NATURE OF ESTABLISHING CREDIT GATHERING, ANALYSIS AND DISSEMINATION OF CREDIT
INFORMATION- The work of a credit investigator may be divided
CREDIT- rooted on trust in an individual. It is the ability of a person
to obtain goods or services under a promise of future.
DEBT- is the outstanding unpaid balance of obtained credit from
another
CREDIT MANAGEMENT- The science of evaluating the
creditworthiness of a person and its grant. Art of collecting what has
been granted in credit to persons and maintaining continued patronage
and goodwill in the process.
SYNERGISTIC COOPERATION- The "raison-d-itre" of business
for all operating units to cooperate positively with each other to attain
overall business objectives.
COLLECTION MANAGEMENT- The art of collecting what has
been granted in credit to person and maintaining continued patronage
and goodwill in the process.
CONFIDENTIALITY- Credit information is confidential.
COMPLETENESS- An inquiry should clearly describe the subject,
state its object and scope and show that it is made responsibly.
into three major phrases:
TRUSTWORTHINESS- It implies confidence in the debtor's
integrity and in his ability to pay the loan or credit on the date
stipulated and according to the terms agreed upon.
RISKS- This element can cause a creditor sleepless nights, especially
when he begins having second thoughts about his decision to extend
credit.
PERSONAL, PERFORMANCE, ECONOMIC, RISKS AND
SECURITY FACTOR- The analysis of a credit risk always involves
five factors which are as follows:
PERFORMANCE, LIQUIDITY AND POLICY AND SYSTEM
RISK- Credit risk is composed of:
CREDIT RISK MANAGEMENT PROCESS- This involves the
judicious, timely and prudent checking of the five basis of credit;
character, capacity, capital, condition and collateral in applicable
process.
PERIOD OR TERM OF PAYMENT- Refers to the length of time
within which the debtor must pay the credit, whether this credit be in
money, goods or services
EXCHANGE OF VALUE- For the credit transaction to have meaning
and attain its purpose, there must be a positive __________________.
THE UP-TO-DATE OR DOG TYPE- A debtor who pays on time
and who responds to available prompt payment incentives offered.
OCCASIONAL DELINQUENT OR MONKEY TYPE- Most
debtors become this type because there is no perfect matching of their
income and expenses
HABITUAL DELINQUENT OR LIZARD- This kind of debtor
must be the target of strict collection efforts to prevent his account
becoming bad.
THE CHANGED CIRCUMSTANCE OR CHAMELEON TYPE-
A debtor who, for health, social, economic or political reasons; by law,
contract, accident or fortuitous event, suddenly cannot pay his
obligation.
THE PREMEDITATED DELINQUENT OR CROCODILE
TYPE- A debtor who, in the first place, should be avoided and noticed.
OFFENSIVE OR AGGRESSIVE- A debtor's defense is generally
used by one who is premeditated delinquent debtor. One who, from the
inception or obtaining the credit, had no intention of paying at all.
DENYING OR EVASIVE- This debtor's defense is motivated by the
debtor's inability to pay with good reason or to avoid payment without
good reason.
DEFIANT- A defense generally used by debtor who is either
unscrupulous or a habitual bad debtor.
PLEA FOR A SYMPATHY AND COMPASSION- This kind of
defense is either a victim of an accident or misfortune or has been
placed in such an unfavorable health financial position that he cannot
earn enough to pay back his debt.
THE NEGLIGENT- Does not bother about due dates of his debts
THE HONEST BUT CONFUSED- One who did not understand in
the first place the terms or conditions of the sale or debt/obligation he
entered into
THE CAN'T BE BOTHERED- A debtor's who refuses to pay a -
small balance of a debt until these add up to a substantial amount and
then pays
SEASONAL DELINQUENT- Fall behind in paying debts because
his business/cashflow slows down at certain periods of the year
HONEST LATE PAYER- Pays late because his own debtors - also
pays him late
CHRONICALLY SLOW- A debtor who makes all creditors wait FUNCTIONS OF CREDIT
until they give more liberal payment terms
1. Facilitates the movement of goods and services through the
CHARACTER- The credit applicant's personality, moral values, channels of trade to the consumers.
family, social and business relationship. 2. Sustains and promotes production.
3. Establishes rules for credit and collection transactions.
CAPITAL- The property the credit applicant own in his name whether 4. Leads to efficient collection of accounts receivable
movable or immovable. 5. Contribute as a profit center to the attainment of a company’s
desired profit targets.
CAPACITY- The ability of the credit applicant to earn enough to
6. Helps in teaching debtors good credit habits and practices.
repay credit obtained.
7. Can serve as a tool in attaining personal and business goals.

CONDITION- Refers to the debtors existing physical, economic,

financial and political situation in his place of residence or business.

IMPORTANCE OF CREDIT TO THE COUNTRY

COLLATERAL- Other properties whether personally owned or
1. An agent of production
owned by another person that the credit applicant is able to give as a
2. Develops the saleability of goods and services
security for the credit obtained.
3. A liquidity medium
4. A medium of capital formation
5. Complements the monetary system
6. A tool for the redistribution of wealth
7. Helps in the creation of business
8. Motivates higher business standards and practices
9. Increases purchasing power
10. Make it possible to attain growth and progress
CHARACTERISTICS OF CREDIT 4. Legal and moral persuasion such as the 5- day banking week
and uniform, clearing procedures for checks, debt instruments
1. As a bipartite contract 5. Legal action or outright coercion by the secretary of finance,
2. As pecuniary contract BSP Monetary Board
3. As fiduciary contract
4. Involves futurity
5. Involves risk
TYPES OF CREDIT MAN

1. Mathematician Credit Man

NEGATIVE IMPACT OF CREDIT ON PEOPLE
One who is generally impressed by the financial reports submitted or
1. Can be a wedge between people obtained from the credit applicants.
2. May motivate for unwise and/ or conspicuous consumption
3. May lead to speculation/ over expansion
4. Causes dependence on others 2. Gaya-Gaya Puto Maya (Follower) Credit Man

5. One bit reason for stagnation/ regression of people

This credit manager will extend credit to a customer up to 25%-50% of

GOVERNMENT MECHANISMS TO ADMINISTER CREDIT the amount extended by the recognized leaders of the credit manager’s
industry.
1. Increasing or decreasing the legal/ liquidity reserve
requirements of banks and other financial institutions
2. Issuing government credit instruments such as bonds, 3. Historian Credit Man

government securities, treasury bills and the like

This credit manager generally based his credit extension decision on
3. Selective credit controls such as rediscounting facilities given
the past performance of the customer without giving serious
to Board of Investment, registered industries and companies
consideration about the exigencies of socio-political, economic factors
locally or internationally.

4. Sentinel Credit Man
Many credit managers unwittingly practices this mode of managing
their department operation generally due to lack of education, training
or experience and challenges met in the demanding role of their
position.
5. Necessary Evil Credit Man
This kind of credit manager will invariably pose no objection in having
some losses in the management of his receivables, conscious of the
fact that not all credit transactions can be collected.
CLASSES AND KINDS OF CREDIT
ACCORDING TO TYPE OF USER
Classified according to the type of users, credits are the following
classes: consumer credit, mercantile credit, bank credit and investment
credit.
Consumer credit
       Consumer credit also called consumption credit is that kind of
credit extended to consumers in order to facilitate the process of
consumption.  This type of credit exists in those cases where an
individual acquires funds intended for personal consumption or
enjoyment in return for a promise to make appropriate payments in the
future.
      This type of credit differs from other types in that the proceeds of
loan are not usually used in such a way as to facilitate its payment by
the borrower. Most lenders ask a borrower to sign a promissory note,
commonly called a note, which is simply a written promise that the
amount barrowed will be paid on certain date. The borrowers who sign
the note are the maker.
Retail credit
Is a typical example of consumer credit, which is held synonymous
with one another, as with personal credit, the use of which is obtained
through charge account and installment credit?
The use of the credit card
Card which work on the principle of letting a person acquire goods and
services on pledge that it shall be paid for a later date is greatly
facilitated today through the introduction of credit card. A credit card
allows the holder to obtain goods on credit that affiliate-establishment
of credit companies like restaurant, department stores and others. The
establishment bills the credit card companies which promptly pay and
in turn collects the obligations from the customer on certain specified
date.
Replevin
 When an article is sold under an installment contract, and the buyer
later fails to live up to his part of the contract, the seller, in order to
protect himself from loss, has the right to repossess the article. The
legal action necessary is usually referred to as possession or replevin,
from the old French; replevin means warrant (“re” meaning bank and
“plevir” signifying pledge.)
Advantage of charge account
Evidently, while there are merits for paying cash for what one buys,
however, a number of advantages are observed from the use of charge
account. A few advantages may be mentioned below:
1. Charge account is a convenient method of making one’s
purchases since the individual is not bothered with having to pay
small sums of money at the time making the purchase.
2. Another added advantage that may be observed from the side
of the buyer ion that he is able to obtain make use of the goods even
before he has a chance to pay for them. Without charge account, the
individual will be forced to wait until such time when he has a
chance to pay for the goods he needs, in which case the satisfaction
of such wants will have to be differed until such time.
3. Customer enjoying the use of charge account usually find it
easier for them to return unsatisfactory merchandise and obtain the
necessary adjustments.
 
Disadvantages of Charge account
1. Some people who buy on charge account are induced to be
careless in the selection of merchandise that they buy.
2. Charge account sometimes encourages many persons to
become wasteful and extravagant.
3. Purchase made on the charge account necessarily cost the
buyers much more than when they buy their goods on cash.
 
Advantages of Installment buying
 A number of advantages maybe said in favor of purchase on the
installment plan they are:
1. Under the installment plan. The buyer is able to obtain and,
therefore, the use of the goods he needs even before he is able to
save the amount covering the full purchase price of the goods.
2. Installment buying maybe considered as one from of savings.
A number of individuals, especially in our cities and suburbs, are
able to acquire a number of expensive articles which they use and
which most probably they could not obtain if the installment plan is
non-existent.
3. To a number of individuals, installment buying not only
convenient but it is also necessity. Possessed with limited
purchasing power, these individuals are forced to buy on the
installment plan which provides them with the only way of
 participating in the enjoyment of an abundance of goods which they
need.
4. Many goods bought on the installment plan “pay for
themselves.” This may be illustrated through the purchase of a
house And lot wherein the individuals, instead of having to pay the
rent for the premises they occupy, would thereby be able to use it to
pay for the house and the lot which they can call as their own the
installment plan.
5. Installment buying makes it possible for families to” spread
out” expenditures.
Disadvantages
 On the other side of the same coin, installment buying suffers from
the following serious disadvantages.
1. Installment purchases cost more than articles purchase.
2. Some people do not know what to buy or what not to buy,
thereby overburdening themselves with financial obligations that
they may be find difficult to meet.
3. It is observed that in some cases, individual may be encouraged
to buy things which they actually do not need, such that eventually
they find difficulty in purchasing their real necessities.
 
Mercantile credit
  Mercantile credit, sometimes also called as commercial credit, which
may be described as that type of credit which one business men may
extend to another when selling goods on time for resale of commercial
use, is a characteristic feature of our modern economy. Parties to a
transaction involving the use of mercantile credit may be merchant
distributors like wholesalers, jobbers, and producers or manufacturers
the  essential characteristic of mercantile credit is that it is an exchange
of goods for the purpose of sale, whether or not the good as will
undergo further processing in the hands of the buyer moreover as is
generally practiced mercantile credit is required only for the length of
time it takes a buyer to process and resell the goods.
Mercantile credit may be distinguished from consumer credit in the
sense that the former is brought about by transactions involving
transfers of goods for business purposes, unlike the latter which is
intended specifically for consumption purposes.
Commercial Bank Credit
  Bank credit refers solely to the credit given by commercial banks to
businessmen instead to assist them in the operation of their business.
Businessmen, aside from purchasing merchandise on credit are.
Moreover, heavy users of short-term credit in the form of loans are
used for a number of purposes as, for instance, the financing or in the
transaction of or for the purpose of production, in the storage or in the
transportation of, Or for the purchase of raw materials.
Relationship between Mercantile and Bank credit.
  The use of mercantile credit brings about the use of a vast amount of
credit instruments which are documents instead to serve as the basis
 for the grant of bank credit. In customary business practice, when
goods are bought with the intention of resale, or for industrial and
commercial use, the transaction may be consummated through
payment in cash or on the basis of time. Thus, in order to the purchaser
to pay cash and therefore, be entitled to a cash discount, the purchase
may borrow from his bank by giving the bank his promissory note. In
the event that the buyer fails to make payment prior to due date, the
seller of necessity will have to carry the financial burden which he
may, however, transfer to his bank giving his own promissory note or
by discounting the notes or acceptances obtained from his customers.
In the first case, the bank may either discount the seller’s paper or the
buyer’s paper in indorsed by the seller.
Mercantile Credit and Banking Credit, compared.
Briefly stated, mercantile credit is generally thought of as merely an
extension of the time for payment, given by the seller of merchandise
to his customer. While certain underlying principle in a number of
very important respects, such as the following:
1. The grant of mercantile credit is particularly an everyday
occurrence both for large and small business. Bank credit, on the
other hand, is used periodically by the borrower— at times only
once a year.
2. The bank lends money either on promissory notes or on the
security of some satisfactory collateral. The seller who extends
mercantile credit merely allows the buyer to have possession falls
due and may or may not require any collateral or security.
3. Bank credit is, as a standard practice, extended in order to
enable the borrower to secure funds foe general “working capital”
purposes, without any necessary reference to a specific single
transaction. In the case of mercantile credit, it is extended only in
connection with purchase of a definite bill of goods.
4. Furthermore, the bank takes for grater precaution before it
extends credit than are considered necessary by the merchant selling
merchandise on credit.
5. Moreover, the presence of competition is keen among
businessmen who grant mercantile credit.
Revolving credit
  A revolving credit is a combination of the charge account and the
installment plan. As has been pointed out by some authors, this type of
credit has developed out of the popular 91-day charge account; an
addition of a service charge is made to the unpaid balance at the end of
each month. However, a fixed limit is placed on the account provided
that the balance does not exceed the stipulated ceiling.
   In the extension of revolving credit, credit investigation of the
applicant is made but once. Once approved and made open to him. He
can take advantage of such facilities offered by the business firm for so
long as he maintains his good credit standing by paying his obligation
every month as agreed. The use of revolving credit has been observed
responsible for the increased sales volume of business houses which
become a convenient method for the customers in obtaining the goods
they want.
Investment credit
  Investment credit is utilized by a business organization for the
purchase of fixed assets or to carry minimum business operations. It
consists of advances intended for the purchase or construction of
necessary plant and equipment. As such, it includes almost all of the
transactions whereby the capital of Modern Corporation, and other
enterprises, is accumulated and place at the disposal of the
entrepreneur.
  Briefly stated, the funds obtained are generally intended to be spent
on equipment which the borrower expects to use continuously until it
is worn out, or suffers from obsolesce. So that maybe quite obvious to
the student, credit must necessarily be granted to cover long period of
time. The soundness of an investment contract depends mainly upon
the continuous and profitable operation of the borrowing enterprise.
Investment credit is evidence by negotiable bonds or long-term notes.
Still, in some instances, they may also be evidenced by real estate
mortgages.
  Five major sources are available from which funds for long-term
investment may be secured, such as: Funds of individual investors,
trustees of funds of individuals and estates, insurance companies,
banking institutions and business concerns.
According to whether Merchandise or Money is given
 
Merchandise credit
  With present-day production methods geared toward mass-marketing
of many items on the installment plan, radios, television sets,
refrigerators, kitchen ranges, washing machines and hundreds of others
have become necessities to many families even in this country where
the per capita income is considerably low compared to that of
American standards,. Such items purchased on the installment plan, as
well as many others obtained on the charge account, are examples of
merchandise credit.
 
Borrowing money
  Besides the present necessity of obtaining goods and services on
credit, consumers are likewise confronted with the need for money
which they try to obtain through borrowing. Such borrowing of money
is an example of credit transaction manner as that of buying on open
account or installment plan. Some individuals in order to avoid paying
big amount of money, if they were to secure goods or merchandise on
installment plan, would rather borrow money from banks and other
financial institutions and thus obtain them on the basis of cash.       
 According to purpose   Credit in some form and to some extent is always involved in all sort
   Credit classified according to purpose may be known as: agricultural of transaction for which cash is not paid on or before shipment of
credit. Export credit, industrial credit, commercial and real estate goods out of the country. Credit risks in international trade differ
credit. materially and in several respects from domestic risk.

Agricultural credit  As is generally observed, export trade may be pushed n

  Consist of those loans which are intended for the acquisition of

by means of extension of credit to buyer, as is the common practice,
fertilizers, pesticides, seedlings, and any instruments, machinery and
but before the buyer takes possession of them. Still, export sales can be
other movable equipment used in the production, processing,
done on the basis of payment when the goods are shipped through cash
transformation, handling or transportation of agricultural products. In
deposit by the buyer or bank guarantees and particularly by letters of
other words, those loans intended to finance agricultural production as
credit and the use of drafts.
well as for the purpose of marketing the products are included in the
term agriculture credit.
Industrial credit
Is intended to financing needs of industries like logging, fishing,
Commodity Loans
manufacturing and others, and which involves big amounts of money.
Since most agricultural product is produced annually and are harvested
Generally speaking, as may be expected, the maturity of this type of
and available for the market within the span of transportation, storage,
credit is long term.
financing and marketing.

Commercial credit
  Many such commodities are stored in cold storage warehouse which
This type of credit, which is sometimes termed as mercantile credit,
store the perishable goods. The warehouse is required to be license to
has already been indicated in a foregoing discussion.
issue negotiable receipt, to meet all specification as to financial
stability, inspection to furnish such security bond coverage, etc. In
Real Estate credit
most instances the receipt on an approved warehouse can be readily
When credit is purposely for construction, acquisition, expansion or
accepted for collateral purposes.
improvement of real estate properties, it is termed as real estate credit.
This type of credit was extended previously by the defunct
Export Credit
rehabilitation finance corporation which was expressly established to
assist in the rehabilitation program of the government.
                              According to maturity
Base on maturity, credit may be classified as: short, medium, or
intermediate, and long term.
pledging of the good faith and the resources of the nation for the
repayment of debt incurred on behalf of the people, could not have
emerge until certain other definite development has occurred. For
instance, the extensive development market, in which there is a certain
amount of liquid capital, funds seeking investment.
SOURCES OF CREDIT

Short-term credit 1. Financial Institutions .

 Is payable within one year from the date of acquisition. This type of 2. Retail Stores.
credit usually covers the purchase of consumers’ goods. The so-called 3. Loans/ Lending Companies.
character loan falls under this type. 4. Insurance Companies
5. Credit Unions
Medium or intermediate term credit
6. Cooperatives
Range from one year to five years in maturity. This is usually given for
7. Loans and Savings Associations
the number or purposes, like the financing of improvements on a firm
8. Family and Friends.
or industry.
9. Usurers
10. Yourself.
Long-term credit
 Which are intended from five years Up. This type of credit covers
those loans intended for investment purposes.
Friends and family

                              Government or public Credit At first glance, the advantages can seem appealing: you can negotiate
Public credit is a branch or a form of credit in general and, as such, is the interest rate and payment terms with them directly. But a word of
subject to rules and principles that govern the use of all credit. caution: if you have trouble repaying them, your relationship could be
However, unlike other form of credit, public credit, which means a damaged forever.
 Plan (HBP) allows you borrow from your RRSP to purchase your first
home.
Financial institutions

Financial institutions are among the best sources of credit, especially

when it comes to personal loans, student loans, mortgages, personal Cheque cashing centres
lines of credit, overdraft protection and credit cards.
These are not highly recommended because they charge high fees for
cashing your cheques on the spot.

Retail stores

Many stores offer their own credit cards. Some also offer financing
plans that allow you to pay for your purchases over time or even at a
CREDIT RISKS (C’S OF CREDIT)
later date. Be careful: if you don’t pay your balance in full on the due
date, you’ll be charged much higher interest rates than a regular credit 1. Character

card. 2. Capacity
3. Capital
4. Collateral
Loan companies 5. Condition
6. Connection
Some companies specialize in giving out loans, often to people are
turned down by other lenders. Since the risk is higher for the lender,
the interest rates paid by borrowers are also higher.
• Credit is classified according type of user, purpose and
maturity. The sources of credit are the financial institutions.
Usurer is also a source of fund but it is prohibited by the
Yourself
government.
Some people can lend themselves funds from their own investments,
• The risks of credit are used as a guide or bases in granting
insurance policies or othersources. For example, the Home Buyers’
loans to credit applicants.
 • Commercial Credit- sometimes termed as mercantile credit 5. Sources and mode of payment
6. Nature of business (income
• Consumer Credit- extended to consumers in order to facilitate
the process of consumption

• Credit Union- a non-profit making money cooperative whose ELEMENTS OF CREDIT

members can borrow from pooled deposits at low interest rate 1. Trust or Confidence
2. Risks
• Investment Credit- utilized by a business organization for the
purchase of fixed assets to carry minimum business operations RISK FACTORS
1. Personal
• Loans and Savings Association- a financial institution that
2. Performance
specializes in accepting savings deposits and making mortgage
3. Economic
and other loans
4. Security

WORK OF CREDIT INVESTIGATOR

1. Gathering of credit information
2. Analysis of credit information
3. Dissemination of credit information
The Investigation Report Should Consist of:
FINANCIAL FACTORS TO CHECK ON CREDIT APPLICANT
1. Liquidity Ratios- measures the firm’s ability to meet its maturing
short-term obligation
2. Leverage Ratios- measures the extent to which credit applicant has
been financed by debt
3. Profitability Ratios- measures management’s effectiveness as shown

1. Who is requesting for credit accommodation in returns generated from sales and investments

2. Amount and type of the credit applied for 4. Efficiency Ratios- measures how efficient and effective is the credit

3. Purpose applicant in using its resources

4. Collateral (Security)
NON-FINANCIAL FACTOR TO CHECK Needs for a Credit Scorecard:
1. To determine the risk level or degree on the credit applicant.
1. Payment performance
2. To evaluate the adequacy of risk cover or security or collateral.
2. General experience/ background
3. To determine the risk level or degree on the credit applicant.
3. Age of business and evidence of sound growth potential
4. To evaluate the adequacy of risk cover or security or collateral
4. Impression of the applicant and its management
5. Adequacy of resources/ availability of financing
6. Trend
SAMPLE OF CREDIT SCORECARD

a. Credit applicant personal circumstances,

BONUS NON- FINANCIAL FACTORS TO CHECK character background……………………………….. 25
b. Personal credit records performance with
1. Security/ collateral
creditors…………………………………………………… 15
2. Confirmed payment arrangement
c. Financial performance projections…………. 20
3. Performance of related companies/ joint several obligator
d. Risks factors………………………………………….. 10
4. Forms of business organization
e. Payments or term mechanics…………………. 15
f. Security package…………………………………….. 15

NON- PENALTY FACTORS TO CHECK ____

1. Recent litigation
100
2. Recent distressful condition/ illiquidity
3. Age of credit applicant
4. Distributive weakness CREDIT EQUATION

Character + Capacity + Capital + Condition= Good Credit Risk

Credit Scorecard- is a credit rating used to assess, evaluate individual Character + Capacity + Insufficient Capital= Fair Risk
credit applicants for ordinary short or medium term credit application. Character + Capital + Insufficient Capacity= Fair Risk
Capacity + Capital + Impaired Character= Doubtful Risk
Character + Capacity – Capital= Limited Risk
Capacity + Capital – Character= Dangerous Risk
Character + Capital – Capacity= Marginal Risk
Capital – Character – Capacity= Poor Risk
Character – Capacity – Capital= Very Bad Risk
Capacity – Character – Capital= Fraudulent Risk
Credit Instrument- an instrument used in the banking and finance
world to describe a time agreed upon that can used as a currency.
Classification:
1. Check
2. Bank Draft
3. Bill of Exchange
4. Promissory Note
5. Government Bond
6. Treasury Bills
7. Traveller’s Cheque
1. Check- is a document that orders a bank to pay a specific amount of
money from a person’s account to the person in whose name the check
has been issued.
* A check should be in writing and properly signed by the drawer
* A check contains an unconditional order
* A check issued on a specified banker only
*The amount specified is always certain and should be clearly
mentioned both in figures and words.
2. Bank Draft- a check drawn by a bank on its funds in another bank.
* Drawn on another office of the same / another bank
* It is payable on demand
* Its payment has to be made to the person whose name is mentioned
therein or according to his order
3. Bill of Exchange- a written order to a person requiring the person to
make a specified payment to the signatory or to a named payee.
* The instrument must be in written and must be signed by the drawer
* The amount of money to be paid must be certain an order to pay
* The payment must be in the legal tender currency of country
* Money must be paid to a definite person and properly stamped.
4. Promissory Note- a signed document containing a written promise
to pay a stated sum to a specified person or bearer at a specified date or
on demand.
* The promissory note must be in writing ADVANTAGES OF CREDIT INSTRUMENTS
* It must contain an express promise 1. Exchange of ownership
* The payee must be certain 2. Employment encouragement
* It should be signed by the make 3. Increase consumption
* The amount must be certain 4. Saving encouragement
5. Capital formation
6. Easy payment
5. Treasury Bills- are short-term secure investments issued by the 7. Development of entrepreneurs
Philippine government through the Bureau of Treasury.

* Maturity time period less than a year DISADVANTAGES OF CREDIT INSTRUMENTS

* High liquidity
1. Encouragement of expenditure
* Low risk
2. Encourage weakness
3. Danger beyond limit
4. Encourage inefficient
6. Treasury Bond (Government Bond)- medium to long-term
5. Economic crisis
investments issued by the Philippine government. They form part of
the government’s program to make securities available to small
investors
Forces of Collection:
1. The Salesmen
2. The House Collectors
7. Traveler’s Check- a certified note issued by a bank that may be
3. Attorneys (Legal Counsels)
used by traveler’s a risk free substitute for a paper currency.
4. Government

* Uses people on vacation in foreign countries instead of cash

* Used to avoid risk of having cash
EFFECTS OF DELINQUENCY IN RECEIVABLES 2. Oversight
3. Bad paying habits and practices
1. Delinquency ties- up working capital/ liquidity
4. Indolence (lazy to pay)
2. It disrupts and complicates business operations
5. Personal or business reverses or misfortunes
3. It reduces profit targets
6. Dissatisfaction
4. It slows down growth
7. Habits, practices and idiosyncrasies of the debtor
5. It causes personal and business failure
6. It prevents the build up reserves for seasonal or long- term
demands
GENERAL TYPES OF DEBTORS
7. The creditor becomes the debtor’s unwitting banker- generally
interest free. 1. The Up-to-Date or (Dog Type)- a debtor who pays on time and who
responds to available prompt payment
2. Occasional Delinquent or (Monkey Type)- no perfect matching of
INTERNAL CAUSES OF DELINQUENCY IN RECEIVABLES their income and expenses
3. Habitual Delinquent or (Lizard or Butiki or Turtle Type)- target of
1. Absence or insufficiency of a credit report
strict collection efforts to prevent his account becoming bad
2. Absence of proper documents or simply the failure to register the
4. The Changed Circumstance or (Chameleon Type)- a debtor for
debt documents in applicable cases
health, social, economic, or fortuitous event suddenly cannot pay his
3. Poor or faulty accounting system
obligation
4. Unsystematic collection efforts
5. The Premeditated Delinquent or (Crocodile Type)- needs fast,
5. Family, business or other intra-social relationships between the
drastic and decisive collection efforts.
creditor and debtor.

GENERAL CATEGORIES OF DEBTOR’S DEFENSES

EXTERNAL CAUSES OF DELINQUENCY IN RECEIVABLES
1. Offensive or Aggressive- one who, from inception or obtaining the
Over- obligation on the part of the debtor or getting into debt
credit, had no intention of paying at all.
regardless of capacity to pay
2. Denying or Evasive- motivated by the debtor’s inability to pay with
good reason or to avoid payment without good reason.
3. Defiant- a debtor who is either unscrupulous or a habitual bad
debtor.
4. Plea for Sympathy and Compassion- victim of an accident or
misfortune that cannot earn enough to pay his debt
KINDS OF DELINQUENT DEBTORS
9. Habitual Discounter- one who insist on a discount- whether earned
or not.
10. The Tightrope Walker- one who is usually on the verge of a
financial crisis.
11. The Braggart (Mayabang)- a debtor who almost always says ‘Do
you know who I am? and generally does not pay the debt unless put in
an embarrassing situation.
12. The Vanishing (Houdini) Debtor- one who is not around come

1. The Negligent- does not bother about the due dates of his debts. paying time, but is always around when borrowing.

2. The Honest but Confused- one who did not understand in the first
place the terms or conditions of the sale or debt/ obligation he entered
STAGES OF COLLECTION EFFORTS
into.
3. The Can’t be Bothered- a debtor who refuses to pay a small balance 1. Impersonal effort
of a debt until these add up to a substantial amount and then pays. 2. Impersonal appeals
4. Seasonal Delinquent- fall behind in paying debts because his 3. Personalized efforts
business / cashflow slows down at certain periods of the year. 4. Coercive or legal efforts

5. Honest Late Payer- pays late because of his own debtors- also pay
him late.
TOOLS AND AIDS IN COLLECTING
6. Chronically Slow- a debtor who makes all creditors wait until they
give more liberal payment terms. 1. Notice or reminder

7. Wittingly Late- a debtor who uses supplier’s credit which is 2. Letters

generally interest free instead of a bank loan. 3. Statements of Account

8. The Stretcher (Plastic Man)- a debtor who is temporarily over- 4. Third party letters

extended or who intentionally delays paying. 5. Telegrams (Text collection)

6. Telephone
Strategies and Tactics of Collection: 6. Feigning Anger- be sure that it’s calculated to motivate the debtor to
pay his obligation or debt against you.
Strategy- a plan of action developed to achieve a goal or objective. 7. Placation (Himas Tactile)- there is always a soft spot in a person
that can be worked on to secure a positive reaction.

WAYS OF COLLECTION STRATEGY:

1. Confrontation HANDLING ANGRY DEBTORS
2. Collaboration
1. Establish the point of controversy
Tactic- the behavioural maneuvering one undertakes to carry out the 2. Exchange information
strategy. 3. Reach for a give and take position

COLLECTION TACTICS:
1. Double Teaming- in that tactics, one collector acts as the good guy
PERSONAL COLLECTION ATTRIBUTES TO DEVELOP AND
and the other one the bad guy but both to exploit the debtor’s fear of
POSSESS
losing creditworthiness and need for relief from debt and friendship.
2. The Turn Down- refusing from a debtor who will not bring his 1. What’s in a name (Sino ka ba?)

account to an acceptable balance or condition being aware that he has 2. Favor (lagay) Power

the capacity and liquidity to do so. 3. Coercive Power

4. Ability Power
3. The Bad Boss- aligning or identifying yourself with the debtor,
5. Lovability Power/ Charismatic Ability
explaining that if the debtor will not help or pay, you will get nowhere
6. Expertise Ability
with you with your boss or superior.
7. Position Power
4. Highballing or Snowballing- asking for payment in excess of what
8. Encyclopedic Power
is due because you know for a fact that the debtor is in very liquid or
financially sound and capable position to pay more.

5. Fighter’s Stance- be sure that this does not boomerang on you since
your debtor may also take a fighter’s stance on you.
TEN (10) RULES TO COLLECT AND GET PAID payment
10. Debtor’s business have been assigned/ transferred or taken over by
1. Those who want to get paid, must insist on payment-on time
a new company
2. Use your aging schedule positively and aggressively
3. Always be a good reason in using your aging schedules
4. Stand your ground
THE LEGAL COLLECTION PROCESS
5. Don’t hesitate, enforce your credit
6. Never threaten, unless you mean and do your threat 1. Sending of proper demands to the party-obligor-debtors

7. Have a team 2. Gathering, preparation and review of actionable documents, and

8. Get assistance soonest credible, competent witnesses

9. Act decisively to collect legally 3. Complaint preparation

10. Collecting something is better than nothing 4. Filing of the case

5. Service summons
6. Reply of the parties to the case- grounds of delay

GENERAL PROBLEMS AFFECTING LEGAL COLLECTION

LAWS THAT COLLECTORS MUST KNOW AND
EFFORTS:
UNDERSTAND WHEN COLLECTING
1. Absence or lack of actionable documents
2. insufficient documents 1. Libel or Defamation- is a public and malicious imputation of a

3. Signed by an Attorney-in-fact crime, vice or defect, real or imaginary, or any act, omission,

4. Unregistered document condition, status or circumstance tending to cause dishonour, discredit,

5. Unnotarized document or contempt of a natural or juridical person or to blacken the memory

6. Unknown debtor or co-debtors whereabouts of one who is dead.

7. Summons cannot be served 2. Slander or Oral Defamation- uttering publicly, writing grave or

8. Debtor’s properties are encumbered or disposed insult or defamation which is of a serious or insulting nature.

9. Debtor have filed for voluntary insolvency and/ or suspension of 3. Unjust Vexation- it is equated with anything that annoys or irritates
without justification.
4. Incriminating Innocent Person- any person who, by any act not
constituting perjury, shall directly incriminate or impute to an innocent
person the commission of a crime.
5. Intriguing Against Honor- any person who shall make an intrigue
which has for its principal purpose to blemish honor and reputation of
another person.
6. Qualified Trespass to Dwelling- any private person who shall enter
the dwelling of another against the latter’s will.
7. Other Forms of Tresspass- any person who shall enter the closed
premises or the fenced estate of another, while either of them are
uninhabited.
8. Grave Threats- any person who shall threaten another with the
infliction upon the person, honor or property of the latter or of his
family of any wrong, amounting to a crime.
9. Light Threats- a threat to commit a wrong not constituting a crime
which for money or that other conditions is imposed, even though not
unlawful whether or not the offender attained his purpose.
10. Grave Coercion- any person who without authority of law shall,
by means of violence, prevent another from doing something not
prohibited by law or compel him to do something against his will
whether it be right or wrong.
11.Extortion- collecting money with the use of harassment, coercion,
simulated legal process to threaten debtors may be a ground for being
liable for extortion.
12. False Testimony in Civil Cases- any person who gives testimony in
civil case which relates to the case, is proven false, given in malicious
manner with the intent to affect the issue presented in the case.
13. False Testimony in Other Cases and Perjury in Solemn
Affirmation- any person who, knowingly making untruthful statements
under oath or make an affidavit, upon any material matter before a
competent person authorized to administer an oath in cases in which
the law so requires.
- Any person who, in case of a solemn affirmation made in lieu of an
oath, shall commit any falsehood.
14. Assault and Battery
Assault- an unlawful offer or attempt with force or violence to do
physical harm to another.
Battery- unlawfully touching the person whether wilfully committed or
arose from want of due care.
15. Falsification by Private Individual and Use of Falsified
Documents- any person who, to the damage of a third party, or with
the intent to cause such damage, shall in any private document commit
any of the acts of falsification.
VIOLATIONS WHICH ARE SUBJECT TO SANCTIONS
1.The use of threat of violence or another criminal means to harm the
physical person, reputation or property of any person
2. The use of obscenities, insults, or profane language which amounts
to a criminal act or offense under applicable laws
3. Disclosure of names of consumer or credit card holders who QUIZ
allegedly refuse to pay debts.
4. Threat to take any action plan than cannot legally be taken.
1. TRUE A credit instrument is a written or printed paper by
4. Communicating or threat to communicate to any person credit
means of which funds are transferred from one person to another.
information which is known to be false, including failure to
communicate that a debt is being disrupted 2. TRUE A drawer is a person upon whom the bill of exchange or

5. Any false representation or deceptive means to collect or attempt to check is drawn.

collect any debt or to obtain information concerning a cardholder or
consumer
6. Making a contact at unreasonable or inconvenient times or hours
which shall be defined as contact before 6:00 A.M. or after 10:00 P.M.
unless the accout is past due for more than 60 days or the consumer or
cardholder has given express permission of said times are the only
reasonable or convenient opportunities for contact.
3. TRUE A payee is the person whose order the drawee is to
make payment or to whom the money is to be paid.
4. TRUE One of the key elements in the bill of exchange is the
place of payment.
5. TRUE In promissory note, there is no need to accept the
instrument if it is payable at a fixed or determinable future time.

6. TRUE Place and date of issue is an essential to promissory

note.
VIOLATIONS
7. FALSE A check has a drawees signature.
1. Disqualification of the bank concerned from the credit facilities of
the BSP 8. TRUE A check must be unconditional.
2. Prohibition of the bank concerned from the extension of additional
9. FALSE A bank draft is not payable on demand.
credit accommodation against personal security
10. TRUE One of the advantages of credit instrument is it
3. Penalties and sanction provided under Sec. 36 and 37 of the R.A
encourages employment.
7653.
1. T-F 5. T-T

A credit information is confidential.
Credit is intended to assist a prospective creditor in reaching a
decision.
A credit scorecard is a source of auditing information for all credit
transactions.
Credit scorecard must be developed when the credit information
desired are readily available.

2. T-T
6. T-T
A trustworthiness implies confidence in the debtor’s integrity.
Analysis of credit information is the primarily concerned of credit
Credit granting is a risk
investigator.

Credit analyst is responsible in documentation of credit information.

3. T-T

Capital is the ability of the credit applicant to earn to repay credit

7. F-T
obtained.
Risk decreases proportionately to the size of the credit applied for.
Condition is the debtor’s existing physical, economic, financial and
political situation in his place of residence. Economic factor is a credit risk

4. F-F 8. T-T

Liquidity ratios measures the extent to which the credit applicant has Character to a credit applicant comprises the inherent integrity.
been financed by debt.
Character is the most important basis of credit.
Leverage ratios measures the firm’s ability to meet its maturing short-
term obligations.
9. T-F
Capacity – character – capital = fraudulent risk 7. Government credit The following credit are classified as according
to purpose except:
Capacity + capital – character = limited risk
8. Short-term credit This type of credit usually covers the purchase
of consumers goods.
10. F-F
9. Industrial credit The following credit are classified according to
Payment performance is a basic factor of financial evaluation. users except:

Recent litigation is a bonus factor in financial evaluation. 10. Usurer Which among the following sources of credit is
prohibited by the government?

1. Consumer credit A credit extended to consumers in order to

facilitate the process of consumption.

2. Commercial credit This type of credit is sometimes termed as

mercantile credit.

3. Long-term credit This type of credit covers those loans intended

for investment purposes.

4. Credit Unions A non profit making money cooperative whose

members can borrow from pooled deposits at low interest rates.

5. Loans and savings Associations A financial association that

specializes in accepting savings deposits and making mortgage and
other loans.

6. Investment credit A credit utilized by a business organization for

the purchase of fixed asset to carry minimum business operations