La Carlota City College

City of La Carlota
–o0o-
Business and Management Department

Module in FM 16
2nd Semester, AY 2020-2021

MARISSES Y.TAMPO,MPA
Contact# : 09494600636
Email Add: marissestampo@gmail.com
Facebook Account: MARISSES TAMPO
Facebook Page: BAM– FM 16 (CREDIT AND COLLECTION)

I. COURSE TITLE : FM 16 (CREDIT AND COLLECTION)

II. NUMBER OF UNITS : 3 UNITS

III. COURSE DESCRIPTION :

This is a lecture course that covers techniques of establishing the credit, obtaining and
checking information, servicing the loan, billing and collecting the amount due. Each of the bank’s
installment credit operation is carefully scrutinized. After successfully completing this course the
student should have a working knowledge of collection policies and procedure. Principles of credit
evaluation; open-end credit; direct lending; leasing of consumer goods; indirect lending; legal aspects
of installment credit; organizing and managing an installment loan department.

IV. COURSE OUTCOMES :

At the end of the semester, the students can:

1. understand the emergence and challenge of the credit economy;

2. identify and understand the classes and kinds of credit;
3. know and understand the importance of credit management; and
4. identify and understand the collection policies and procedures.

V. COURSE OUTLINE :

B. SEMI-FINAL PERIOD
MODULE 3. - Credit Management
- Importance of Credit Management
- The Credit Man in The Business World
- Efficiency of The Credit Man in His Work
- Credit Investigation and Appraisal
- The Credit Work
- Credit Policy
- The Credit File
- Credit Policies of Commercial Houses
- Granting Credit
- Sound Credit Management
 - Credit Fraud
C. FINAL PERIOD
MODULE 4. - Collection Policies and Procedures
- Collection Policies
- Classification of Debtors
- Collection Procedures
- The Collection Function
- The Collecting System
- Collection Letters
- Bad Debts

VI. CONTENT DISCUSSION :

MODULE 3 DISCUSSION : Credit Management

The function credit may be summarized in the following word: to find profits in the field of business
activity which lies between the area of safe risks and those definitely poor.
For the reason, the boundless effort of every business organization to increase its profits by doing and
carrying all the business it can on sound footing has given birth to the science of credit management.

IMPORTANCE OF CREDIT MANAGEMENT

 Granting credit is one thing and collection another. Thus there is a need for a system which will
insure close collaboration between the grant of credit and its collection.
 Precipitous and indiscriminate granting of credit to all types of customers, while increasing sales
volume, could undermine a firm and usher its collapse.

THE CREDIT MAN IN THE BUSINESS WORLD

Important contribution of the credit man:

 His words generally carry much weight. It is he who makes recommendations based upon
investigation, studies and analyses whether credit should be granted or denied.

On the other hand, the overzealousness of the credit man to prevent losses

 Overly strict with respect to the grant of credit could generate losses of customers and thus
consequent reduction in the volume of business.

EFFICIENCY OF THE CREDIT MAN IN HIS WORK

Credit Department
 Credit department does not grant or extend credits.
 Credit department which attempts to evaluate the paying capacity of preset and potential
customers on the basis of information gathered and analyzed.
 Credit and sales department must cooperate closely with each other
 Credit department collects files every available bit of information concerning people or firms that
borrow money.
Functions of Credit
 Systematic and judicious collection of data respecting the financial responsibility character
antecedents, and business qualifications and abilities of the bank’s customers.

Credit Manager
 Is a man who occupies a very important position in the structure of a credit economy and yet is
little known and least talked about outside the world which he lives.
 in a small concerns, he is the credit investigator, credit appraiser credit supervisor, and credit
manager all rolled into one.
 A real good and capable credit manager in a very correct sense, owes his position to himself
 In a big concerns he is the head of a staff of trained experienced and capable me charged with
credit work.
 A good credit manager is progressive in his ideas and thinking.

CREDIT INVESTIGATION AND APPRAISAL

Engaged in the grant of loans or extensions of credits, sound bank management dictates that a thorough
and careful credit investigation of clients and appraisal of security(ies) as collateral be conducted before
any accommodations are made.

Credit Investigation
 this task is performed by the banks credit investigator who has as his main objective, the
verification as well as evaluation of the applicant’s character, credit standing and
integrity through the process of date gathering of all essential facts.
The requests for Credit Investigation Report (CIS) may come from any officers/departments of the bank
for any of the following purposes:
a) On clients seeking loan accommodations or credit line with the Loans Administration
Department through Marketing Management Department;
b) On clients applying with the International Banking Department to secure availment in the
form of Letters of Credit, Import/Export Bills, Trust Receipts, and other forms of
accommodations;
c) On clients opening current/savings accounts with the Cash Administration for the first
time (which, of course, is no longer common nowadays in view of the competitive nature
of the banking business);
d) On clients transferring business with the Treasury Department through the money desk;
e) On co-makers and guarantors for credit;
f) On old clients for updating client information;
g) On insurance companies requesting accreditation or offering to act as surety;
h) On beneficiaries named in the Letter of Credit;
i) On prospective buyers of assets acquired by the bank
j) On prospective suppliers of office equipment and supplies and contractors of services;
k) Others, subject of special cases

Scope of Credit Investigation

The scope of credit investigation depends, to a large degree, upon the following factors:

1. Purposes and types of investigation- whether the investigation is a routine matter or a

special case and the purpose is general or specific
2. Company credit policy- whether the policy is conservative or liberal one, and whether it
requires a comprehensive investigation of cases, or a representative sampling would
suffice.
 3. Client classification- whether the client is new or established one, a past-due account or a
valued one.
4. Amount involved- whether the amount involved is big or small. If it is small one, chances
are a limited type of investigation suffice. If it involves a fairly large sum, investigation
maybe rigid and thorough relative to the risks involved. And, of course, with respect to
the amount of income to be derived measure of profitability.
5. Time and resource constraint- the scope depends on such factors(time and resource
constraint) since the report must be finished on the date it is needed by the requesting
officer/department of the bank and also, on the availability of the credit investigator who
will conduct the investigation.
Generally, the scope of the credit investigation covers and includes the following:
I. COMPANY'S BACKGROUND/HISTORY
This covers the complete business record, such as the date of incorporation, the type of business
organization, record of registration with the proper authorities, the names of incorporators, and
the summary of operating records.
In the case of an individual, his personal background, business, identity, and membership in the
organizations will be necessary together with bank and trade references.

The investigator also takes into account the requirements common in the following types of business
organization.

1. SINGLE PROPRIETORSHIP
 the owner’s capacity to enter into a lawful contract
 if the owner is a married woman, she must possess the legal right to transact business as
required under the Civil Code of the Philippines.
2. PARTNERSHIP
 if the partnership is a general or a limited partnership
 whether the contract of partnership is registered or not with the SEC.

The credit investigator should also take into account and consider the following characteristics of a
partnership, such as:

 There must be a contract;

 The partners must have legal capacity to enter into the contract;
 There must be mutual contribution of money, property or industry for a common fund;
 The purpose must be to obtain pecuniary profits and to share the same;
 The purpose for which the partnership is formed must be lawful; and
 Moreover, the Articles of Co-partnership must not be kept secret.

3. CORPORATION
Important matters which a credit investigator should carefully consider in the Articles of Incorporation
are the following:

 Name of the corporation

 Its purposes, objectives, nature, and powers
 The location or place of business
 The term of duration of corporate existence
 The names and residences of the incorporators
 Names of incorporating officers
 The capital stock and the number of shares into which it is divided
  The names and citizenship of the stockholders and the amount or number of shares they
have actually subscribed to and the amount paid on subscriptions.
 The acknowledgment of the duly executed Articles of Incorporation before a notary
public

II. FINANCIAL CONDITIONS

Herein is represented in summary form a breakdown of the financial statement of the company
reflecting its latest financial condition and the results of operation for the past three or five years.
Aside from the balance sheet and income statement, it may include schedules, explanations or
extraordinary items, breakdown of merchandise and receivables and full explanations of all inter-
company loans and merchandise transactions.

III. DEALINGS WITH GOVERNMENT LENDING AGENCIES, ETC.

 With lending agencies of the government.

 A multitude of facts that could be obtained from merchandise suppliers.
 Other banking institutions. The investigator should focus his inquiries on such matters as
the following:
a) Nature of the credit accommodation granted
b) Whether borrowings are on secured or on clean basis
c) If secured, whether the security consists of real estate mortgage, shares of stock,
warehouse receipts, chattels, assigned receivables, discounted notes receivables,
assignment of claims under a government contract or some other form of security.
IV. BANK'S EXPERIENCE WITH THE SUBJECT
Has there been any previous relationship established in the past?
V. COURT CASES

 The credit investigator gathers information about the subject’s involvement in collections,
civil cases, as well as criminal cases, if any.
 This is through finding gathered information about court cases from the Credit
Management Association of the Philippines.

THE CREDIT WORK

The efficient performance of the credit work revolves around the presence and cooperation of the staff of
trained, experienced and capable personnel whose task and responsibilities are delineated by the kind of
positions they hold in the department.
The people involved in the efficient performance of the credit work includes:
1. Credit Supervisor- is responsible for managing all aspects of a company's activities involving
credit given to clients and customers, with a strong focus on collecting payments on delinquent
accounts.
2. Credit Analyst- is a financial professional who assesses the creditworthiness of securities,
individuals, or companies. Credit analysts determine the likelihood that a borrower can repay
their financial obligations by reviewing the borrower's financial and credit history and
determining whether the state of the subject's financial health and the economic conditions are
favorable to repayment.
3. Credit Appraiser- refers to a person who is assessing a particular loan application or proposal in a
thorough manner in order to gauge the repayment ability of the loan applicant. A lender conducts
 a credit appraisal chiefly to make certain that the bank gets back the money that it lends to its
customers.
4. Credit Investigator- examines the credit history of applicants for financial institutions. They
scrutinize the information provided by the customer in the loan application, researching past
payment records, pulling credit reports, and calculating loan-to-income ratios to determine
whether or not to approve the loan. Some companies hire credit investigators to run financial
background checks on prospective employees, especially for positions that handle large amounts
of money.

Necessity for Close Supervision

The necessity for a considerable amount of supervisions on the part of the credit manager over his staff is
quite apparent. Credit men, operate during much of the working time away from home office removed
from definite and direct executive control. However, one method which could make the credit men do
their job, as expected of them, is to give them a “deadline” for the case they have under investigation and
study.
Psychologist suggest three important appeals for use in attacking the problem of supervision, such as:

 Pride in Accomplishment.
 Monetary reward for a difficult job done.
 Commendation and praises.

Bank Appraisal Report

An "appraisal" is a comprehensive report that determines the value of your property based on a number of
valuation factors, ranging from gross living space, to the view and the year a property was built.
Generally speaking a bank appraisal report contains, among others, the following information:
1. SUBJECT OF APPRAISAL
a) Name of registered owner
b) Location of the property
2. LAND IDENTITY
a) TCT number
b) Technical description
c) Lot number
d) Block number
e) Frontage
3. DESCRIPTION OF LAND
a) Shape
b) Frontage
4. NEIGHBORHOOD DATA
a) Semi-commercial
b) Commercial
c) Residential
d) Industrial
e) Raw land
f) Others
5. PUBLIC UTILITIES
a) Electricity, water, telephone, gas, etc.
b) Kind of transportation facilities available
6. IMPROVEMENTS
a) Full description of improvements
7. VALUATION
 b) Market and Appraisal value of land
c) Net value of improvements
d) Total appraised value
e) Recommended Loan Value
8. ENCUMBRANCES
a) Names of mortgages and amount
b) Others that might be annotated in the Original or Transfer Certificate of Title

CREDIT POLICY

In most instances, a bank’s credit policy evolves from an unwritten set of standards, sometimes very
nebulous, to more specific criteria covering the conditions under which loans are made. Where a bank is
small, such policies are seldom found in writing.
A policy has been described as a “decision in advance.” The entire range of loan function of a commercial
bank is basically interwoven with the decision-making process.
Credit policy is a set of guidelines that sets credit and payment terms for customers and establishes a clear
course of action for late payments.
A sound credit policy with the sufficient degree of flexibility could help contribute to the successful
operation of commercial banks insofar as loan functions are concerned.

How Bank Loan Policy is Formulated

 Any loan policy that may be formulated by a bank reflects but one phase of the over-all
policy program of the institution.
 The actual preparation of policy statements is usually carried out by the president or senior
loan and credit officer.
 A statement of loan policy, among others, includes reference to types of loans and the basis
upon which loan applications may be considered.
 The kinds of securities that are considered acceptable by the credit-granting institution are
also the subject of loan policy.

In the formulation of a loan policy, the officers are guided by two primordial considerations:

 First – the protection of the depositor’s funds.

 Second – the production of a fair return for its lending and investment activities.

Setting a Standard for Control Purposes

No policy achieves maximum effectiveness unless it is accompanied by a periodic check-up to insure its
proper implementation and ascertain its week spots, if any.
A sound loan policy should be made flexible in order to provide for alternative courses of action and thus
enjoy the advantage of the policy serving and a guideline rather than as a straight jacket.
Such loan policy should provide specific guidelines for particular types or categories of bank credits, such
as the following:
a) Agricultural credits
b) Commercial loans
c) Industrial loans
d) Real estate loans
e) Consumer or personal loans
f) Term loans

Dissemination of Loan Policy

The importance of effective communication to the success of any undertaking has been stressed time and
again. In the particular case of commercial banks, its policies should be disseminated with their
implementations. Since a loan policy is but one facet of the over-all policy of the bank, it follows that an
internal information drive should be launched from time to time, with the objective of inculcating upon all
those concerned the need, as well as the importance, of giving meaning the substance to such policy
through its effective implementation.

THE CREDIT FILE

So important is the credit file to any firm extending credit that it hooves upon it to adopt a system of
gathering and putting every information about customers and applicants into a folder which is filed in
proper order. Hence the term credit file means a collection of data about an individual’s borrowing and
repayment activity. Your credit file contains the information that determines your credit score. When you
apply for an automotive, mortgage, or other type of loan, the financial institution will check your credit
file to see whether you appear to be a good or bad credit risk.

CREDIT POLICIES OF COMMERCIAL HOUSES

To say that a credit department is essential in every organization engaged in the grant of credit is to
elaborate on the obvious. On the part of small concerns, a credit department may exist merely as a
section. Or it may not exist at all. At any rate, even in the absence of any, credit, functions are discharged
by a responsible official in the organization.

Scope of Credit Policy

After adopting a credit policy, to business enterprise must decide just what are its credit terms and what
credit period it will adopt as well as its credit limits.
By credit terms is meant the terms or conditions under which the credit is granted.
By credit period is meant the length of time within which the customer is expected to remit in part or in
full.
Some credit granting companies impose a limit with respect to the amount or value that a customer can
obtain from the firm. This is known as credit limit.

Purpose and Advantages of Credit Limitation

 Limits are sometimes used as absolute maxima of credit, nevertheless their general use as
is in the nature of danger signals, just like the warnings posted at approaches to railroad
crossings.
 The principal purpose of credit limits is to serve as guides to credit management and
control.
 It appears quite the evident that credit limits operate as an overall device for the control of
credit extensions.
 Credit limits aid in reducing the cost, of credit management and in enhancing its
efficiency.

Principles of Controlled Credit

1. Only after a thorough investigation of the credit worthiness of the customer seeking credit may
credit be granted.
2. Each new customer should be made acquainted with the terms and conditions as promulgated and
implemented by the business firm with respect to terms of payment; discounts, if any; credit
period; and credit limit
3. It is necessary that the first reminder be sent immediately the next day after bills become past due.
4. Continued use of the credit privilege should be suspended in respect to slow paying customers.
 5. Decisions and actions should be characterized by firmness but short of being rude and arrogant.
6. When it becomes absolutely necessary, the services of collection agencies must be sought or legal
services enlisted as the case may be.

GRANTING CREDIT
Granting credit to the individual is one thing to a business firm is entirely a different matter.

The 3 Major Considerations immediately come into the picture all of which merit attention.
 The first relates to the size of the order.
 The second refers to the identity of the applicant for credit and his reference.
 The third is the customer’s rating in the register of some mercantile agencies.

Wholesale and Retail Credit

 Wholesale customers usually buy for resale to others.
 While retail customers buy for their own consumption

The Principal Objectives of Credit Management

1. Maximizing Sales- for a firm not only to continue its operations but moreover have a strong foothold
in the business, it must be able to maximize its sales. More and more sales assure the company with
increasing volume of business and continuous flow of income and consequent receipt of profits.
Accordingly, credit management is charged with that important task: to help increase sales while
minimizing losses. Increased sales and profits are the by-products of a better understanding and
skillful handling of all credit functions.
2. Controlling the Amount of Receivables-the basis of effective control is a plan for control based upon
some realistic set of standards. Toward the achievement of these ends, it is necessary to develop, interpret
and maintain effective controls and standards which will assist all concerned to:
a) Project desired results more accurately
b) Identify and forecast major trends that affect significant credit activities
c) Determine the need for changes in policies and/or practices
d) Detect credit problems
4. Controlling costs of Credit and Collection- every company incurs expenses in the extension of
credit and in the collection of accounts receivable. These expenses include:
a) Bad debt losses
b) Wages and Salaries of employees charged with credit and collection functions;
c) Cost of funds tied up in receivables
d) Cost of fees and dues for credit information.
e) Charges incurred for outside assistance in making collection
f) Rent or space occupied by credit and collection personnel
It does not necessary, however, mean minimizing expenses. Rather, it refers to cost per unit , that
is decreased cost per unit of work, which results from improved planning, direction and
supervision.

Importance of Credit Limits

 It cannot be stressed too strongly, that one pressing problem which taxes the minds of
credit managers is not only the decision when to extend credit but a complementary
problem of how much credit must be extended.
 Imposing credit limits could be a service to buyers on credit since it could prevent them
from falling hopelessly into huge debts that they may not be able to pay regardless of the
means they employ to weed themselves out such a precarious predicament.
Types of Credit Limits
1. QUANTITATIVE CREDIT LIMITS – is meant the maximum amount of credit which may be
permitted to remain outstanding on account.
2. TEMPORAL CREDIT LIMIT – impose certain requirements which a borrower or prospective
debtor must comply before he could be granted credit.

Sound Credit Management

Sound Credit management principles revolve around three E’s :

1. Estimation
2. Enforcement
3. Evaluation

CREDIT FRAUDS
If only all individuals are honest, then no credit manager would wrinkle or grow gray hairs prematurely.
But that perhaps wishful thinking.
These dishonest firms and individuals are known by various names and employ various tricks. Some of
them become successful in their “line trade” while others fall by the wayside and become apprehended
even in their first try.
Credit fraud is the criminal use of someone else's personal credentials, as well as their credit standing, to
borrow money or use credit cards to purchase goods or services with no intention of repaying the debt.
Credit card fraud is the most prevalent type of identity theft.
MODULE 4 DISCUSSION : Collection Policies and Procedures

For countless years to come, for most business firms, if not all, the formulation of a sound credit policy as
well as the adoption of an efficient method that will insure 100% collection of all existing indebtedness
will remain an elusive goal, if not an empty dream.
For if these were possible, then no business firm need suffer from the presence of bad debts, which are the
nightmare of the collection departments and business firms. Neither would there have been any business
or industry which have stopped operations because of them and cause said business or industry to fold up
in the end. At best, a company can try its best efforts to minimize the incidence and volume of bad debts.

COLLECTION POLICIES
As has been pointed out time and again, in every business entity which is engaged in the grant of credit,
granting credit is only one phase of its major activity; collection is another. Briefly stated, the job of
collection is to get the money due to the company. However, all collection effort should be made in line
with the policy of the business firm, that is, collection costs must be kept within reasonable limits, good-
will of customers must be cultivated and maintained; and risk must be reduced.
A CREDIT COLLECTIONS POLICY is a document that includes “clear, written guidelines that set the
terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making
collections, and steps to be taken in case of customer delinquency”.
In fewer words, it is a guide offering an organized and repeatable philosophy on selling on the rules,
regulations and procedures to manage daily operations. The goal for a credit collections plan is to clearly
define these elements so that sales and collections employees conform to documented steps and
procedures designed to optimize your resources, reduce credit risk, and improve overall cash flow.

A well written and comprehensive credit collection policy will:

 Ensure continuity in the department in the event that key personnel leave the credit department.
 Help make sure all customers are treated fairly.
 Ensure consistent credit decisions are being made.
 Be used as a training tool for new sales associates and the credit and collections team.
 Be used to ensure consistency of procedure and execution between the credit department, sales,
and management.

Classification of Debtors
A debtor is a company or individual who owes money. If the debt is in the form of a loan from a financial
institution, the debtor is referred to as a borrower, and if the debt is in the form of securities – such as
bonds – the debtor is referred to as an issuer. Legally, someone who files a voluntary petition to declare
bankruptcy is also considered a debtor.
Generally speaking, collection efforts are not intended for those who pay their obligations promptly and
religiously. Rather, they are directed to those who take time to pay-the slow-payers. More so to those who
try to avoid meeting their obligations if they could. For this reason, many business firm classify their
debtors into certain types for purposes of insuring a sound policy and an effective collection procedure.

Types of Debtors
While debtors who are unable to pay their obligations on time may all be lumped under the broad class of
delinquents, nevertheless, they may be further classified and distinguished according to the attitudes and
behavior they manifest and display. Briefly, they are:
1. COOPERATIVE DEBTOR
 This kind of debtor not infrequently pass sleepless nights trying to find ways and means
by which they could discharge their obligations soon, if not soonest.
 They do not constitute much of a problem to bill collectors.
2. CHRONIC COMPLAINER
 Debtors who has repeated and nevertheless baseless complaints from creditors.
 They are designed to serve as a smoke screen for their failure to meet their obligations on
time.
3. POLITICIAN TYPE
 This type of debtor does not deny the existence of his obligation which arose from
previous transactions.
 His intention is to postpone the settlement of the obligation.
4. UNCOOPERATIVE & INDIFFERENT
 This type does not pay on time, not because he cannot pay but rather because he finds it
difficult to part with his money.
 The Tagalog have a word for this kind of individual. He is “makunat” which in English is
synonymous to “stiff” or “hard”.
5. PARANOIAC
 They make it appear as if they are wallowing in wealth although in fact they are hard up.
 They enjoy talking about things that will help to inflate their ego.
 They keep on promising that they will settle their obligations although the questions that
remains unresolved is -WHEN?
6. BELLIGERENT / PUGNACIOUS
 These are individuals who think that society owes them a living.
 This type of debtors whenever reminded of their existing indebtedness, becomes haughty
and arrogant and moreover challenge the bill collectors to a fistfight.
7. THE ELUSIVE TYPE
 This creditors are elusive as an eel.
 It is hard for the bill collectors to find them in their offices or in their homes.

Paying Habits
Another way of classifying debtors is according to their paying habits that is, upon their promptness in
meeting their obligations. They are:
1. PROMPT PAYERS- this group consists of individuals and business entities that are conscious of
their financial obligations which are discharged promptly without the need of being reminded
about them.
They are rated as good, if not excellent risk. They continue to enjoy such good rating until there
is evidence which not only casts doubt on their credit standing but proves the contrary.
2. DELINQUENT DEBTORS- is not only merely a poor prospect for further business. He is no
prospect at all. He will shun the creditor, if only from a sense of personal embarrassment.
Moreover, once he becomes that involved financially, he is all too likely to o from bad to worse
as credit risk.
At this point, let us consider the types of delinquent debtors or borrowers and the widely
divergent handling problems the present. In brief tabulation form and as presented by Borroughs
Clearing House, they are:
A. Fair credit
a) Careless borrower- merely needs reminding regularly
b) Complainer- he has grievances after he falls behind
 c) Unforeseen problems- unemployment, shrunken income, medical expenses
B. Slow credit
a) Poor manager of his finances, over-indebted.
b) Marital problems- may quit his job, skip, or hit the bottle
c) Coward- afraid to face creditors.
C. No good credit
a) Lives beyond his income, credit passed unknown.
b) Gypsy- in residence or employment
c) Crook- directly attempting to defraud.

COLLECTION PROCEDURES
COLLECTIONS PROCEDURES refers to detailed list of steps for ordered execution leading to when and
how to collect past-due amounts. Collections procedures can not only outline steps to collecting on
delinquent accounts but also include steps to preventing accounts from becoming delinquent. Providing
new credit customers with terms of sale and payment information and including this information on credit
receipts and statements can serve to remind customers of their credit obligation.

Collection Function
Proper management of the investment in receivables implies the existence of a collection function.
Collection work is, at times, done directly by the credit department. At times, by an independent agency
which offers and renders collection service for fee.
A collection department is charged with the task and responsibility of insuring the earliest possible
payment on receivables without any customer losses through ill will. Needless to state, prompt collection
or payment tends to reduce the investment required in receivables and its associated capital costs and also
tends to reduce incidence of losses in accounts receivables investment.
It should always bear in mind, that the longer a receivable remains outstanding, the longer the company
becomes continually exposed to hazards and risks of non-payment or loss. The business firm may even
loss sales. As one businessman has aptly observed, most customers, if not all, do not reorder from
suppliers from whom they owe some money which could not pay or refuse to pay.

Collection Department
To say collection is a major and important activity of any credit-granting concern is to elaborate on the
obvious. In fact, so important is that the success of the credit-granting concern hinges, by and large, on
the efficient functioning of its collection machinery collection is really a part of the credit function
although it should be placed in the charge of a separate individual or subordinate division, collection Is
almost psychological task- a task for someone who has, at least, a deep and usable knowledge of human
nature.
The collection department of a company is faced with the serious and delicate problem of inducing the
borrower to pay without losing its goodwill. The handling of the problem in the very first place demands,
the realization and precognition of the fact whenever a customer is made to pay, however just the
obligation actually is, room for resentment may not be totally absent. The manager of the collection
department using tact must be able to show to the delinquent debtor that it is to his advantage to pay soon
enough and thus avoid the cost of litigation and more important still- personal embarrassment that
generally attend court cases. Such should be done without showing traces of any threat or intimidation.
Only cases of definite unwillingness to pay, or actual disinterest should legal steps be taken to insure
collection, either through the company’s attorney or a collection agency. In this regard, it may be noted
that the more personalized the collection policy of the company is, the more cooperative debtors become.

Qualities of a Good Bill Collector

Just as the manager of collection department is competent and capable, so must the men under his charge
be those who possess certain desirable qualities in general. Doubtlessly, they must develop every ounce
of their mental, moral and physical equipment in order to acquit themselves creditably to their task and
occupation.
1. Industry- while industry alone does not guarantee the success of man in his undertaking,
nevertheless, it brings commensurate rewards.
2. Persistence- is the twin brother of industry. A good bill collector is never tired and afraid of
making repeat calls until the amount owed by the debtor is turned over to the company. It takes
persistence to break down resistance, stubborn as it may be. Persistence is the nemesis of failures.
3. Tact-the job of a bill collector is both taxing and at the same time a thankless one. To succeed,
one must as much as possible avoid offending the delinquent debtor while making the collection
for the company, if it is possible. Thus, he should possess tact- prudence and good judgment.
4. Resourcefulness- good bill collectors have demonstrated quite aptly why they are a success in
their chosen occupation. Possessing many desirable qualities, one thing basic to their success is
resourcefulness. This may be considered as synonymous with need for achievement, or the so-
called nACh, for short.

The Collection System

While it is to be admitted that no single collection system can be exactly fit the needs of every kind of
business, nevertheless, one that s expressly geared to the business enterprise that is flexible and changing
as needs arise should be devised and installed.
The collection system should be anchored on heling preserve the goodwill of its customers just as
accounts are collected when due from them. By establishing rapport with its customers, collection efforts
should be exerted as to induce the customers to settle their accounts willingly on their own initiative and
thus devoid of the necessity of any reminder from the creditor company. While this is not always
possible, its attainment helps cement close relationship between the company and its customers.

Collecting Delinquent Accounts

Notwithstanding the extreme care adopted in the grant of credit, there are occasions when some
borrowers get into financial trouble and thus find it difficult, if not impossible, to discharge their
obligations. Indeed, the same laws of probability which govern the percentage of good loans also govern
the percentage of slow and troublesome loans.
When borrowers become placed under such a circumstance, one good practical policy to adopt is
maintaining a regular, continuous follow-up, keeping in constant touch with the borrower; trying to be
cooperative and helpful; and, moreover, always being courteous but nevertheless firm.
Collection department procedures
1. Not all customers pay their bills without being asked to do so. This is the rationale for the
existence of collecting firm.
2. The primordial responsibility of every collecting department is to bring in the money owed the
company with least costs and efforts.
3. It is imperative as well as sound practice to bill customers as soon as their obligations become
due, this will help reduce the required investments in receivables.
4. Collection efforts should be always in line with company policy; pegging down collection cost
within reasonable limits; preserving goodwill of customers; and minimizing risks.
5. In a very subtle and tactful manner, the collection department should be able to show to the
customers that it is their advantage to pay their obligations to the company and thus avoid the
attendant embarrassment of court suit and impaired reputation.
6. Collection letters should be worded in a personal fashion and make customers feel that they are
important and moreover friends of the company with whom they transact business.
7. Every collection effort should be properly recorded in the credit file so that a complete history is
available at all times and moreover, kept up to date.
8. The collection department should periodically review its policies and procedures and evaluate
against results.
Collection through Banks
For the convenience of the paying customers, a number of companies allow them to pay their obligations
through the facilities of certain specified banking institutions. Hence, said customers are spared
the trouble of paying a visit personally to the offices of the creditor companies to make their
payments.

Benefits from Effective Collection Effort

Indeed, the benefits arising from effective collection efforts are many but the most important ones, may
be presented in summary form, as follows:
1. Reduction in the volume of accounts receivables;
2. Freeing capital for carrying the business operation;
3. Increasing profits through decreased expenses;
4. Shortening of credit period; and
5. Establishing a line of customers who are financially sound.

Seven Elements of Collection Policy

1. Collection is made easier, when the credit extended is a package of three things: credit, supplies,
and knowledge.
2. Rural banks and other lending institutions must devise ways to streamline “timing” operations.
3. Be selective in your clientele.
4. Employ well-trained credit technicians.
5. Maintain a continuity of human-relationship once established.
6. Tell the story of your bank to your community at every opportunity.
7. The final element of a sound collection policy, if the other six have failed, is to admit a collection
problem in your hands.
COLLECTION LETTERS
Collection letters are beyond question the most difficult to write. In fact, failure on the part of h writer to
prevent offending the customer causes more harm than good. Indeed, many a time, is has multiplied the
costs, the losses, and the harm.
A LETTER OF COLLECTION is written when payment is due, or it could be in case of an overdue bill. In
the course of business main challenge is to maintain and demonstrate good relation with customers. A
collection letter is an indication that the agreed rules have not been followed. Though the situation can be
different but a letter of collection should be drafted keeping in view the demand of the situation.
As a collection letter is an authentic document about the business relation of the two parties, so the letter
should maintain a professional and formal tone. The letter should address the recipient by name; date
should be mentioned on the letter, as it will be a proof of communication between the parties. The letter
of collection should be having a reference of the products or the services in concern. The mode and time
of payment should be mentioned in the letter. The letter should outline main features of the business,
terms and conditions, on which both the parties have agreed.
As the letter of collection is a formal letter and it informs debtor of the payment and also serves as a
warning of an eventual legal or court’s action in case of negligence or a delay, so it should be mentioned
clearly but use polite words, this letter is a proof that debtor was contacted and warned. It is not wise to
attach any kind of original invoice with the letter but you can place a reference that gives rise to the due
payment. The collection letter should be signed by the sender, better to stamp it. The letter can be sent by
post or you can fax it. The sender should keep record of all such letters, in case it is needed in future. You
can also find a sample of collection letter with this template.

Fundamental Principles of Collection Letters

Most people are sensitive about their financial affairs. And this includes perhaps you and me and many of
us. in some instances, debtors, for reasons unknown only to them, have turned deaf ears to pleas of
creditors regarding the payment of their obligations. But be that as it may, still they are human beings and
as such must be treated with passionate understanding. Thus collection letters:
1. Addressed to them must be devoid of any offensive, vulgar, profane, and insulting language. It
must always be dignified, respectful, and gracious.
2. Should be specific and as short as possible without in anyway appearing curt, and must refrain
from use of terms or words that are susceptible to various meanings or which the customers may
not be able to understand well.
3. Should use dated actions, that is, inform the debtor that the creditor expects certain action by given
date, and never “in the near future”
4. Should always follow a definite pattern, they must start with casual reminder of the obligation and
progressing to a final step, that is, the possibility of a legal action if payment is not made by a
definite date.

Importance of Collection Letter

The importance of collection letters to any firm which grants credit to its customers may be observed
from the fact that the sale never becomes complete until and unless the account is paid. Hence, collection
letters form part of the collection machinery of the company.
Basically, two objectives are sought behind every collection letter, namely:
1. To collect the money due to the company.
2. To keep and retain the goodwill of the customer.

Qualities of a Good Collection Letter

It should be short and direct.
It should be dated action.
It should be written from customer’s viewpoint.
It should not provide any cause or occasion to arouse the anger and bitterness of the customer.
It should be revised periodically.
It should have humanistic approach.
It should follow a definite pattern.
It should be written in such a way as to make it appear as if it were the last to be sent to the debtor.

Types of Collection Letters

Collection letters are of several types, classified according to stages of collection procedure.
1. Reminder letter- as is commonly practiced by business firms, the first stage of collection procedure
consists of notification, that is, sending bills and statements to the customers. This is followed by a
“reminder” letter. The first reminder letter is generally sent out within a reasonable time after the
mailing of invoices, bills and statements.
2. Sending past due notices- are sent out by most companies as a matter of collection procedure.
3. Follow-Up LetterS- when one or two reminders fail to bring any response from the debtor,
collection letters which are still friendly, but nevertheless firmer in tone, should be sent. Such
letters generally touch on an inquiry from the debtor why no settlement of the obligation is made,
or emphasizing the obligation of the debtor why it must paid soonest.

4. Discussion
letter- when the customer chooses to ignore the reminder letter, the stage is ripe for the next step- to
find out from the customer the reasons why he has not taken any actions on his existing obligations
with the company. This letter usually initiates or extends an offer to the customer to help him in his
predicament by discussing it together so that it will obviate the possibility of any misunderstanding
and unpleasant consequences.
5. Appeal
letter- not infrequently, there are times when a company may decide to forego sending a
“discussion” letter to its customer and instead proceed from the “reminder: letter sending an
“appeal” letter. When such in case, the letter has the characteristics of both a “discussion” letter
as well as an “appeal” letter.

Dear _______

Have you considered for a while what your friends and others in the community would
think about you if you persistently and stubbornly refuse to settle your obligations? Indeed, the
consequences would be tremendous as they would be disastrous. These are the things that we do
not want to happen. Neither would you?
Nowadays, nothing could be wide kept secret and away from circulation. Almost
anything could spread far and wide! so, why take a chance.

Very truly yours,

__________________

6. The “Demand” letter- when reminders, follow-up, and appeal letters fail to produce the desirable
results, the creditor is made to realize that he has a problem in his hands. He cannot collect the
account simply through the use of collection letters, short of any drastic action. Hence, the
necessity for sending “demand” letters. The “demand” letter is used to inform the delinquent
 debtor of the consequences that will befall upon hi, when the case is brought to court, such as”
the loss of face or embarrassment, shouldering additional expenses like court fees, lawyer’s fees,
interest charges and a host of others.

Effective Techniques
In a number of business firms which are engaged in the grant of credit, especially so in which collection
work is a of some dimensions, certain techniques have been developed which have been proven effective
in the different stages of collection procedure.
For instance, in the first stage, which is sometimes termed s the reminder stage, the following techniques
are of immeasurable value in the collection effort procedure:
a) Duplicate statement or invoice
b) Use of sticker
c) “reminder” letter
d) Printed cards
e) Aged statement and reminder
In the follow-up stage, the techniques generally consist of the following:
a) Letters
b) Telephone calls
c) Registered letters
 d) Personal calls or visit
In the last stage, resort is made to the services of lawyers or collection agencies.

Registered Letters
When a delinquent pays no attention letters and is not accessible to personal calls or telephone
communication, the collector may occasionally use a registered letter to a good effect. In such a letter, the
creditor may call attention to the fact that such other letters have not been answered, and he may inform
the debtor of the condition of his account, and any other details or circumstances which may assist in the
collection. In these letters, added emphasis may be obtained by addressing them directly to an officer or
other person in position of authority in the business.
The effectiveness of the registered letter is due to its official character. Registry is formal and unusual.
When a delinquent customer receives a registered letter in the reference to his account, he will in many
cases conclude that the matter is becoming serious and as such needed immediate attention and action.
The debtor knows that the letter was registered and that he has signed a receipt for it.
Telephone Calls
In many instances, the telephone is an effective medium in collecting debts. It is a short cut which can be
used when a debtor fails to respond to other communications. It gives the collector an opportunity to talk
personally with the debtor and obtain a promise of payment; or to ascertain what the situation is so that he
can shape his action accordingly.
Collection through the Use of Drafts
In some instances, it may become necessary to use drafts in enforcing the settlement of an obligation such
instrument is commonly used by wholesalers and manufacturers. It represents one of the more urgent
steps in the collection series. In some lines of business, the first or second letter may be followed by a
draft; in other line of trade the terms of credit stipulate that if the account remains unpaid after certain
time, a draft will be drawn upon the customer without further notice. Resort to the use of drafts should be
made only after most of the collection letter have failed to bring the desired response.
Telegram
In any written communication which refers to an indebtedness, much care must be taken to avoid liability
under the laws against libel and blackmail. Anything writer, it may be pointed out, is “in black and white”
and thus if it goes beyond the limit of the law, the sender himself supplies the inconvertible proof which
may convict him.
The caution is even more applicable to telegram than to a letter. The telegram is in a sense, public
property. dunning or pestering which persistent demands for payment, of a debt is considered unlawful
and must be avoided.
If used properly, a telegram is often very effective, although it cannot be too specific in its wording. A
telegram gives a sense of urgency and as such enjoys such advantage over other forms of communication.

BAD DEBTS
As borne by experience on the part of many businessman, notwithstanding measures and efforts to collect
accounts receivable, not infrequently, there are occasions wherein debts could not be collected for some
reason or another. To companies under such a predicament, the usual question is asked: when and under
what circumstances should be written off?
1. The debtor-customer has become declared insolent.
2. Inspite of diligent efforts as well as exhaustive remedies, the customer has stubbornly refused to
send any reply or take action to settle his obligations.
3. The inability to locate the whereabouts of the debtor-customer withstanding diligent efforts and
the use of means at the command of the creditor company.
4. The business has ceased operation for several years.
5. The untimely demise of the customer leaving obligations behind which the heirs could not ot
have stubbornly refused to honor and settle.
VII. ASSESSMENT :
 Assignment/outputs - 20
Quizzes - 20
Periodic Exam - 60
Total - 100%

VIII. REFERENCES :

Cabrera, Ma. Elenita Balatbat, (2012) Financial Management: Principles and Applications. Manila:
GIC Enterprises & Co. Inc.
Cabrera, Ma. Elenita Balatbat, (2015) Financial Management: Principles and Applications.
Manila: GIC Enterprises & Co. Inc.
Frank J. Fabozzi and Drake Pamela Petterson, Finance: Capital Markets, Financial
Management and Investment Management.
Francisco, Marivic F. (2016). Personal Financial Management. Manila: Mindshapers Co.
Miranda, Gregorio. Credits and Collection. Quezon City:Andriana Publishing Co.I nc..