Week 4 - Credit and Collection Policies Formulation Quiz

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Questions and Answers

What is the purpose of credit policies in a company?

To guide the performance of credit functions and meet objectives (correct)

To complicate credit transactions

To discourage the granting of credit terms

To hinder efficient customer service

At what levels do policies exist within a company according to the text?

Company and strategic level

Company and major division or department (correct)

Department and division

Company and minor division

What does the term 'dynamic' mean in the context of credit policies as per the text?

Inflexible and resistant to change

Rigid and unresponsive to changing conditions

Flexible and responsive to changing conditions (correct)

Static and unchanging

What factors affect the strength of credit power and credit risk according to the text?

Factors inherent in risk and external factors Signup and view all the answers

Which of the following is NOT a part of credit policies?

Complicating credit transactions Signup and view all the answers

Why are credit policies considered essential for efficient customer service?

To meet objectives, put order, and facilitate necessary transactions Signup and view all the answers

What factors contribute to a firm enjoying a wider profit margin as per the text?

Creditor's financial condition, efficient management, and superior productive distributive ability Signup and view all the answers

How can changes in environmental issues affect profit margins according to the text?

Higher production costs resulting from pollution control requirements Signup and view all the answers

What role do internal company objectives play in developing credit policies?

They are underlying factors to be considered Signup and view all the answers

Why should pending or probable regulations be considered in the business environment?

Because they can affect overall company objectives Signup and view all the answers

What should credit policies be harmonious with according to the text?

Established policies of other departments within the company Signup and view all the answers

What affects the amount of credit exposure a company can take according to the text?

Financial condition of the company Signup and view all the answers

What is essential to achieve maximum effectiveness of a policy?

Regular check-ups Signup and view all the answers

Why should any exceptions to the credit policy be documented?

To allow for flexibility Signup and view all the answers

What is the focus of target market identification in credit and collection procedures?

Risk asset acceptance criteria Signup and view all the answers

What does account origination or prospecting involve in the context of credit initiation?

Client assessments Signup and view all the answers

Why should a written credit policy be flexible?

Due to changes in economic conditions Signup and view all the answers

What ensures that actual performance and practices can be evaluated against a credit policy?

Established procedures and controls Signup and view all the answers

What should the account officer do before any origination exercise is done?

Secure relevant information on the prospect's financial interests Signup and view all the answers

What is the first activity in the Credit Department when it starts its functions?

Receiving credit applications Signup and view all the answers

Why is it important for a customer/client to fill out a credit application form?

To provide initial credit information for a credit decision Signup and view all the answers

What is the purpose of providing a listing of company requirements to a credit applicant?

To help the applicant know if they can meet the requirements Signup and view all the answers

Why must a credit extension not be approved without the customer/client filling out a credit application form?

To ensure compliance with company regulations Signup and view all the answers

What does the duly filled credit application form provide the Credit Department with?

Initial credit information for decision-making Signup and view all the answers

Which document is NOT required for a Single Proprietorship applying for credit, based on the text?

List of Officers and Directors certified by the Corporate Secretary Signup and view all the answers

What is a document required for both Single Proprietorship and Partnership/Corporation when applying for credit?

Audited Financial Statements Signup and view all the answers

Which entity type requires a 'Copy of Registration with the SEC' when applying for credit?

Both Partnership and Corporation Signup and view all the answers

Which item is NOT listed as part of the pre-screening process mentioned in the text?

Detailed background check of officers Signup and view all the answers

What is a document specifically required for Partnership/Corporation applying for credit?

Alien Registration Certificate of foreign officers Signup and view all the answers

Which statement accurately reflects the nature of credit application requirements according to the text?

'Board Resolutions to borrow or enter into facility' is only requested from Corporations. Signup and view all the answers

Study Notes

Credit Process Initiation

The account officer introduces products and services to the prospective client, securing relevant information on financial and related interests.
Good staff work and preparation are required for a successful credit origination process.

Pre-Screening Process

The credit application is the first activity in the credit department, with a credit application form for prospective customers.
No credit extension should be approved without a completed credit application form.
The credit application form provides:
- Initial credit information for decision-making
- Information for further interview with the applicant
- Leads for starting the credit investigation process

Required Documents

Individual:
- Latest Income Tax Return
- Marriage Contract (if married)
- Photograph
Single Proprietorship:
- Business Information Sheet
- Certificate of Business Name Registration with the DTI
- Income Tax Return
- Audited Financial Statements
- Statement of Assets and Liabilities
- Photograph of principal/owner
Partnership/Corporation:
- Business Information Sheet
- Copy of Registration with the SEC
- Articles of Incorporation and By-Laws (for corporation)/Articles of Co-Partnership and Partner’s Resolution (for partnership)
- List of Officers and Directors certified by the Corporate Secretary
- Bio-data/Personal Information of Officers and Directors
- Alien Registration Certificate of foreign officers
- Audited financial statements
- Board Resolutions to borrow or enter into the requested facility

Credit Policy Formulation

Credit policies are guides for the performance of credit functions.
Credit policies are designed to:
- Meet credit objectives
- Guide credit transactions
- Establish minimum requirements under normal conditions
- Be flexible and responsive to changing conditions
Factors influencing credit policy include:
- External factors (environmental, political, regulatory)
- Internal factors (company financial condition, overall company objectives, department policies)
Credit policies should be harmonious with established policies of other departments.

Implementation and Review

Implementation of credit policy involves:
- Assigning responsibilities and authorities
- Establishing procedures and controls
- Feedback and reports
Periodic review of credit policy is necessary to:
- Insure its proper implementation
- Identify weak spots
- Evaluate actual performance and practices

Target Market Identification

Target market identification involves identifying the client base and credit program facilities.
This process considers:
- General policy, program thrusts, strategies, and targets of the company
- Business environment, market information, present portfolio mix, risk asset acceptance criteria, and resources of the lending unit.

Account Origination

Account origination refers to the introductory and exploratory discussions between account officers and clients regarding credit initiation.
The account officer should ask for additional requirements to better evaluate the proposed credit transactions.

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Description

Test your knowledge on the formulation, communication, and implementation of credit collection policies within a company. Explore different levels of policies and their significance in achieving company objectives.