Understanding Credit Terms and Policies

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Questions and Answers

What does collateral represent in a loan agreement?

A secondary repayment source if the borrower defaults (correct)

A guarantee of loan repayment from the borrower

The primary source of income for the borrower

The total capital invested in the business

In the context of credit evaluation, what is the significance of capital?

It indicates the total assets owned by the borrower.

It is the lender's assessment of the borrower's reputation.

It exclusively determines the borrower's credit score.

It reflects the commitment the borrower has to their business. (correct)

Which statement regarding credit policies is true?

Credit policies need to be monitored and updated as needed. (correct)

Changes to credit policies are rarely necessary.

There is a universal ideal credit policy for all industries.

Credit policies should remain fixed over time.

What does the term 'character' refer to in the context of lending?

The general impression of the borrower's trustworthiness Signup and view all the answers

What indicates a borrower's potential future payment performance?

The payment history on current credit relationships Signup and view all the answers

What should a collector focus on when dealing with a financially distressed customer?

Providing leniency and understanding Signup and view all the answers

What is the primary goal of credit policies in a company?

To maximize profits and minimize bad debts Signup and view all the answers

Which factor is deemed the most critical in credit evaluation?

Capacity to pay Signup and view all the answers

During which stage is the credit risk primarily evaluated in credit procedures?

During the credit granting process Signup and view all the answers

What is a recommended method for improving a collector's skills?

Participating in outside training courses Signup and view all the answers

Which factor influences the implementation of restrictive credit policies?

Seller over-extension Signup and view all the answers

What aspect of a customer's situation is important when assessing credit decisions?

External conditions and loan purpose Signup and view all the answers

What is essential for ensuring understanding and compliance with credit policies?

Effective communication of credit policies Signup and view all the answers

How are financial ratios used in credit analysis?

To measure a company's performance efficiency Signup and view all the answers

What is a key responsibility of a credit manager?

Handling special collection problems Signup and view all the answers

What does a good credit policy aim to achieve?

Maximizing sales and reducing losses due to bad debts Signup and view all the answers

What type of customer requires a collector to be particularly firm?

Perennial discounters Signup and view all the answers

What is the historical significance of character in credit granting?

It was most emphasized historically Signup and view all the answers

Which quality is NOT considered important for a collector?

Physical strength Signup and view all the answers

What could happen if a business focuses too much on selling?

Potential failure in collection policies Signup and view all the answers

What is NOT included in the development of credit policies?

Personal opinions of employees Signup and view all the answers

What is the primary purpose of the Credit Information Corporation (CIC)?

To collect and share credit information. Signup and view all the answers

Which of the following statements is true regarding credit reports?

Borrowers have the right to access and dispute their credit report information. Signup and view all the answers

Under RA 9510, what is required for authorized entities to access credit information?

Specific purposes must be defined. Signup and view all the answers

What constitutes a prohibited practice in debt collection?

Threatening actions that are not legally permissible. Signup and view all the answers

Which situation allows publishing personal debt information legally?

If the borrower consents in writing. Signup and view all the answers

Why are written credit policies preferred over unwritten ones?

They provide greater clarity and consistency. Signup and view all the answers

What must lending companies ensure when outsourcing debt collection?

The third-party agencies follow the law. Signup and view all the answers

What can be a consequence of severe violations of debt collection rules?

Loss of a company's business license. Signup and view all the answers

How does capacity impact a borrower's ability to obtain credit?

It evaluates cash inflows related to repayment. Signup and view all the answers

What is the primary function of collateral in a loan agreement?

To secure the loan with assets in case of default. Signup and view all the answers

What is NOT a benefit of having a well-written credit and collection policy?

Guaranteeing a profit margin. Signup and view all the answers

Why is it crucial to update credit information regularly?

To allow for better customer relations. Signup and view all the answers

What is the significance of the 'character' assessment in credit evaluations?

It considers historical payment behavior. Signup and view all the answers

What does the 'purpose' section of a credit and collection policy define?

Governance framework for credit management. Signup and view all the answers

What is a key consideration when setting credit limits for customers?

Anticipated purchasing volume of the customer. Signup and view all the answers

What does evaluating credit risk primarily involve?

Evaluating the likelihood of repayment. Signup and view all the answers

Study Notes

Credit and Collection Policies

Objective: Maximize profits and minimize bad debts.
Advantages of Written Policies: Consistency, efficiency, and documented steps.
Disadvantages of Increased Staff Turnover: Not listed as an advantage.
Credit Risk Evaluation: Primarily during the granting process.
Credit Policy Balance: Ideal balance between liberal and restrictive.
Credit Manager Role: Handling special collection problems, communication, and compliance.
Credit Policy Scope: Encompasses company objectives, maximizing sales, and reducing losses.
Collector Responsibilities: Contact delinquent customers, pleasant personality, and positive atmosphere.
Collector Skills: Communication, understanding, and handling distressed customers.

Credit Analysis

Key Elements: Assets, liabilities, equity, performance efficiency.
Financial Ratios: Measure company performance.
"Capacity to Pay": Most critical factor; assesses borrower cash flows and repayment ability.
"Conditions": External environment and loan purpose influence credit decisions.
Historical Emphasis: Character was previously most emphasized.
Credit History: Critical for repayment likelihood.
Five C's of Credit: Capacity, character, capital, collateral, and conditions.
Debt-to-Credit Ratio: Low ratios increase loan approval likelihood.
Collateral: Secondary repayment source for lender if borrower defaults.

Credit Policies and Procedures

Credit Application and Interview: First step in credit procedures.
Customer Purchasing Volume: Considered when setting credit limits.
Credit Policy Updates: Crucial for adapting to changing conditions.
Credit Information Corporation (CIC): Collects and disseminates credit information.
Borrower Rights: Access to and dispute credit reports.
Debt Collection Practices: Must comply with laws and regulations.
Company Authority: Can be revoked for severe violations.
Credit Policies Responsibility: Not solely the credit manager's responsibility.
Internal Factors: Impact credit policies.
Assignment of Responsibilities: Necessary for proper implementation.
Policy Adaptation: Essential for current situations.
Ideal Policy Variations: Vary by industry.
Character Assessment: General impression (trustworthiness, business experience).
Collateral Value: Secondary repayment source for lender.
Capital Contribution: Indicator of borrower investment and commitment.
Numerical Data Limits: Credit evaluator's judgment is not solely based on numbers from applications.
Payment History: Indicator of future performance.

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Description

Test your knowledge on key concepts related to credit evaluation and lending practices. This quiz covers important terms such as collateral, capital, and character, and assesses your understanding of credit policies within a business context.