Credit Systems in Business

Suppliers' Credit

• Suppliers provide credit to businesses in the "buy-and-sell" industry.
• Terms can range from 30 to 120 days.
• Credit is typically provided in the form of raw materials, finished goods, or merchandise.

Line of Credit

• A line of credit enables a business to access short-term credit from a bank, subject to availability of funds.
• It is different from time or term loans in several ways:
  • Loan release: In a line of credit, only a portion or the full approved amount can be withdrawn, unlike time loans where the entire amount is released upfront.
  • Interest calculation: In a time loan, interest is calculated on the full amount for the entire term. In a line of credit, it's calculated based on the actual amount withdrawn.
  • Commitment fee: Banks charge a one-time fee for a line of credit regardless of whether the loan is fully, partially, or not used.

Packing Credit Advances

• Credit extended by banks to exporters to fund the manufacturing of goods for export.
• Involves financial assistance for procuring raw materials, processing them into finished goods, and preparing them for export.

Treasury Bills (T-Bills)

• Short-term debt securities issued by the Philippine government to raise funds.
• Peso-denominated and unsecured.
• Offer fixed-income returns with predetermined interest rates.
• Typically mature within a year and are issued at a discounted price.

Bank Guarantee Credit

• A bank guarantees the payment of a buyer's obligations to a seller.
• Used to secure transactions like letters of credit (L/Cs).
• The bank assumes the responsibility of covering any shortfall in payment by the buyer.

Promissory Note

• A credit instrument, often called a P/N or pronote, that represents a written promise to pay a debt.
• Can be a separate document or incorporated into sales invoices, delivery receipts, or pledge documents (like in pawnshops).
• Promissory notes are often detailed with specific provisions to avoid legal disputes.

Trust Receipt

• Not a credit instrument in itself, but becomes one when used in a credit transaction.
• The seller (entruster) gives the buyer (entrustee) possession of goods, but not ownership.
• The buyer holds these goods in trust to sell them.
• Proceeds from sales must be remitted immediately to the seller to avoid violating the trust agreement.
• Failure to comply with trust receipt terms may lead to criminal liability.

Deed of Conditional Sale

• Used in selling appliances on credit.
• Transfers possession of the appliance to the buyer but not ownership.
• The seller retains the right to repossess the appliance in case of non-payment.
• The seller is responsible for losses incurred due to fortuitous events.

Warehouse Receipt

• Issued by a registered warehouse to provide evidence of deposit.
• Not a credit instrument.
• Used in deposit transactions (like a farmer depositing palay in a warehouse).

Accounts Receivables Financing

• A method of financing where a business sells its receivables (promissory notes) to a finance company.
• Finance companies purchase receivables at a discount.
• The discount represents the gross profit of the finance company.
• Both ownership and possession of the promissory notes are transferred to the buyer.

Factoring

• A type of accounts receivable financing where the finance company purchases the accounts receivable.
• Similar to accounts receivable financing, the finance company typically purchases the receivables at a discount.

Mortgage

• A type of loan secured by real estate.
• The borrower (mortgagor) provides the lender (mortgagee) with a legal claim on the property as collateral.
• The borrower retains possession of the property until the loan is repaid.

Title Verification

• Important to verify land titles before buying a property.
• Methods of verification:
  • Checking the "Memorandum of Encumbrances" section of the Owner's Duplicate Certificate.
  • Consulting a lawyer for a due diligence investigation.
  • Checking with the Land Registration Authority (LRA).
  • Checking with the Securities and Exchange Commission (SEC) for companies (for authenticity and legality).

Spotting Fake Titles

• Guidelines to help identify fake land titles:
  • Check if the party responsible for goods in transit is listed (e.g., mortgage documents).
  • Look for provisions related to successor-in-interest and holder-in-due-course.
  • Verify the title's authenticity and existence through the LRA.

Government Agencies

• Land Registration Authority (LRA): Responsible for land titling.
• Securities and Exchange Commission (SEC): Responsible for company registration.

Other Notable Points

• Successor-in-interest and holder-in-due-course provisions: These provisions are crucial when dealing with promissory notes and mortgages.
• Government Interest Rate Changes: In cases where the government adjusts interest rates, the rate incorporated into the pronote will change accordingly.
• Deed of Conditional Sale: This document serves as a credit instrument for a conditional sale, granting the seller the right to repossess the item if the buyer fails to pay.
• Warehouse Receipt: This is an important document for goods stored in a warehouse, indicating ownership and custody of the goods.
• Trust Receipts: A trust receipt gives possession, but not ownership, of goods for the entrustee to sell, with proceeds typically remitted to the entruster.
• Fortuitous Events: In a deed of conditional sale, the seller bears the loss due to unforeseen events, not the buyer.
• Accounts Receivable: Accounts receivables financing provides companies with immediate cash flow by selling their invoices to finance companies.
• Factoring: Similar to accounts receivables financing, factoring involves the sale of receivables by businesses but often with more comprehensive services.

This quiz explores various credit systems utilized in business, including supplier credit, lines of credit, and packing credit advances. Understand the terms, benefits, and calculations associated with each type of credit to enhance your financial knowledge and decision-making skills.