, and terms of credit = Part of the components of a sound credit policy that needs to be rigorously applied Collection, monitoring, and control = Part of the components of a sound credit policy that needs to be rigorously applied Risk management = Part of the components of a sound credit policy that needs to be rigorously applied
Match the examples with the type of credit policy they represent:
Granting credit to below-average credit profiles with worse risk ratings = Loose credit Granting credit to a broader range of average credit profiles with a process for exceptional approval = Flexible credit Only granting credit to above-average credit risks, such as better risk ratings = Tight credit Examples include “cash only” small-dollar consumable goods or businesses with slim margins = No credit
Match the organization's specific needs with the type of policies mentioned in the text:
Small businesses selling to customers on credit = Credit sales policy Large financial institutions lending directly to corporations = Asset-based lending policy Firm-specific framework designed by management to standardize lending decisions = Credit policy Categorizing policies based on firm-level goals and business environment = Dynamic policy
Match the ABA report on credit conditions with its purpose:
Measures the general type of credit policy for financial institutions = Index for measuring general type of credit policy Assesses individual company's specific needs and policies = Assessment tool for individual company's specific needs and policies Provides guidelines for formulating different types of credit policies = Guidelines for formulating different types of credit policies Analyzes the impact of macroeconomic factors on overall credit conditions = Analysis tool for macroeconomic factors and overall credit conditions
Flexible credit represents a neutral strategy that does not aggressively grow or restrict access to credit for clients.
True
Tight credit strategy is often implemented to limit credit losses and/or replenish capital.
True
Loose credit policy represents an unwillingness to extend credit, as a company is highly risk-averse or has no business case to support the cost/benefit of extending credit.
False
The ABA report on credit conditions measures the general type of credit policy for small businesses.
False
Components of a sound credit policy include the credit application process, types, limits and terms of credit, collection, monitoring and control, and risk management.
True
A credit and collections policy outlines guidelines for customer qualification, but does not provide steps for making collections.
False
The main goal of a credit collections plan is to increase credit risk and reduce overall cash flow.
False
Credit risk analysis only considers sales goals and customer demand, neglecting other factors.
False
A credit policy serves as a comprehensive guide and processes for executing a corporate credit strategy.
True
An organization that advances credit should not be concerned with aligning new business with its credit risk tolerance.
False
Study Notes
Credit Policy Strategies
- Flexible credit policy: Neutral strategy that neither aggressively grows nor restricts access to credit for clients.
- Tight credit strategy: Implemented to limit credit losses and/or replenish capital.
- Loose credit policy: Unwillingness to extend credit due to high risk aversion or lack of business case to support the cost/benefit of extending credit.
Components of a Sound Credit Policy
- Credit application process
- Types, limits, and terms of credit
- Collection
- Monitoring and control
- Risk management
Credit Risk Analysis
- Considers multiple factors, not just sales goals and customer demand
Credit Policy Purpose
- Comprehensive guide and processes for executing a corporate credit strategy
Credit and Collections Policy
- Outlines guidelines for customer qualification
- Does not provide steps for making collections
Credit Collections Plan Goal
- Reduce credit risk and increase cash flow (opposite of stated goal)
Organization and Credit Risk Tolerance
- Organization that advances credit should align new business with its credit risk tolerance
Learn about the basics of credit and collections policy, including guidelines for supplying goods on credit, customer qualification criteria, collection procedures, and managing customer delinquency. Understand the philosophy and rules of selling on credit.
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