This document discusses credit, credit management, and the credit process. It covers the social aspect of borrowing, the nature of credit as a means to obtain something of value in exchange for a future promise to pay. It describes the characteristics of credit including risk and trust. It outlines different types of credits including consumer, bank, investment, agricultural, and export credits. It discusses laws around truth in lending and outlines a company's credit policy. It also covers important aspects of the credit process like credit analysis, sources of credit information, financial statements, important questions to consider for credit, maintaining a credit file, and collection procedures.

1. CREDIT AND CREDIT
MANAGEMENT

2. The Social Aspect of Borrowing
 The ability of a business
enterprise
to obtain borrowed funds
for use in its operation
is the main social feature
of borrowing .
 Todays trends on business
transactions

3. THE NATURE OF CREDIT
 CREDIT-
 Simply as a means by which something of value is obtained for a promise to pay for it at some
future time. It signifies power and obligation on the part of the debtor. Moral and right on the part
of the creditor and expectations of the fulfillment of the promise.
 AS A POWER
 the ability of the debtor to obtain goods or services on the strength of his promise to pay for the
future time.

4. CHARACTERISTICS OF CREDIT
1. RISK -
The possibility of the debtor to pay or not to pay his accounts.
2. TRUST
Without trust no credit transaction
3. TIME OR FUTURITY
The date agreed upon for payment.

5. CLASSES AND KINDS OF CREDITS
1. CONSUMER CREDIT -
the most common type of credit or most called as personal credit.
2. Bank Credit and Mercantile Credit –
credit created by a bank by adding the proceeds of a loan to a depositor’s
account.
3. Investment Credit – utilized by a business organization for the purchase of fixed
For those necessary for undertaking business operations with five (5) major sources such as ;
1. Funds for individuals and estates
2. banking institutions and like SSS and the GSIS.
4. Agricultural Credit – for in the General Banking
Acc. This includes loans intended for the
acquisition of fertilizers .
5. Export Credit- when the exporter sells his goods abroad on the bases of deferred payment.

6. TRUTH IN LENDING ACT
DESIGNED PURPOSELY
TO
PROTECT CITIZENS
FROM THEIR UTTER LACK
OF
AWARENESS OF THE TRUE
COST OF CREDIT.
ACT NO. 3756 ,
known as the
“TRUTH IN LENDING ACT”
 This law requires each creditor to make known to the
borrower or buyer in writing the following.
1. The cash price or delivered price of the
property service to be required.
2. The amount, if any, to be credited as down
payment of trade – in.
3. The difference between the amounts set
forth in 1 and 2.
4. The changes, individually, which are paid or
be paid by such person in connection
with the transaction but which are not
incident to the extension of credit.
5. The total amount to be finance;
6. The finance charge expressed in terms of
person and centavos;
7. The percentage that the finance charge bears
to the total amount to be financed expressed
as a simple annual rate on the outstanding
unpaid balance of the obligation .

7. THE CREDIT POLICY
• No business is too small to
ignore the importance of the
credit function.
• Whatever credit policy a compay
may choose to adopt is
doubtless circumscribed or
influenced by its objectives .
• However ,by large, a sound
credit Policy is one geared
toward maximum sales and at
the same time intended to
reduce losses to the minimum.
 The Credit Department
Responsible for the proper and thorough evaluation of the
credit rating of prospective customers desirous of availing
the use of credit.
 Basis of Credit
 Two important and complimentary questions to determine the
credit rating of an applicant.
1. Can the customer pay his debt when it becomes due?
2. Will he pay it when due?
 There are five broadened C’s to avail credit namely
1. character -desirable qualities of a person – good character
2. capacity - ability to pay
3. capital - assets of an individual
4. collateral -property acceptable to the creditor as security
5. conditions – stability of a place or country.

8. CREDIT ANALYSIS
SINE QUA NON
Determination of proper
credit rating.
There is a pressing and
compelling need to conduct a
proper and thorough analysis and
evaluation of credit risks of
applicants for credit.
It is necessary and important
that sources of information to be
tapped to the fullest extent and
placed under careful scrutiny to
arrive at a correct diagnosis.
Thus credit manager must
coordinate with the services of the
credit investigator, appraisers ,
salesmen and even hire the services
of independent and expert
appraisers to analyze correct
market value.
SOURCES OF CREDIT INFORMATION
A. INTERNAL SOURCES
a. Debtor’s previous credit record with the business firm.
b. Credit man’s personal knowledge of debtor’s character
and reputation.
c. Personal contacts with debtor
1. Through correspondence.
2. Through personal visit by credit man or his
representatives.
3.Reports of Salesmen.
d. Analysis of debtor’s financial statement.
e. Audits of surveys of the business.
 B. FROM EXTERNAL SOURCES;
a. Mercantile agencies
b. Trade references
c. Banks
d. Newspaper
e. Court cases
f. Reports from competitors of the borrower
( in case of a business firm)

9. CASH FLOW ANALYSIS AND FINANCIAL STATEMENTS
CASH FLOW ANALYSIS – Inflow
and outflow of cash. A flow of net
working capital or for a flow of
more liquid current liabilities .
Cash is only one of the current
assets and is part of the working
capital.
CASH FLOW EVALUATION –
refers to the analysis of the
projected sources and application
of funds to determine the available
cash to meet future obligations.
a. Sources and uses of cash on a
monthly or annual basis.
b. A repayment scheme on the
accommodation applied for
c. A disclosure of pertinent
assumptions used in the
forecast
 FINANCIAL STATEMENTS - a report summarizing the
financial condition or financial results of an organization on
any data or for any record. Financial statements of the
individual firm are the most important source of financial
data.
 There are three fundamentals of financial statements
1. The balance sheet - which depicts the financial
condition of the business firm at the end of a
specified period .
2. The profit – and –loss statement – summarizes
the financial operation over period of time.
3. The reconciliation of the capital accounts which
summarizes changes in them from one balance
sheet to another. Pointing out changes
resulting from revaluation of assets or
investment of funds.
 Financial statements must be religiously scrutinized to help
provide as basis for a sound credit decision.

10. IMPORTANT QUESTIONS
IMPORTANT QUESTIONS TO AVAIL
CREDITS
a. Who is the borrower?
b. Why did he come to the financial
institution if he is not a customer?
c. How much credit is required?
d. What is the purpose of the loan?
e. How will the specific credit solve the
problem?
f. Why does he think he will?
g. When will the loan be repaid?
h. Where will the funds come to repay
the loan?
i. What financial institution is
available?
j. What will the loan mean to the
borrower and the lending institution
from a standpoint?
k. Where has the borrower had credit
before if he is not a customer?
 CREDIT FILE -
every firm or institution must keep such file
that is systematically arranged bearing the name and
addresses of customers and information that would be
most helpful in the evaluation of credit rating.
 COLLECTION PROCEDURE
The collection department is the one in-charge to
obtain money due to the company. It is a wise and sound
policy that money should be collected without in any
way offending the customer.
 SENDING STATEMENTS PROMPTLY
 The first step in the collection procedure preparing a
list of customers whose accounts are past due. From
said list , statements must then be prepared covering
individual customers and sent promptly if no reply is
receive from the customers a follow –up letter would
be in order but it should be couched in diplomatic
language and must know and ask if the letter was
received by the customer.

11. Prepared by :
MC GREGOR M. AGUILAR