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Credit and Collection Prelims

Fundamentals of Credit
The idea of exchanging goods or services in return for a promise of future payment
developed only after centuries of trade: money and credit were unknown in the earliest
stages of human history.
What is Credit?
Etymology From the latin word credo meaning faith or trust
From debtors or borrowers stand point, is his ability to effect the exchange of values by
offering the promise of future payment.
From debtors point of view is his ability to obtain goods or services without an actual
tender of payment.
From creditors point of view credit is not the debtors ability to pay. Credit is the grant
of time w/ in which the debtor must pay. This credit, or time granted by the creditor or
seller, is always accompanied by a promise made by the debtor to pay at a later date.
* The transmittal of economic value now, on faith, in return for an expected equivalent
economic value in the future.
Who initiates credit?
It is generally the debtor who initiates the credit relationship because of his offer to buy
goods or avail of the services of the creditor payable at a future date.
Elements of Credit
1. Trust or Confidence Integrity of the debtor and creditor
Debtor source of fund of creditor
Creditor Expectation of debtors payment on time
2. Risk All lending is risk, The bigger the loan the higher the risk
Risk Evaluation/Risk Factor
3. Period or Term of Payment length of time w/in which the credit must be paid.
Compliance with the terms of payment is important to the debtor as this will affect his
image to the creditor or what we know as credit rating.

Credit Contract
Is any contract under which credit is provided to a person (which includes a natural
person or business) for:

the purchase of goods or services (for example, credit sales)

general purposes undisclosed to the provider (for example, cash loans, credit
cards and arranged overdrafts)

the purchase of land, buildings, or for improvements (for example, mortgagees,


buy-back transactions and revolving credit arrangements)

Investment purposes (for example, investing in stocks, a company or developing


a business).

* Credit contract is also termed as credit agreement. The contract or agreement


contains the terms and conditions and other legalities concerning the credit and also the
collateral if there is any. Provided that it is in conformance with the truth and lending act
and the consumer act of the Philippines.
REPUBLIC ACT No. 3765
Truth and Lending Act
AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION
WITH EXTENSIONS OF CREDIT.
What is meant by a finance charge?
A finance charge includes interest, fees, service charges, discounts, and such other
charges incident to the extension of credit as may be prescribed by the Monetary Board
of the Bangko Sentral ng Pilipinas through regulations.
What are the information required to be furnished to the debtor or borrower?
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to 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
financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed
as a simple annual rate on the outstanding unpaid balance of the obligation.
When and how should these information be furnished to the debtor or borrower?
The information enumerated above must be disclosed to the debtor or borrower prior to
the consummation of the transaction. The information must be clearly stated in writing.
What is the effect on the obligation in case of violations to the Truth in Lending
Act?
The contract or transaction remains valid or enforceable, subject to the penalties
discussed below.
What are the penalties in case of violation?
1. Any creditor who violates the law is liable in the amount of P100 or in an amount
equal to twice the finance charged required by such creditor in connection with such
transaction, whichever is the greater, except that such liability shall not exceed P2,000
on any credit transaction. The action must be brought within one year from the date of
the occurrence of the violation.
2. The creditor is also liable for reasonable attorneys fees and court costs as
determined by the court.
3. Any person who willfully violates any provision of this law or any regulation issued
thereunder shall be fined by not less than P100 or more than P5,000 or imprisonment of
not less than 6 months, nor more than one year or both.
However, no punishment or penalty under this law shall apply to the Philippine
Government or any agency or any political subdivision thereof.

Basis of Credit
1. Character personal traits
2. Capital property the debtor owns
3. Capacity ability of the debtor to earn enough to repay his debt on time.
* A debtor may still be extended credit even if he does not have enough capital provided
that the creditor is convinced of his trustworthy character.
4. Condition the debtors ability to pay, or that of his business to continue his business
operations in the face of existing economic, financial and political situation in his place
of business.
5. Collateral Security of loan. Can be any property of the debtor as long as its value is
higher than the amount loaned.
6. Connection Sinong kilala mo?
Advantages or Importance of Credit
1. Credit is an agent of production
2. Credit develops the stability of goods and services
3. Credit is the liquidity medium
4. Credit is a medium of capital formation
5. Credit complements the monetary system
6. Credit is a tool for the redistribution of wealth
7. Credit helps in the creation of business
8. Credit motivates higher business standards and practices
What businesses dont like about Credit
1. Credit can be a wedge between relatives and friends and business associates, or an
outright cause of personal or business failure
2. Credit can motivate unwise or conspicuous consumption
3. Credit can lead to unwise or over expansion and over speculation
4. Credit is one of the major causes of massive overspending in government
infrastructure projects
* Credit unwisely used is a Pandoras box of trouble, as many companies, creditors and
the government are now finding out to their sorrow
CREDIT INSTRUMENTS:

Credit Instruments are the documents describing details of credit and debit. Credit
Instruments provide a written means from future reference describing terms and
conditions of any debt and loan. Credit Instruments may be an order for payment of
money to a specified person or it may be a promise to pay the loan. Credit Instruments
generally in use are cheques, bills of exchanges, bank overdraft etc.
KINDS OF CREDIT INSTRUMENTS:
There are two broad kinds of Credit Instruments.
1. Negotiable Instruments:
A negotiable instrument is a written instrument signed by the maker/drawer that
contains an unconditional promise or order to pay a certain sum of money which must
be payable on demand or at a fixed or determinable future time. It must be payable to
the bearer or order (read: sequence) and if it is addressed to a drawee, the drawee
must be identified or indicated with reasonable certainty. The drawee requirement
applies in case the instrument is a negotiable bill of exchange (like a check.) If there is
no mention of a drawee, the instrument will pertain to a negotiable promissory note.
Two important features of a negotiable instrument are negotiability and accumulation of
secondary contracts. Negotiability, simply put, means the instrument can be transferred
from one person to another with the recipient being given the right to collect. As the
instrument is negotiated from person to person, juridical ties (secondary contracts) are
created between the parties involved in the transaction.
2. Non Negotiable Instruments
Cannot easily be transferred to another person. Ownership of the contract is almost
absolute
Kinds:
A.) Bills of Exchange
Unconditional written orders addressed by the maker to another person (the payee,)
signed by the person giving it and requires the payor to pay the payee on demand or on
the date indicated a sum certain in money to the bearer or order.
Types
1.) Draft: sometimes called a bill of exchange and normally refers to bills of exchange
used in documentary exchanges, like letters of credit transactions.
2.) Inland and Foreign Bill: inland bills are bills that are drawn and payable in the
Philippines. If the bill is drawn and payable elsewhere, it's a foreign bill.

3.) Time Draft: drafts payable at a fixed date.


4.) Sight/Demand Draft: draft payable when the holder presents is for payment.
5.) Trade Acceptance: bill used in sales contracts where the seller (as drawer) orders
the buyer (as drawee) to pay the seller a certain sum (as payee.)
6.) Banker's Acceptance: time draft where the drawee has written "accepted" on its face.
7.) Check: the most common negotiable instrument. Bill of exchange drawn on a bank
and payable on demand.
B.) Promissory Notes
An unconditional written promise made by one person to another, signed by the maker
and to be paid a certain sum of money to the bearer, or order, on demand or at a fixed
or determinable future time. If it's drawn to the maker's own order, it's not complete until
he endorses it.
Types
1.) Certificate of Deposit: written acknowledgement of a bank of its receipt of a certain
sum of money with a promise to pay it.
2.) Bond: certificate/evidence of debt where the issuing company (or the government
body) promises to pay the bondholder a specified amount of interest for a specified
period of time and pay the loan when the period expires.
3.) Debenture: promissory note/bond backed by a corporation's general credit and
usually not secured by a mortgage or lien on specific property.
CREDIT INVESTIGATION
The process by which seller of goods and/or services establishes and determine
whether or not to sell on credit, is to conduct by itself or thru a reputable credit
investigation agency
CREDIT INVESTIGATION REPORT
A report done by a person in charge about the investigation of debtor. A credit
investigation report must establish generally the following:
1. Character Personal circumstances
2. Capacity

3. Capital consists of movable and immovable properties of the credit applicant in


his/her name.
a. Movable or Personal Properties
ex. Vehicles, jewelry, art pieces etc.
b. Immovable or real properties
ex. House and lot, rights
4. Collateral Appraiser
5. Condition Environment, neighborhood
CREDIT INVESTIGATOR
Plays the role of an aide or ally to the sales/treasury functions. Basically he determines
the facts in connection with the credit worthiness of customers or clients or credit
applicants by gathering information about them.
In- House Credit Investigator A credit investigator that is an employee of an institution.
He gathers information and conducts investigation without a fee. His salary is already
his payment
Outside Credit Investigator Not connected with the institution. Outside party that is
hired by an institution to conduct the credit investigation
A credit investigator must have:
1. Accuracy in thinking process
2. Imagination
3. Good Memory
4. Responsible
5. Ability to deal with people under different situations
Credit Information
Credit Information is confidential in nature. It is confidential because of the need to
establish a good relationship between a creditor and debtor
The relationship that exists between the creditor and the debtor must be based on 2
factors:
1. Confidentiality information gathered will be solely used for the purpose of credit and
evaluation of the debtor
2. Completeness - Completeness of investigation reports.