Credit Management

General Principles
RESEARCHED AND PREPARED BY:
RONALYN V. CABALLERO, MBA
PROFESSOR

Evolution Of Credit
Time was when man contented himself with hand to

mouth existence. What he needed he produce, and

he produced only what he needed.
He realized some needs could only be satisfied by
other mens produce. So he learned to exchange his
goods with his neighbors goods. An uncomplicated
system was developed.

Evolution Of Credit (continued)

He likewise realized the inconvenience of bringing

bulky products to exchange for anothers goods. In the beginning, stones, then gold, or any valuable
item, and finally money.
Hazards involved in carrying large amounts of
money and other valuables in the pursuit of trade
proved to be disastrous, a system using a medium of
exchange based on trust~ was established.

Evolution Of Credit
Today we see credit being passed on to debtors in

various forms, they could be items bought through

credit card; they could be items transacted through
existing credit line of a customer;
Items bought from the corner convenience store that
list items on account

Evolution Of Credit
Most business today thriving mostly on charge

sales/purchases in various forms

Lot of businessmen securing their capital from bank
loans

Definition: CREDIT
Derived from the Latin word credo meaning to

believe, to trust.

Credit: Definition
Means securing something of value, whether

tangible or intangible, in return for a promise to pay

at a some determined future time.

Three Separate Usage of Credit

Credit transaction (buying on credit, extending
credit)
2. Credit standing~ (character and reputation of the
borrower is on the line)
3. Credit instrument- ( a document evidencing the
formal credit transaction)
1.

Other Definition of Credit

A purchasing power (Mill)
The essence of credit is confidence on the part of the

creditor in the debtors willingness and ability to pay

his debt. (Holdsworth)
A sale on trust
Personal reputation a person has, in consequence of
which he can buy money, or goods, or labor, by
giving in exchange for them, a promise to pay at a
future time (Mac Leod)

Categories of Credit:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Trade credit
Bank credit
Agricultural credit
Character loan credit
Retail credit
Factoring
Investment credit
Government credit
Export credit

1. Trade Credit (TC)

Sometimes called mercantile credit
Used to secure goods for resale in exchange for a

promise to pay at some specified future time.

1. Trade Credit (TC) (contd)

The prime elements of trade credit is that it is used

in an exchange for goods intended for resale, with or

without further processing by the buyer.
TC is the principal medium of exchange in the
production and distribution of goods up to the time
they reach the retailer~.

2. Bank Credit
Function of a Bank. The commercial bank has two

primary functions:
To receive deposit and
To advance funds on the basis of loans of discounting
commercial papers~

3. Agricultural Credit
Two types:

Long-term to finance the purchase of a farm land

and improvements.
2. Short-term to finance production and marketing
crops or livestock.
1.

4. Character Loan
~Any personal loan extended to the client without

any collateral~.

5. Retail Credit
Charge accounts is often considered credit for
convenience, usually through the use of credit
cards~.
2. Installment credit allows for partial payments at
scheduled intervals or at a fixed date~.
1.

6. Factoring
The outright conversion of accounts receivable to
cash at a substantial discount
2. The assumption of all bookkeeping and collection
responsibility for the accounts receivable
purchased
3. The assumption of losses accruing to said
purchased accounts.
1.

6. Factoring (contd)
The principal advantage of factoring is that it

permits the rapid turn over of capital necessary for

growth.
The factoring client (the seller of accounts) may
reinvest his proceeds without waiting for the
maturities of his receivables- usually at a 30, 60, or
90 day term.

7. Investment Credit
The means by which businesses acquire fixed assets.
One resort to investment credit when his funds are

insufficient to finance capital expenditures.

8. Government Credit
Also called, public credit
Refers to the credit of national state and local

governments

9. Export Credit
Similar to trade credit except that the procedures

and documentations are different.

Arises because of foreign trade.
The risk is greater than those of retail trade credit,
the percentage of bad debt losses in export credit is
lower than domestic trade credit because it is more
secured in nature.

Common Forms of Credit Transactions

1. Charge Account consists in the granting of

credit on the mere signature of the customer/client

or authorized representative~.
2. Secured Charge Account refers to the
extension of credit payable usually also in thirty
(30) days but this time, aside from the signature
of customer/client, additional collaterals are
required in the form of bond from a bonding
company or other valuable properties~.

Common Forms of Credit Transactions

3. Installment Accounts the account is payable

in installments, usually monthly. It is broken down

in installments because the amount of credit
extended is substantial~.
4. Straight loans loans in the form of money or
equivalent usually granted by banks and other
financing institutions~.

Function of Credit

1. Economic function credit serves as:

(1.1) a medium of exchange; and

(1.2) to make capital available.

Function of Credit
2. Social Function a social function of credit is to

evoke for independence of thought and action. Its

use obviates the necessity for hoarding on the part
of those who desire to save and leads them to place
their funds in institutions where the principal is
more secure than are hoardings~.

Function of Credit
3. Business Promotion

(3.1) business promotion

(3.2) to adjust his volume of capital to the varying
needs of his business

Advantages of Credit

1.

Credit in its nature, plays a vital and major part in

any economy. It speeds up the transfer of goods
from producers to consumers~.

2. Credit also makes capital more productive~.

Advantages of Credit
3. Credit does not only benefit the consumer but the

entire business industry as well~.

4. A great advantage of credit in business is
convenience.
5. Credit may be secured to establish an enterprise
and finance its various transactions, adding to its
growth

Disadvantages of Credit
Massive defaults across sectors trigger credit
controls, making it harder to secure the needed
liquidity to continue business operations.
2. Credit encourages over-zealous and aggressive
entrepreneurs to over expand unreasonably~.
1.

Disadvantages of Credit
3. Credit likewise contributes to the extravagance and

carelessness on the part of the borrowers~.

4. In a marketing-oriented company, the desire to
push sales might lead to extension of credit
unworthy or risky parties who might end up to be
bad debtors after all who will cause the collapse of
the company.
5. Overextension of credit could create imbalance in
the financial system~.

Problem Tickler
Mr. A sells various goods on installment basis. He buys said
goods from Mr. B on cash basis. In selling his goods, he keeps
a list of his customers purchases and correspondingly enters
his book the amount paid each time his customers pays the
installment due. He even acknowledges his customers
payment by issuing an official receipt.
- Why does Mr. A keep a record of his transactions? - If he
trusts his customers, why does he has to put
everything
in writing?
- Is the term selling on credit properly used in this case?
Why?