Credit Management: Chapter 7

Chapter 7: Credit Management

• Credit management is important to know to grant credit properly.
• Credit investigation and appraisal are needed to understand credit.
• Knowing the credit work and policy required for commercial houses.
• Granting credit has a value for financial management and avoiding frauds.

Importance of Credit Management

• Credit is a necessity for businesses to grant in one form or another.
• Granting of credit requires managing its collection.
• Granting credit indiscriminately can increase sales volume; however, can undermine a firm and cause its collapse.

The Credit Man

• Credit men are important to contribute to the operation of the company, making credit recommendations based upon investigations, studies, and analyses for whether credit should be granted or denied.
• The credit man must protect a company from losses but also avoid being overly strict, which could lose customers.

The Credit Department

• Gathing credit information about the applicant to assemble information guiding the loan officers when establishing credit ratings is important; the information helps loan officers assess and analyze.
• Credit and sales departments must cooperate effectively so business can operate on a sound basis.

The Credit Manager

• Credit managers occupy very important positions in the structure of a credit economy.
• Small businesses might require them to be credit investigators, appraisers, supervisors, managers, and loaning officers all in one.
• Credit managers must have the knowledge to complete the facts surrounding a credit application for them to handle their responsibilities well.

Credit Investigation and Appraisal

• Banks require a credit investigation of clients prior to approval.
• The quality of information is largely dependent on the credit investigator.
• Credit investigators verify and evaluate the applicant's character, credit, and integrity.

Credit Investigation Report (CIR)

• A CIR may be requested from any officer or department of a bank.
• Purposes for report include loan accommodations, letters of credit, new accounts, transferred business, co-makers/guarantors, updates, insurance companies, beneficiaries, prospective buyers, and suppliers.
• An investigator is assigned to each case to study the applicant's background and assess bank records and other requirements.
• The scope of credit investigation depends on several factors, including and financial and time purposes, company credit policy, client classification, amount, data involved.

Company Background Check

• Business records, registration details, names of incorporators, and operating records must be examined.
• Personal background, business identity, and references are needed for individuals.
• Requirements for single proprietorships, partnerships, and corporations must be considered.

Partnership Considerations

• Determine if the firm is a general or limited partnership, as this impacts liability.
• Ensure the partnership contract is registered with the Securities and Exchange Commission.
• Must be a contract, legal capacity, mutual contribution, profit motive, and lawful purpose.

Corporation Considerations

• The legal existence of a corporation starts from date of the issuance of a certificate.
• Look into the corporations name for establishment and it's purpose and objectives.

Financial Conditions

• Summarize company's financial statements reflecting financial condition and operations.
• Include balance sheets, income statements, schedules, and explanations.

Dealings with Government Lending Agencies

• Focus on size and fluctuations of borrowings, nature of security, and installment payments and arrearages.

Experience with Merchandise Suppliers

• Useful for credit matters, amounts owed, past due, terms, and payment history.

Relationships with Other Banking Institutions

• Must include the nature of accommodations granted, type of borrowings, and securities.

Bank's experience with clients

• Determine if there has been a previous relationship established in the past.

Court Cases

• Information can be gathered for involvement in collection civil or criminal cases.

Credit work

• It is important to identify the subject's place of business, business reputation, and the general quality of their products and/or services being offered.

Control of credit

• It is important to monitor the subject conditions of the business and if there resort to unfair methods of competition.

Credit Work Professionals

• Includes a supervisor, a senior credit analyst, a junior credit analyst, senior appraiser, appraiser, or credit investigator.
• Supervisors handle supervision of section/department, requests for reports, reviews, inquiries, implements procedures, existing relations, and the supervision of monthly reports.
• Senior credit can concentrate on evaluation of cash flow projections based on balance sheets and information.
• Supervisors and other credit professionals create/review reports and investigations.
• Appraisers conduct ocular inspections of properties being offered as collaterals.

Motivation

• Important factor to close supervision
• Pride, monetary reward, and commendation are useful in solving supervision.

Bank Appraisal Report

• Bank reports contains general information regarding the name of mortgager, encumbrances, and credit policy.
• Land identity, description, area, and lot number.
• Description of land usage.
• List neighborhood data.
• List utilities.
• Describe transportation.
• Describe the improvements.
• Make an estimation.

Credit Policy

• Defines what it will adopt in the business, how to handle existing and prospective customers.
• Credit terms or conditions depend on time, when payments, and discounts.
• Credit periods depend on customer ability to remit.
• Credit limits serve as a tool to help avoid issues with loans

Credit Limits

• The purpose and use of credit limits serves a function for the control of credit.
• Operates as a device for the extensions of controlling credit and reduce costs.
• Controlled credit is obtained after a process including: investigation of customer, terms and conditions, reminders, customer suspension, and appropriate decision making.

Problem of Credit Extension

• Few merchants escape the extension of credit to customers, but some uses them to increase profitable sales.

Granting Credit

• Granting credit requires the exercise of proper care and caution to avoid certain effects and problems.
• The credit manager should have an idea of the applicant firm identity, their references, and considerations of the order.

Objectives and Credit Management

• One key objective is to maximize sales and increase volume.
• It is important to be able to control the amount receivables.
• With controlling certain costs in management, firms reduce costs and improved performance.

Importance of Credit Limits

• The tool is used to protect economic society, with it's types either being quantitative or temporal.

Sound Credit Management

• Revolving around three concepts
• Estimation of various sources, gathering of credit and condition.
• Enforcement of processes and collection.
• Evaluation of principles and records.

Credit Fraud

• Is avoidable with credit policies as many firms employ such practices.

Credit management

• The goal is to protect the economic society while using responsible judgement in cases.