FNM105 Credit and Collection Lesson 1 - PDF

FNM105: Credit and Collection Lesson 1: the  Credit is a “sale on trust” You must believe in the Emergence and Challenge of Credit Economy person whom you give cash or goods to pay or give back t...

FNM105: Credit and Collection Lesson 1: the  Credit is a “sale on trust” You must believe in the Emergence and Challenge of Credit Economy person whom you give cash or goods to pay or give back the same at a definite future date. Learning Outcomes  Credit is a present right for a future payment At the end of this phase, students are expected to: (MacLeod)  You already received the goods, items or property 1. Understand the history of credit before paying for them 2. Discuss how credit emerged in business  Do NOT give credit to anyone you do not TRUST  We only give credit to people whom we know and 3. Identify the challenges encountered by business that has the credibility to pay debt. gave birth to credit. History of Credit History of Credit  Economic self-sufficiency  Barter – the exchange of goods without the use of  Barter – the exchange of goods without the use of money. money  Economic self-sufficiency  Common medium of exchange = money Nature of Credit Ancient coins 1. It is the ability to obtain a thing of value. A thing of value may mean a cash form of credit or merchandise form of credit. Debtors can apply for cash credit from several sources like banks, private individuals or other financial intermediaries. Merchandise form of credit is noncash form, where sources are retail outlets and the like. 2. A promise to pay. Aristotle The debtor makes a promise to pay the creditor. A promise to pay, to be valid should be in writing, “Money is barren. It does not breed” acknowledged by both the debtor and the creditor. The Money is for consumption and not to increase interest. promise should specify the principal amount, interest and the maturity date. Credit 3. Definite sum of money. Credere/Credo = Latin word meaning “to believe” or “to trust” Credit involves exact amount of money loaned, or money value for non-cash form of credit. The contract Credit = debt It emerged out of necessity must identify the principal value of loan and the Credit is the power to obtain goods or services by corresponding interest for the credit period. giving a promise to pay money (or goods) on demand or 4. Payable on demand or future time. at a specified date in the future (Johnson) A promise by the debtor for the settlement of Credit the agreement between a lender and a obligation may involve a future date as loan maturity, or borrower, where the lender agrees to extends a certain anytime the creditor demands payment. sum of money to the borrower. The borrower in return agrees to pay the money at a future date with an Advantages of Credit interest on the outstanding balance 1. Credit facilitates and contributes to the increase in Credit is a contract agreement in which a borrower wealth by making funds available for productive receives a sum of money or something of value and purposes. repays the lender at a later date, generally with interest. 2. Credit saves time and expenses by providing a safer and more convenient means to complete transaction 3. It helps expand the purchasing power of the business. 4. It enables immediate consumption of goods 5. It helps expand economic opportunities 6. It spreads progress to various sector of the economy 7. It made possible the birth of new industries 8. It helps buying more convenient for customers. Disadvantages of Credit 1. It encourages speculations 2. Contribute to extravagance 3. It causes overexpansion Cost of Credit 1. Interest = 0.125%,.25%, 1.25% 2.5% 2. Operating Expenses 3. Risk Foundation of Credit 1. Credit is founded on trust 2. Sources of credit information must be available to those granting credit. 3. Money standards must be stable 4. The government must protect the enforcement of valid obligation