Principle and Concepts of Credit PDF

Topic 1 : Principle and Concepts of Credit can buy money, or goods, or labor, by giving in exchange for them, a Credit promise to pay at a future. ( Mac - Credi...

Topic 1 : Principle and Concepts of Credit can buy money, or goods, or labor, by giving in exchange for them, a Credit promise to pay at a future. ( Mac - Credit is a term derived from the Leod) Latin word credo meaning to - power to obtain goods or services by believe, to trust giving a promise to pay money (or - form of deferred payment goods) on demand or at a specified - first party is called a creditor, also date in the future. ( Johnson) known as a lender - present right to a future payment. ( - second party is called a debtor, also Mac Leod) known as a borrower The 1st Principle of Credit - is the provision of resources by one Do not Give Credit to Anybody You Do Not party to another where that second Trust party does not reimburse the first TRUST is the fundamental element of party immediately, thereby Credit generating a debt, and instead arranges either to repay or return CREDIT AND COLLECTION those resources at a later date MANAGEMENT - rooted on trust in an individual - is a purchasing power (Mill) Credit Management - the essence of credit is confidence is the science of evaluating the on the part of the creditor in the creditworthiness of a person and its debtor’s willingness and ability to grant. pay his debt. (Holdsworth) - “ short sale” of money (Johnson) Collection Management - “ sale of trust” art of collecting what has been - the exchange of an actual reality granted in credit to persons and against a future probability. ( Le maintaining continued patronage Vasseur) and goodwill in the process. - defined as the power time in return for some equivalent or services at a Remember: future date. (Bullock) - is the personal reputation a person - Bad credit can never be eliminated has, in consequence of which he but maybe minimized.  - It must be remembered that “ A sale ➔ poor nations could eliminate the is never a sale” unless collected. vicious cycle of poverty ➔ poor countries could become more Advantages of Credit productive ❖ facilitates exchange ➔ poor countries can generate more ❖ increases the volume of production economic activities and accelerate ❖ eliminates the risks involved in their economic growth through credit making payments to distant places ➔ The negative effects of population ❖ economizes the use of coins and growth can be eradicated by greater paper money economic progress. ❖ eliminates the danger of being ➔ it ensures the close collaboration robbed of large amounts of money between the grant of credit and its ❖ it makes possible the accumulation collection of small savings and their ➔ it reduces the incidence of risk of employment for productive purposes loss due to default of payment from the debtor Disadvantages of Credit ➔ It is done to avoid risk and loss on ❖ it facilitates the over-expansion of the part of the lender or creditor or business activity which might lead to any other business firms. recession ❖ a too liberal credit encourages Topic 2 CLASSIFICATION AND extravagance FUNCTIONS OF CREDIT ❖ Credit sometimes increases business risk The value of credit management to ❖ Easy borrowing by the government business and to the national has often led to the wasteful use of economy lies in its vast power to public funds help ensure an uninterrupted flow of ❖ Credit Risk money and resources. - the risk associated with granting of credit One cannot pay when one cannot - is the non-payment of loans of the save or collect enough to pay with. borrower Classifications of Credit as To Forms Of Credit transactions Need for Credit Charge Account Classifications of Credit According to the Use It is Availed of: consists in the granting of credit on the mere signature of the Consumer Credit customer/client or authorized when the property or service representative. thus acquired is used for the Secured Charge Account personal benefit of the credit grantee Refers to the extension of credit payable usually in thirty (30) days, Example: car purchased for personal use, but this time, aside from the house, furniture signature of the customer/client, and fixture, appliance, credit additional collaterals are required in from sari-sari store. the form of bond from a bonding company or valuable properties Industrial Credit Installment Accounts when it is used for business, the debtor expects to accumulate the account is payable in the amortizations from the use of installments, usually monthly. It is purchased items. broken down in installments because the amount of credit Example: when one purchases a truck to extended is substantial. This kind of be used as cargo truck. account is common in sales of Trade Credit durable goods, like appliances, cars, trucks and the like. when the thing purchased is to be used in connection with the business of the Straight loans obligator, or, without necessarily expecting loans in the form of money or that the purchase price could be equivalent usually granted by banks accumulated from the use of the thing, and other financing institutions. The though it is the business of the debtor from loans may either be secured or where he expects to secure payment. unsecured, payable in installments Example: when one purchases a truck for or lump sum depending on the his bakery policies of the lending institutions.  business, or, when one channels of trade to the borrows from a bank consumers Sustains and promotes to be used for his business. production Functions of Credit Establishes rules for credit and collection transactions Economic Function Leads to efficient collection of credit serves as a medium of accounts receivable exchange in the economy Contribute as a profit center to credit is to make capital the attainment of a company’s available for business purposes desired profit targets, either by itself or in cooperation with a Social Function company’s sales and marketing credit is to evoke independence units of thought and action. Helps in teaching debtors good Its use obviates the necessity for credit habits and practices hoarding on the part of those Can serve as a tool in attaining who desire to save and leads personal and business goals them to place their funds in Topic 3 The Importance of Credit to institutions when the principal is Business / Economy more secure than hoardings. Business Promotion Credit and Collection facilitates the for the business executive, credit movement of goods and services through performs several functions. channels of trade to the consumers. credit gives the opportunity to It sustains and promotes production, manage the business with the establishes rules for credit and collection funds of others and to adjust the transactions, leads to efficient collection of volume of capital to the varying accounts receivable, contributes as a profit needs of the business. center to the attainment of a company’s Functions of Credit and Collection desired profit targets, either by itself or in cooperation with a company’s sales and Facilitates the movement of marketing units, helps in teaching debtors goods and services through the good credit habits and practices, and can between and among people and serve as a tool in attaining personal and nations. business goals. Credit is a liquidity medium The value of credit management to a business and to the national credit, to a large extent, has a economy lies in its vast power to direct relationship with money as help ensure an uninterrupted a medium of exchange, because flow of money and resources. credit has the effect of increasing One cannot pay when one the total amount of money in cannot save or collect enough to circulation and liquidity in a pay with country. more money as long as it is in correct proportion with the gross Credit is an agent of production national product and supported by sufficient foreign exchange Credit makes possible the reserves, increases the availability of funds for purchasing power of people. productive This is demonstrated in the Credit is a medium of capital formation many socially oriented loans and Business today grows and credit programs of the national continues to grow by relying on government and the private credit for the accumulation of sector. capital. Credit develops the salability of goods Credit complements the monetary and services system Economic development in the this is best exemplified by the Philippines and in the Bangko Sentrals’s credit market-oriented economies of instruments such as; its the world would stagnate without certificates of indebtedness credit. (CBCIs), various government Goods and services will move securities and bonds and similar faster and in greater quantities requirements issued by the private sector. Credit is a tool for the distribution of Credit motivates higher business wealth standards and practices credit makes it possible for credit makes it possible for the someone without financial consumer to acquire more goods resource to acquire goods and and avail of more services. services necessary to earn or credit contributes to improving save to acquire wealth. business standards by providing manufacturers, sellers , and Credit complements the monetary lenders with the initiative to system improve the quality of their this is best exemplified by the products or services in the hope Bangko Sentrals’s credit of boosting sales. instruments such as; its Credit increases purchasing power certificates of indebtedness (CBCIs), various government The additional liquidity by loan or securities and bonds and similar credit to debtors, requirements issued by the correspondingly increases their private sector. purchasing ability. Credit is a tool for the distribution of Credit make it possible to attain growth wealth and progress credit makes it possible for More economic activities can be someone without financial made by using credit judiciously, resource to acquire goods and prudently. services necessary to earn or Credit increases purchasing power save to acquire wealth. The additional liquidity by loan or Credit helps in the creation of business credit to debtors, credit makes possible the correspondingly increases their organization of business firms by purchasing ability. providing vital funds necessary Credit make it possible to attain growth for the start-up of any and progress business/economic enterprise.  More economic activities can be made by using credit judiciously, prudently. Credit Management Association of the Philippines (philosophy) To inculcate credit consciousness in the public’s mind. To place the credit man in his proper place as a professional. To infuse credit discipline to the greater mass of our people.