Cbae Bsbafm 1stterm1stsem Fm222

UNIVERSITY OF MINDANAO
College of Business Administration Education

Financial Management Program
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for Self-Directed Learning

(SDL)
Course/Subject: FM 222 – Credit and Collection
Name of Teacher: Maria Julieta R. Torres
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS INTENDED
USE. THIS IS INTENDED ONLY FOR THE USE OF THE STUDENTS
WHO ARE OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
2nd Floor, SS Building
Bolton Street, Davao City
Telefax: (082)227-5456 Local 131
TABLE OF CONTENTS
Title Page Page

Cover Page 1
Table of Contents 2
Course Outline: Credit and Collection 3
Course Outline Policy 3
ULOa: Explain credit collection management (CCM) and its six (6)
functional areas, usage, and benefits 7
Metalanguage 7
Essential Knowledge 9
I. Overview of Credit and Collection Management 9
I.1 Six (6) Key Functional Areas of CCM 9
I.2 Why Use CCM? 10
I.3 Who needs CCM? 10
I.4 Benefits of CCM 10
References 11
Activities 11
ULOb: Discuss the various types of credit, how credit works and its
importance 13
I. Types of Credit 14
I.1 How credit works 14
I.2 Importance of Credit 15
References 16
Activities 16
ULOc: Analyze credit and collection policy, its objectives, key factors
to consider, credit limits, and how it works. 19
I. Credit and Collection Policy 19
I.1 Objectives 19
I.2 Key Factors to Consider 19
I.3 Credit Limits 20
I.4 How Credit Limits Work 20
References 20
Activities 21
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Course Outline: FM 222 – Credit and Collection
Professor: Maria Julieta R. Torres. CPA, MBA,

Email: mariatorres@umindanao.edu.ph
Student Consultation: By online (LMS), FB-Messenger group chat
Mobile: 0920962-5368 (CALLs only)
Phone: (082) 2275456 local 131
Effectivity Date: June 2020
Mode of Delivery: Blended (On-Line with face to face or virtual sessions)
Time Frame: 54 Hours
Student Workload: Self-Directed Expected Learning
Requisites: None
Credit: 3
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled Virtual or face to face sessions.
Course Outline Policy
Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is
designed for blended learning mode of instructional
delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54
of a face or virtual sessions.
Assessment Task Submission Submission of assessment tasks shall be on the 3rd,
5th, 7th, and 9th weeks of the term. The assessment
paper shall be attached with a cover page indicating
the title of the assessment task (if the task is a
performance), the professor's name, date of
submission, and the name of the student. The
document should be emailed to the professor. It is
also expected that you already paid your tuition and
other fees before the submission of the assessment
task.
If the assessment task is done in real-time through
the Blackboard Learning Management System's
features, the schedule shall be arranged ahead of
time by the professor.
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Turnitin submission In order to ensure honesty and authenticity, all

(if necessary) assessment tasks are required to be submitted
through Turnitin with a maximum similarity index
of 30% allowed. If your paper goes beyond 30%,
students will either opt to redo his paper or
explain in writing addressed to the course
coordinator the reasons for the similarity. If the
paper has reached a more than 30% similarity
index, the student may be called for disciplinary
action in accordance with the University's OPM
on Intellectual and Academic Honesty.
Please note that academic dishonesty such as

cheating and commissioning other students or
people to complete the task for you have severe
punishments
(reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after
Assignments/Assessments the designated time on the due date, without an
approved extension of time, will decrease by 5%
of the possible maximum score for that item for
each day or part-day that the assessment item is
late.
However, if the late submission of the

assessment paper has a valid reason, a letter
of explanation should be submitted and
approved by the course coordinator. If
necessary, you will also be required to
present/attach
evidence.
Return of Assignments/ Assessment tasks will be returned to you two (2)
Assessments weeks after the submission and returned by
email or via the Blackboard portal.
For group assessment tasks, the professor will

require some or few of the students for online or
virtual sessions to ask clarificatory questions to
validate the originality of the assessment task
submitted and to ensure that all the group
members are involved.
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Assignment Resubmission You should request in writing addressed to the

professor his/her intention to resubmit an
assessment task. The resubmission is premised
on the student’s failure to comply with the
similarity index and other reasonable grounds
such as academic literacy standards or other
reasonable circumstances, e.g., illness, accident
financial constraints.
Re-marking of Assessment You should request in writing addressed to the
Papers and Appeal professor your intention to appeal or contest the
score given to an assessment task. The letter
should explicitly explain the reasons/points to
contest the grade. The program coordinator shall
communicate with the students on the approval
and disapproval of the request.
If the professor disapproves, you can elevate

your case to the program head or the dean with
the original letter of request. The final decision
will
come from the dean of the college.
Grading System All culled from BlackBoard sessions and
traditional contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%
All culled from on-campus/onsite sessions (TBA):

Final exam – 40%
Submission of the final grades shall follow

the usual University system and procedures.
Preferred Referencing Style Harvard Style Referencing
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Student Communication You are required to create a umindanao email

account, a requirement to access the
BlackBoard portal. Then, the professor shall
enroll the students to have access to the
materials and resources of the course. All
communication formats: chat, submission of
assessment tasks, requests, etc. shall be
through the portal and other university
recognized platforms.
You can also meet the professor in person

through the scheduled face to face sessions
to raise your issues and concerns.
For students who have not created their student

email, please contact the professor or program
head.
Contact Details of the Dean Vicente Salvador E. Montaño, DBA
Email:vicente_montano@umindanao.edu.ph
Phone: 09094177626 (CALLS only)
Contact Details of the Assistant Dean Jestita F. Gurrea, DBM
Email: jgurrea@umindanao.edu.ph
Contact Details of the Program Rowena C. Cinco, MBA, CMITAP
Head Email: BSBAFinMan@umindanao.edu.ph
Phone: 09454229329 (CALLs only)
Students with Special Needs Students with special needs shall communicate with
the course coordinator about the nature of his or her
special needs. Depending on the nature of the need,
the course coordinator, with the program
coordinator's approval, may provide alternative
assessment tasks or extension of the deadline for
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
Instructional Help Desk Reil Romero
Email: BSEntrep@umindanao.edu.ph
Phone: 09090618789
Library Help Desk Brigida E. Bacani, Head, LIC
Emai: llibrary@umindanao.edu.ph
Hotline no.: 09513766681
Well-being Welfare Support Help Rhoda Neileen P. Luayon
Desk Email: gstcmain@umindanao.edu.ph
Phone: 09212122846
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Course Information – see/download course syllabus in the BlackBoard LMS.
CC’s Voice: Hello, prospective financial manager! Welcome to this course FM 222: Credit and
Collection. By now, I am confident that you already made the career decision
to become a finance manager and that you are enrolled in this course to
enrich your knowledge.
CO Mainly, before becoming a successful finance manager, you have to deal

with the financial manager's primary functions: planning, leading, organizing,
controlling, evaluating and continually improving credit system and credit
policies, which is the ultimate course outcome (CO) of this subject. When
we talked about credit as a crucial component of credit and collection,
assessing learning outcomes or competencies and financial performance
of managers is intimately attached. Thus, in this course, you are expected
to demonstrate knowledge in credit and collection. These include types of
credit and credit policies.
Big Picture
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to:
a. Explain credit collection management (CCM), its six (6) functional areas,
usage, and benefits;
b. Discuss the various types of credit, how credit works and its importance;
c. Analyze credit and collection policy, its objectives, key factors to consider,
credit limits, and how it works.
Let’s get started!
Big Picture in Focus: ULOa: Explain credit collection management

(CCM) and its six (6) functional areas.
Metalanguage
In this section, the essential terms relevant to the study of credit collection
management and to demonstrate ULOa (Unit Learning Outcome), which will be
operationally defined to establish a standard frame of reference as to how the texts
work in your chosen field or career. You will encounter these terms as we go through
the study of credit collection management.
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To perform the aforesaid big picture (unit learning outcomes) for the first three (3)
weeks of the course, you need to fully understand the following essential knowledge that
will be laid down in the succeeding pages. Please note that you are not limited to refer to
these resources exclusively. Thus, you are expected to utilize other books, research
articles, and other resources available in the university's library, e.g., ebrary,
search.proquest.com, etc.
1. Credit Collection Management. It is a set of typical business applications that

covers a company's accounts receivable and accounting system to hasten critical
areas in the business process.
2. Credit Collection. It is the debt recovery process of arrears and past-due loans
paid by the customer in a mortgage on behalf of the borrower.
3. Management. It is the organization and harmonization of the activities of a
business to achieve its well-defined objectives.
4. Debt Collection. It simplifies the process of a loan to a customer with a written
agreement that the amount of credit will be reinstated by the consumer (an
individual or a business organization) before an indicated deadline becomes
due.
5. Credit. It is the trust which authorizes one party to provide money or resources
to another party.
6. Loan. It is the borrowed money by one or more individuals, organizations, or
other firms to other individuals, organizations, or other entities.
7. Asset. It is a property with an economical price that an individual or corporation
possesses or controls with the belief that it will provide benefit in some time in
the future.
8. Accounts Receivable. In the simplest term, it is money owed to a company by
its debtors.
9. Delinquent account. It is an account that is past due or overdue wherein a
borrower is unable to pay his debt when it becomes due.
10. Credit. It is the trust which permits one party to provide money or resources to
another party.
11. Creditor. A lender that is authorized to receive a payment from a borrower. The
lender can be a business, organization, or individual.
12. Debtor. A company or individual who borrows money.
13. Scorecards. These are numerical criteria that try to convey a measurable
assessment of the possibility that a borrower will show distinct conduct
concerning his credit application.
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Essential Knowledge
I. Overview of Credit and Collection Management
Credit & Collections Management (CCM), as defined in a metalanguage, is a set

of typical business applications that covers a company's accounts receivable and
accounting system to hasten critical areas in the business process. A company should
have a good accounts receivable team to perform its work effectively and efficiently and
to collect accounts receivables on or before due dates and must see to it that delinquent
accounts or past due accounts are managed.
I.1. Six (6) Key Functional Areas of CCM:
1. Credit Facilitation. It comprises credit scoring, credit application

processing, reference checking, gathering credit reports from credit
bureaus, new account approval, credit limit decisions, order approval,
accounts receivable portfolio monitoring, financial statement analysis,
and credit risk management.
2. Billing & Invoicing. It consists of identifying errors in invoices,
confirming vendor compliance, generating an accurate invoice;
generation, sending, and distribution of invoices and statements.
3. Remittance Processing. It includes financial, EFT (Electronic
Funds Transfer including ACH, Automated Clearing House), payment-
to-invoice matching, auto-cash
processes and procedures, the settlement of cash, cash forecasting, as
well as credit card processing.
4. Collections Management. It is a collection strategy instrument that
pushes workflow automation, prioritizes collection activities. also a
reminder system, activity logs, account and invoice level notes,
integrated communication tools, faxing capabilities, email, invoice
reprinting, integration of A/R data, and other forms of data export,
payment plan calculators, auto-dialers and imaging tools
5. Dispute Resolution. It is dispute and judgment resolution,
chargeback processing, exception reporting with automated escalation
processes, document sharing, collaboration tools, and tools for root
cause identification.
6. Reporting and Analysis. It includes dashboards, email alerts, query
capabilities, out-of-the-box reports cash forecasting, report generation,
exception reporting, workload balancing, cycle time analysis, portfolio
risk management, customer intelligence, and month-end reporting
tools.
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I.2. Why Use CCM?
I.3. Who Needs CCM?
I.4. Benefits of CCM
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Self-Help: You can also refer to the sources below to help you further
understand the lesson:
Fidelito R. Soriano. 2019 edition. Manila, Philippines: IC Enterprises & Co. 2019BFI
Sales, agency and credit transactions: law and application: for business and law
students: 346.072 So6s 2019
Sharma, Sandeep, 2019 Micro finance and banking system 2019 BC 332 Sh2m
Michael Dennis (2019), Credit and Collection Handbook 1st Edition, Prentice Hall ASIN
:
0130827835
Steven M. Bragg (2017) Credit & collection guidebook Centennial, Colorado: Accounting
Tools 2017 BC 657 B73c
https://www.eccreditcontrol.co.nz/locations/wellington-east/clarifying-the- importance-of-
credit- management/
https://anytimecollect.com/credit-collections-management-facts-figures/
Let’s Check
Congratulations! You just finished the most vital concept of credit collection
management. Let us check your understanding of the concept.
Activity 1. In the space provided, write the term/s asked in the following statements:
__________ 1. It is a set of common business applications covering a company's

accounts receivable and accounting system to hasten critical areas
in the business process.
__________ 2. It is the debt recovery process of arrears and past-due loans paid
by the customer in a mortgage on behalf of the borrower.
__________ 3. It is the organization and harmonization of the activities of a
business to achieve its well-defined objectives.
__________ 4. It simplifies the process of a loan to a customer with a written
agreement that the amount of credit will be reinstated by the
consumer (an individual or a business organization) before an
indicated deadline becomes due.
__________ 5. It is the ability to borrow money or access goods or services to
understand that you'll pay later.
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__________ 6 It is the lending of money by one or more individuals, organizations,

or other entities to other individuals, organizations, etc.
__________ 7. It is the trust which authorizes one party to provide money or
resources to another party.
__________8. It is the borrowed money by one or more individuals, organizations,
or other firms to other individuals, organizations, or other entities.
_________ 9. A lender that is authorized to receive a payment from a borrower.
The lender can be a business, organization, or individual.
__________10. A company or individual who borrows money.
Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of Credit Collection
Management is not enough; you should also be able to explain its inter-relationships.
Now, I will require you to explain your answers thoroughly.
1. Explain the importance of Credit Collection Management to a business entity.
2. If Credit Collection Management is vital to a business entity, explain its benefits to

a business entity.
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In Nutshell
Activity 3. The study of credit collection management is indeed an advantage to

becoming a financial manager. It can be a very complex study that requires a more in-
depth knowledge of the financial industry outside the classroom and school.
Basing on the definition of the essential terms in the study of Credit Collection
Management and the learning activities that you have done, please feel free to write your
arguments or lessons learned below. I have indicated my discussions or teachings
learned.
1. What is the impact of Credit Collection Management to the credit collection

process?
2. How does Credit and Collection Management Works?
Your Turn
3.
4.
5.
6.
Big Picture in Focus: ULOb. Discuss the various types of credit,

how credit works and its importance
Essential Knowledge
As defined in the metalanguage, credit is the trust which permits one party
to provide money or resources to another party. And these two (2) parties are 1)
Creditor, who is the lender that is authorized to receive a payment from a borrower.
The lender can be a business, organization, or individual. 2) The debtor can be a
company or individual who borrows money. And there are four (4) well-known types
of credit.
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I. Types of Credit
1. Revolving Credit: Regular credit card is an example of this type. The debtor
is granted a maximum credit limit and can avail purchases up to this amount.
Monthly payments are made and carry-over the remaining balance over to the
next month. As a good rule of thumb, it is to NOT carry-over more than 30% of
the credit cardholder limit over to the succeeding month. For example, if you
have a Php100,000.00 credit limit, try to keep the balance under Php30,000.00
The lower the balance, the better will be your credit limit. However, maintaining
your balance at zero may not level your credit score, so your creditor might
believe your credit account as an inactive account. Keeping high balances on
your credit card will likewise negatively impact your credit.
2. Charge Cards: Unlike credit cards, you must pay off the total balance each
month according to your billing statement.
3. Service Credit: These can be agreements that you will comply with paying
every month, e.g., utility bills, association membership dues, cell phone service
plan.
4. Installment Credit: These are loans for a specific amount that you agree to
pay back in installments (ordinarily monthly) over an agreed time. Car loans,
home mortgage, student loan, or credit-builder account, are examples of this
type.
II. How Credit Works
The concept of credit is not new, and one that most borrowers use.
Credit is the receipt of a thing with price now, with the promise to pay in a future date.
Now, let's take an example. Supposed you were in a mall and saw something that
you wanted - a shirt, a pair of shoes, a branded bag, but didn't have enough money to
buy it. So, what will you do? You pleaded your mother to buy it for you and promises to
pay on your next salary. That's credit!
If you pay back your credit as promised, you build trust with your parents, friends,
or whoever lends you money. This trust aids you in making your character and increases
your opportunities for borrowing more in the future.
Banks or other financial institutions use the same concept when assessing whether
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or not to extend credit. These institutions review your credit report and check your history
to determine if you can avail the loan applied. If you have an outstanding credit score, the
higher the possibility of acquiring credit and, usually, the lesser the interest rate will be
granted.
One of the means to a satisfactory credit is understanding credit reports and

managing each type of loan.
III. Importance of Credit
Credit is part of financial superiority. It aids in availing the things needed now by an
individual or business, like a loan for a house, a car, or a credit card, based on the promise
to pay at a later date. Improving credit standing helps ensure one to qualify for loans when
the time comes that you need to borrow.
Credit management, or also termed as credit control, is one of the most critical
activities in a business. It is the process of certifying that customers will pay for the goods
delivered or the services rendered. Credit management has a crucial role in a business
cash flow: it can be profitable, but if cash is insufficient to continue the business, it will go
bankrupt or acquire it by a person or company with sufficient knowledge to deal with
money.
The credit of customers who have not yet paid their account is termed as
ACCOUNTS RECEIVABLES (AR). It is a challenge for businesses with AR to monitor
these accounts receivables because the firm does not have any control.
There are two enormous disadvantages to AR.

1. Whenever the customer has not settled his amount due, capital remains tied up
in AR, and without adequate terms and conditions does not even carry interest.
Money is cash, and the payment can be used for, among others, far more
sufficient and cost-effective reasons.
2. Any amount in the company’s books of accounts is outstanding; there is a risk

that the customer will default in his payment. The longer it will take the customer
to pay, the higher the chance to be encountered for the non-payment of a loan.
Non-payment or bad debt would mean a loss of 100%. It is recommended that
accommodating credit within 90 days will intensely augment your opportunities for
a successful collection.
At a glance, the solution is simple: not to extend credit to customers. If a customer

needs to buy something from your company, you can inform him that he should either
pay in advance or pay cash on delivery. With this, you will not have AR; therefore, all your
money is freely available, and there is no risk of doubtful accounts.
Nonetheless, in many cases where you decide not to extend credit, the customer
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surely will go to your competitors. It creates credit management as a critical process. In

every dealings with a customer, you will have to evaluate two types of risks: (1) risk of
non-payment or delayed payment, and (2) risk of having no sales.
Likewise, it is easier said than done. Credit management is a relevant and

enlightening activity and a complicated task. Hence, a collection agency acts as an
extension of your business to ensure that good money is not thrown after bad.
Sales, agency and credit transactions: law and application: for business and
law students: 346.072 So6s 2019
Michael Dennis (2019), Credit and Collection Handbook 1st Edition, Prentice Hall ASIN:
0130827835
Steven M. Bragg (2017) Credit & Collection guidebook Centennial, Colorado:

Accounting Tools 2017 BC 657 B73c
Jim Akin, October 3, 2019. What is Credit? from

https://www.experian.com/blogs/ask-experian/credit-education/faqs/what-is-
credit/
https://www.slideshare.net/e2btek/what-is-credit-collections-management
http://www.businessdictionary.com/definition/management.html
https://www.google.com/search?q=definition+of+credit&oq=Definition+of+credit&aqs=
chrome.
Will Kenton Reviewed by Thomas Brock Updated April 9, 2020. Credit from
https://www.investopedia.com/terms/c/credit.asp
Let’s Check
Congratulations! You just learned one of the most vital concept of credit collection by
knowing the types of credit. Let us check your understanding of the concept.
Activity 1. Enumerate the four (4) Types of Credit and explain in your own words.
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1.
2.
3.
4.
Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of Credit is not
enough; you should also be able to explain its inter-relationships. Now, I will require you
to explain your answers thoroughly.
1. How does credit works?
2. How important is a credit to a business entity?
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In a Nutshell
Activity 3. The study of credit collection is indeed an advantage to becoming a financial

manager. It can be a very complex study that requires a more in-depth knowledge of the
financial industry outside the classroom and school.
Management and the learning activities that you have done, please feel free to write your
learned.
1. Credit is the trust which permits one party to provide money or resources to
another party.
2. Any amount in the company’s books of accounts is outstanding, and there is a risk
that the customer will default in his payment.
Your Turn
3.
4.
5.
6.
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Big Picture in Focus: ULOc: Analyze credit and collection policy,

its objectives, key factors to consider, credit limits, and how it works.
Essential Knowledge
I. The Credit Policy
What is a Credit Policy?
A credit policy is established rules, regulations, procedures which are used to:
• Establishes which customers can avail of credit and how credit is collected.
• It contains the terms and conditions of payment for parties where credit is
extended.
• Outlines the limits to be given on outstanding credit accounts.
• Enumerates the procedures being used on how to deal with past due
accounts.
The following considerations should be taken into account in the preparation of

a credit policy:
1. Objectives of establishing credit policies:

a. To maximize sales;
b. To minimize costs and bad debts losses;
c. To achieve profit or income goals;
d. For control/motivation;
e. For business sustainability and growth.
2. Key factors to consider in formulating credit and collection policy:

1. Credit period. It is the length of time customers are instructed to pay for
purchases made;
2. Discounts. It is the price reductions for early payment;
3. Credit standards. It refers to the mandatory financial strength of regular
credit customers;
4. Collection policy. It refers to the procedure used to collect past due
accounts.
A restricted policy may have a shorter credit period, whereas a relaxed

policy may allow more than the standard 30 days.
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3. Credit Limits
The highest amount of credit a financial institution extends to a client is termed a

credit limit. A lending institution continues to extend a credit limit on a credit card or a line
of credit. Borrowers usually set credit limits based on information in the application of the
person availing of a loan.
One of the elements that affect customers' credit scorecards and can affect their
ability to get credit in the future is the credit limit.
Credit limits are the maximum amount of money a borrower will grant a customer
to spend using a credit card or revolving line of credit. Banks, which are considered
alternative lenders, determine the limits, and credit card companies are based on various
data concerning the debtor. They examine the borrower's credit scores, personal income
based on the financial statements submitted, loan repayment history, and other factors
related to the borrower's paying capacity.
How Do Credit Limits Work?
A credit limit works almost the same way regardless of whether the debtor has a
credit card or a line of credit. A borrower can spend up to the credit limit, but if he exceeds
the amount of credit limit, he will be charged fines or penalties in addition to his regular
payment. If the debtor spends less than the limit, he can continue to use the card or line
of credit until he has attained the limit.
Sales, agency and credit transactions: law and application: for business and
law students: 346.072 So6s 2019
Michael Dennis (2019), Credit and Collection Handbook 1st Edition, Prentice Hall ASIN :
0130827835
Steven M. Bragg (2017) Credit & Collection guidebook Centennial, Colorado:

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https://www.coursehero.com/file/puearb/The-four-key-factors-in-a-firms-credit-policy-/
https://www.investopedia.com/terms/c/credit_limit.asp
https://www.americanexpress.com/en-us/credit-cards/credit-intel/what-is-credit-report/
Let’s Check
Activity 1. Congratulations! You just finished the concept of credit policy. Let us check
your understanding of the concept.
1. Enumerate the five (5) objectives of establishing a credit policy.
1. ________________________________
2. ________________________________
3. ________________________________
4. ________________________________
5. ________________________________
2. Enumerate the four (4) key factors to consider in formulating credit policy.
1. ________________________________
2. ________________________________
3. ________________________________
4. ________________________________
Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of the credit policy is
not enough; you should also be able to explain its inter-relationships. Now, I will require
you to explain your answers thoroughly.
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1. Explain the importance of Credit Policy to the company's management decisions

regarding granting credit to a customer.
2. What is the credit limit, and how does it work?
In a Nutshell
Activity 3. The study of credit collection management and credit is indeed an

advantage to becoming a financial manager. It can be a very complex study that
requires a more in-depth knowledge of the financial industry outside the classroom
and school.
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Management, particularly credit policy and the learning activities that you have
done, please feel free to write your arguments or lessons learned below. I have
indicated my discussions or teachings learned.
1. What is the impact of Credit Collection Management to the credit collection

process?
2. What happens to the company if there is no credit policy on the credit limit?.
Your Turn
3.
4.
5.
6.
7.
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TABLE OF CONTENTS
Title Page Page

Table of Contents 24
ULOa: Understand creditworthiness and explain the 5 C's of
Credit 29
Metalanguage 29
I. Creditworthiness 30
II. 5 Cs of Credit 31
References 32
Activities 33
ULOb: Describe credit investigation, report, and evaluation 36
I. Credit Investigation and Evaluation 36
I.1 The Credit Report 36
I.2 The Financial Ratios 37
I.3 Risks Related to Credit 39
I.4 The Credit Scorecard 39
I.5 The Credit Equation 40
References 41
Activities 42
ULOc: Discuss credit collection and repayment 45
I. Collection and Repayment 45
I.1 Debt Collection System 45
I.2 Traditional Collection Methods 45
I.3 Debt Repayment 46
References 47
Activities 47
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CC’s Voice: Hello, prospective financial manager! Welcome to this course FM 222: Credit and
Collection. By now, I am confident that you already made the career decision
to become a finance manager and visualize yourself already inside a room
with a business atmosphere.
CO Primarily, before becoming a successful finance manager, you have more

in-depth knowledge of the credit management tools in evaluating your
clients, which is the significant course outcome (CO) of this subject. When
we talked about credit as a crucial component of credit and collection,
assessing learning outcomes or competencies and financial performance
of managers is intimately attached. Thus, in this course, you are expected
to demonstrate knowledge in the 5 C’s of credit as credit evaluation tools.
Big Picture in Focus
1. Understand creditworthiness and explain the 5 C's of credit;

2. Describe credit investigation, report, and evaluation and
3. Discuss credit collection and repayment.
Big Picture in Focus: ULOa: Understand creditworthiness

and explain the 5 C's of credit
Metalanguage
In this section, the essential terms relevant to the study of Credit and Collection is
to demonstrate ULO (Unit Learning Outcome). It will be operationally defined to establish
a typical frame of reference as to how the contents work in your chosen field or career.
You will encounter these terms as we go through the study of credit and collection.
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To perform the aforesaid big picture ULO (unit learning outcomes) for the two (2)
weeks of the course, you need to fully understand the following essential knowledge that
will be laid down in the succeeding pages. Please take note that you are not limited to
refer to these resources exclusively. Thus, you are expected to utilize other books,
research articles, and other available resources in the university's library, e.g., ebrary,
1. Creditworthiness. It is the stage that an individual or business is deemed

proper to achieve financial credit, often based on their trustworthiness in their
credit history.
2. Credit Investigation. It is a process conducted by a financial institution to
examine a prospective customer's ability to repay a loan. Failure to pass this
process will result in disapproval of a loan.
3. Credit Report. An itemized analysis of the applicant's credit history reported
by the credit investigator, an agency, or a bureau that gathers financial data
about individuals and prepares credit reports based on data.
4. Scorecard. A strategic management instrument, which can be a semi-standard
structured report that can be used by financial managers to maintain the
performance of activities by the employee within their control and to monitor the
results arising from these actions.
5. Financial Ratio. It is a comparative degree of two selected numerical values
acquired from the financial statements of the business.
6. Collection. The method of recovering the amount of loan by a firm from its
customers.
7. Debt Repayment. Loan arrangement where the principal is paid back
over the life of the loan.
8. Past Due Account. It is a credit account when the debtor has failed to make
at least the minimum monthly payment of his credit by the due date.
9. Risk. A condition or circumstance involving exposure to danger.
10. Credit Risk Management Process. It involves the proper, prudent, and timely
checking of the five (5) C’s of credit: capacity, capital, character, collateral, a
condition in applicable cases.
Essential Knowledge
I. Creditworthiness
Creditworthiness means a borrower determines that you will default on your debt
obligations, or how creditable you are to be granted a new credit. Your creditworthiness
is what borrowers watch before they approve any further credit.
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Creditworthiness is established by various factors, including your repayment

history and credit scorecard. The availability of assets and the number of liabilities you
have are also considered by some financial institutions when they assess the possibility
of default.
Understanding Creditworthiness
Your creditworthiness expresses to the creditor how qualified you are for the loan
or credit card application. The decision the company generates is based on how you have
dealt with credit in the past. It observes several different factors, such as your credit score,
overall credit report, and payment history.
II. 5 C’s of Credit
The five Cs of credit are tools used by

lenders to assess the creditworthiness of
prospective borrowers. The method evaluates
five(5) characteristics of the borrower and
conditions of the loan, trying to determine the
risk of default and, consequently, the risk of a
financial loss for the creditor. The five Cs of
credit are capacity, capital, collateral, and
conditions and character.
The Five “Cs” of Credit
1. Capacity
You can repay the credit. Lenders want to be guaranteed that your business
generates enough cash flow to repay the loan in full. It is assessed from the
financial system of measurements (metrics and benchmarks) like debt and liquidity
ratios, credit score, borrowing, cash flow statements, and repayment history.
2. Capital
It is the money invested by the owner of the business. Banks are more willing to
lend to a business person who has invested part of their own money into the
venture. However, there are other ways to acquire initial funding if you don't want
to take on all the risk yourself.
3. Collateral
These are assets that are used to secure or guarantee a loan. Collateral is a
standby source if the borrower cannot repay a loan. Assets or properties such as
working capital accounts receivable and inventory, real estate and equipment, and
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house and a lot can be considered as collateral. Choosing the right business
organization can help protect assets from being foreclosed by the lender if a case
is filed against the borrower or if a lender is trying to collect. Putting up a legal firm
helps mitigate that risk.
4. Conditions
It is the reputation of a business, whether it is growing or uncertain when using its
funds. It also considers the state of the economy, industry trends, and how these
factors will affect your capability to repay the loan. To make sure that credit is
repaid, banks want to lend to businesses operating under stable conditions. They
are inclined to identify risks and protect themselves and are assessed from the
competitive landscape, customer relationships, supplier, and macroeconomic and
industry-specific concerns. A business can't curb the economy but can make
plans.
5. Character
It is a lender's judgment of a borrower's over-all personality, well-being,
trustworthiness, and credibility.
.
Banks aspire to extend a loan to individuals or business firms that are responsible
and keep commitments.
Banks will assess your loan application based on your work experience,
credentials, references, credit history, reputation, and relationships with lenders.
Michael Dennis (2019), Credit and Collection Handbook 1st Edition, Prentice Hall ASIN :
0130827835
CFIN 5:Corporate Finance by Scott Besley, Cengage Learning. Boston, MA, USA
BC 658.15 B46c 2017
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Basic Finance by Scott Beasley & Eugene Brigham 2013-2015 edition Cengage Learning
BC-D 332 B46b 2013-2015
https://www.investopedia.com/terms/c/credit-worthiness.asp
https://www.investopedia.com/terms/f/five-c-credit.asp
Let’s Check
Congratulations! You just finished the most vital concept of creditworthiness and the 5 Cs
of Credit. Let us check your understanding of the concept.
Activity 1. MULTIPLE CHOICE. Encircle the letter of your choice.
1. The ability to obtain goods and services with only a promise to pay at some
determinable future time.
a. Credit b. Capacity c. Collateral d. Condition
2. It implies confidence in the debtor's integrity, ability to pay the loan on the
date stipulated, and according to terms agreed.
a. Credit Trustworthiness b. Creditworthiness c. Credit Integrity
3. A valuation performed by lenders that decides the possibility a borrower may
default on his debt obligations.
a. Credit Trustworthiness b. Creditworthiness c. Credit Integrity
4. It has all information, parts or elements; lacking nothing; whole; entire; full.
a. Confidentiality b. Completeness
5. The name of the credit applicant in whose behalf the inquiry is made can be
disclosed without permission.
a. True b. False c. Maybe
Activity 2. Matching Type. Match the letter to the Item nos.
A. Character
B. Capacity
C. Capital
D. Condition
E. Collateral
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1. It is a lender's judgment of a borrower's over-all personality, well-being,

trustworthiness, and credibility.
2. Lenders want to be guaranteed that your business generates enough cash flow
to repay the loan in full.
3. It is the reputation of a business, whether it is growing or uncertain when using
its funds.
4. These are assets that are used to secure or guarantee a loan.
5. It is the reputation of a business, whether it is growing or uncertain when using
its funds. It also considers the state of the economy, industry trends, and how
these factors will affect your capability to repay the loan.
6. It is assessed from the financial system of measurements (metrics and
benchmarks) like debt and liquidity ratios, credit score, borrowing, cash flow
statements, and repayment history.
7. It also considers the state of the economy, industry trends, and how these
factors will affect your capability to repay the loan.
8. It is the total of qualities and traits which form the individual description of a
person or thing, including moral or ethical quality.
9. It includes financial assets, such as funds kept in deposit accounts or funds
acquired from specialized financing sources.
10. It may include properties or assets such as working capital, accounts
receivable and inventory, real estate and equipment, and house and lot.
Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of creditworthiness
and the 5 Cs of Credit is not enough; what also matters is you should also be able to
explain its inter-relationships. Now, I will require you to explain your answers thoroughly.
1. Creditworthiness is the stage that an individual or business is deemed proper to achieve

financial credit, often based on their trustworthiness in their credit history.
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2. What is the importance of the 5 C's of credit to the lending industry?
In a Nutshell
Activity 3. The study of checking creditworthiness and the 5 Cs of Credit is an advantage

to becoming a financial manager. It can be a very complex study that requires more in-
depth knowledge of the financial industry outside the classroom and school.
Basing on the learning activities that you have done, please feel free to write your
learned.
1. Creditworthiness is what borrowers watch before they approve any further credit.
2. The 5 Cs of credit evaluates five (5) characteristics of the borrower and conditions of
the loan, trying to determine the risk of default and, consequently, the risk of a
financial loss for the creditor.
Your Turn
1.
3.
4.
5.
6.
7.
Big Picture in Focus: ULOb: Describe credit investigation,

report and evaluation
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I. Credit Investigation and Evaluation
Essential Knowledge
I.1 The Credit Report
As mentioned earlier, a credit report is an itemized analysis of the applicant's credit

history reported by the credit investigator, an agency, or a bureau that gathers financial
data about individuals and prepares credit reports based on data. Lenders can use these
reports along with additional data collected to determine applicants' creditworthiness. It
includes details on lines of credit, personal information, public records such as
insolvencies, and company listings, which have requested to look into the customer's
credit report.
What Information is Included in a Credit Report?
In practice, the credit bureau creates a faintly different credit report, but most are
divided into five main parts, namely:
1. Personal information includes any name used in connection with an account,

birth date, social security number, and former addresses.
2. Credit account information includes current and past credit accounts (such as
credit cards, loans, and mortgages), bank account balances, payment history,
and for how long each account has been opened.
3. Debt collections may appear if a lender has ever assigned overdue account
payments to an external collection agency.
4. Public records list applicable history of bankruptcies, foreclosures, liens, or civil
cases.
5. Recent inquiries may contain any entities that have recently inquired about the
loan applicant’s credit, like credit card companies, financial institutions, or other
lenders.
Sample credit investigation request form
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I.2 The Financial Ratios
These are useful tools that help companies and investors assess and compare
relationships between different parts of financial information through an individual or
company's history, an industry, or an entire business sector. Numbers are obtained from
a company's balance sheet, income statement, and cash flow statement, which allow
analysts to compute various types of financial ratios for several types of business acumen
and data.
There are six (6) commonly used financial ratios:
1. Working Capital Ratio

It is the assessment of the company's condition in which you desire to invest, which
includes understanding its liquidity on how easily the company can convert its resources
into cash for payment of short-term liabilities. The working capital ratio is computed by
dividing current assets by current liabilities.
Example: GDM Corporation’s current assets - Php8.0M, and current liabilities - Php4.0M,
that's a 2:1 ratio—moderately sound. However, if two similar firms each had a 2:1 ratio,
the company with more cash aside from its current assets, that firm will have a better
capability to pay off its debts quicker than the other firm.
2. Quick Ratio
It is also called the acid test, and the formula is:
current assets - inventories
liabilities
The indication is to illustrate whether current liabilities can be covered by current
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assets like cash and other cash items having cash value. Likewise, inventory will take
time to be disposed of and be converted into liquid assets. If GDM’s current assets are
Php8.0M deducting Php2.0M in inventories and divide Php4.0M in current liabilities, this
will result in a 1.5:1 ratio. Businesses prefer to have at least a 1:1 ratio, but companies
with less than that may be acceptable since it would mean it can turn-over their inventories
hastily.
3. Earnings per Share

When one participates in the firm's future earnings (or risk of loss), he is buying a
stock. Earnings per share (EPS) will measure the net income earned on a percentage of
common stock. Analysts will divide the net income by the weighted average number of
common shares outstanding for the year.
4. Price-Earnings Ratio
P/E, for short, reveals investors' valuations of future earnings. Formula:
the share price of the stock / EPS
For example, a corporation closed trading at Php46.51 a share and EPS for the past one
year averaged Php4.90, then the P/E ratio would be 9.49. It would cost the investors
Php9.49 for every peso generated of annual earnings.
When ratios are correctly applied, making use of them can aid in increasing
investment performance. However, investors have been willing to pay more than 20 times
the EPS for individual stocks if insight that future growth in earnings will give them a
satisfactory return on their investment.
5. Debt-Equity Ratio
Now, what if your potential investment target is borrowing too much? It can lessen
the safety margins after what it obliges, increase its set charges, decrease the availability
of earnings for dividends for investors, can even trigger a financial disaster.
Formula:
outstanding long + short-term debt
book value of shareholders' equity.
Example. Let's say GDM has Php3.1M loans and shareholders' equity Php13.3M. A ratio
of 0.23 is adequate in most conditions. Moreso, same as all other ratios, the metric has
to be examined in terms of industry standards and company-specific norms.
6. Return on Equity
Common stockholders are interested in how profitable their investment is in the
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businesses they have investments. Return on equity is computed with this formula:
net earnings (after taxes) - preferred dividends

common equity
Example: net earnings are Php1.3 million, and preferred dividends are Php300,000.00
and Php8.0million in common equity. ROE is 12.5%. The higher the ROE, the safer the
business is at generating income.
I.3 Risks Related to Credit
In the business world, there will always be the presence of risks in managing a
business. The following are the primary risks encountered by a company:
1. Credit Risk. Also known as default risk, it is the possibility of a loss resulting
from a borrower's failure to repay a loan or comply with promised obligations.
Conventionally, it refers to the risk that a borrower may not receive the principal and
interest borrowed from him, which results in an interruption of cash flows and higher costs
for collection. It can be measured by the five Cs: credit history, capital, the loan's
conditions, capacity to repay, and related collateral.
2. Performance Risk. It is the potential that a product, service, program, or

project will not deliver as much value as required.
3. Liquidity Risk. It is a financial risk wherein, for some time, a financial asset
or security or commodity cannot be traded fast enough in the market without impacting
the market price.
4. Policy and System Risk. It refers to the probability that an event at the
firm’s level could cause severe uncertainty or collapse the industry or economy.
I.4 The Credit Scorecard
In business, the credit scorecard is statistical documentation used to measure

achievement or development on a particular objective. It is a strategic management
performance system of measurement used to monitor, assess, and improve different
internal business roles and resulting in external outcomes. Balanced scorecards are
measurements and offer feedback to the management of organizations.
The scorecard is also the performance system of measurement used to

identify, improve, and control a firm's different roles and succeeding outcomes. It
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consists of measuring four (4) main aspects of a business: learning and growth, business
processes, finance, and customers.
In 1992 the credit scorecard was first introduced by David Norton and Robert
Kaplan, who took other metric performance measures and adapted them to nonfinancial
information.
I.5 The Credit Equation
From the credit scorecard, a credit decision can be made. Reducing it into
formula through the use of the credit scorecard is currently being adopted by some
creditors, usually by credit card companies.
The FICO borrower's scores are mostly used by creditors with other details on
borrowers' credit reports to assess credit risk and decide whether to extend credit.
Different factors in five areas are taken into account by the FICO scores to determine
credit worthiness: types of credit used, the current level of indebtedness, payment
history, length of credit history, and new credit accounts.
However, FICO does not reveal its proprietary formula for computing the credit
score number. But it is known that the calculation includes five significant components,
with varying levels of importance.
These categories, with their relative weights, are:
History of payment - 35%

The amount Loan - 30%
Length of credit history - 15%
New credit accounts - 10%
Type of credit account - 10%
Total score - 100%
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Sample of a credit scorecard
FICO scores range between 300 and 850. Over-all, scores above 650 show an
outstanding credit history. Apr 9, 2020
Fair Isaac Corporation (FICO) is a significant analytics software corporation that

offers products and services to entities and consumers. FICO was formerly named the
Fair Isaac Corporation. In 2009, it changed its name to FICO. It was well-known for
delivering the broadest used consumer credit scores, which various financial institutions
adopt in determining whether to lend money or grant credit.
Michael Dennis (2019), Credit and Collection Handbook 1st Edition, Prentice Hall
ASIN: 0130827835
https://www.investopedia.com/terms/c/creditreport.asp
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https://www.insuranceopedia.com/definition/1425/credit-investigation
https://www.thebalancesmb.com/what-is-financial-ratio-analysis-393186
https://www.investopedia.com/financial-edge/0910/6-basic-financial-ratios-and-what-
they-tell-you.aspx
Let’s Check
Congratulations! You just finished the most vital concept of credit investigation, report,
and evaluation. Let us check your understanding of the concept.
1. This process is used by creditors to verify and attain the borrower's identity,
personal background, financial capability, and credit history.
a. Credit Investigation b. Credit Evaluation c. Credit Analysis
2. It is the process of a business, or an individual must go through to be qualified
for a loan.
a. Credit Investigation b. Credit Evaluation c. Credit Analysis
3. Credit risk increases proportionately to the size of the credit applied.
a. True b. False c. Maybe
4. The analysis of a credit risk always involves five (5) factors which are the ff.:
a. Personal Factor b. Performance Factor c. Economic Factor
d. Security Factor e. All of the above
5. It is the potential that a product, service, program, or project will not deliver as
much value as required.
a. Liquidity risk b. Performance risk c. Policy & system risk
d. Credit risk
6. It is a financial risk that, for a certain period, a given financial asset, security,
or commodity cannot be traded speedily enough in the market without an
impact on the market price.
a. Liquidity risk b. Performance risk c. Policy and system risk
d. Credit risk
7. It refers to the probability that an event at the firm’s level could cause severe
uncertainty or collapse the industry or economy.
d. Credit risk
8. It is the risk of default on a debt that may arise from a borrower failing to
make required payments.
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d. Credit risk
9. It involves the proper, timely, and prudent checking of the five bases of credit:
character, capacity, capital, collateral in applicable cases.
a. Credit Management Process b. Credit Risk Management Process
c. Credit Risk Management Policy d. Credit Risk Process
10. Which statement is NOT among the adverse developments in the causes of
risk?
a. Adverse macro-economics, business cycle, health, the financial condition
of the debtor.
b. Capacity to absorb disturbances caused by aberrations in cash flow,
leverage, capital, management experience
c. Competition and Industry trends;
d. Integrity and reputation problems;
e. Management performance
11. It measures the probability that a company will default over 12 months and
predicts the likelihood of the business having difficulty surviving as a trading
entity.
a. Credit Scorecard b. Debtors Risk Rating c. Credit Equation
d. Credit Analysis
12. It is a scientific model that attempts to provide a quantitative estimate of the
probability that a customer will display a defined behavior (e.g., loan default,
bankruptcy, or a lower level of delinquency) concerning their current or
proposed credit position with a lender.
a. Credit Scorecard b. Credit Equation c. Credit Evaluation
13. One of the items below is NOT an attribute to look for in collectors:
a. Integrity, industriousness, resourcefulness, initiative, tenacity,
perseverance;
b. Proper grooming, neatness
c. Happy disposition, adaptability to situations;
d. Working knowledge, skills in communication
e. All of the above
14. It is a comparative magnitude of two selected numerical values taken from a
business entity’s financial statements.
a. Financial Ratio b. Financial Rating c. Liquidity Ratio
15. It is the assessment of the company's condition in which you desire to invest,
which includes understanding its liquidity on how easily the company can
convert its resources into cash for payment of short-term liabilities.
a. Working Capital Ratio b. Earnings per Share c. Return of Equity
d. Return on Assets
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Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of collection and
repayment is not enough; what also matters is you should also be able to explain its inter-
relationships. Now, I will require you to explain your answer thoroughly.
1. In business, the credit scorecard is statistical documentation used to measure

achievement or development on a particular objective.
In a Nutshell
Activity 3. The study of checking creditworthiness and evaluation and collection and
repayment is indeed an advantage to becoming a financial manager. It can be a very
complex study that requires more in-depth knowledge of the financial industry outside the
classroom and school.
Based on the definition of the essential terms in the study and the learning
exercises that you have done, please feel free to write your arguments or lessons learned
below. I have indicated my discussions or teachings learned.
1. What is the impact of the credit scorecard to the creditor?

2. What is the importance of the 5 C's of credit to the lending industry?
Your Turn
3.
4.
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5.
6.
7.
Big Picture in Focus: ULOc: Discuss credit collection and

repayment.
Essential Knowledge
I. Collection and Repayment
I.1 Debt Collection System
The debt collection process involves tracking payments of debts or money that
have been owed by individuals or businesses. Debt collection has been predominant
since the early days of banking, as it is the primary source of income for banks.
It is an essential part of the financial industry, and organizations that focus on the
collection payment are known as Debt collectors or Collection Agencies. These
agencies operate as agents of lenders and collect debts for a fee or percentage of the
total amount owed.
I.2 Traditional Collection Methods
Loan collection is usually a process that is highly regulated. As the creditor wants
to get back the loan with interest, they typically offer the loan with either a mortgage or a
guarantor to back up the debtor. The debtor executes a legal contract with the lender to
repay the loan at a particular time and date.
It is monitored by both creditor and rating agencies to track how punctual a debtor
is repaying the loan. It is used to calculate the credit score of a debtor for future loans.
Generally, the method to collect a loan follows the steps given below:
1. Collect the money according to the due date of the debtor.
2. Retain a systematic follow-up on how the customer can handle the repayment
3. If the customer defaults in one or two installments, get in touch with the
Customer to determine the reason.
4. If the customer is in good standing, protect the goodwill and promote more
offers to him.
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I.3 Debt repayment
Debt repayment is the process of paying off your principal balance on loan over a
specified period. Despite a relatively reasonable underlying meaning, understanding how
to use debt wisely and repay your debt adequately are keys to proper wealth
management. It involves an understanding of the basic terms surrounding the debt
repayment process.
The process of debt repayment differs based on the type of credit you are repaying.
For instance, home mortgages often take 15 to 30 years to repay your debt
principal. Cars usually take from 36 to 72 months. Other personal loans and smaller value
types of credits may vary from a few months to several years. You must understand the
terms and conditions of any debt contract that you enter.
Sample of A Commercial Vehicle Installment Collection Process Flow Chart
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ASIN: 0130827835
http://www.businessdictionary.com/definition/collection.html
https://habiletechnologies.com/blog/loan-collection-trends/
https://www.sapling.com/7851485/debt-repayment-definition
http://www.businessdictionary.com/definition/repayment-mortgage.html
Let’s Check
Congratulations! You just finished the most vital concept of credit collection and
repayment. Let us check your understanding of the concept.
1. It is a credit account on which the debtor has failed to make at least the
minimum monthly payment by the due date.
a. Delinquent Account b. Past due Account c. Bad Account
d. All of the above
2. Which statement/statements is/are NOT true?
a. Delinquency in accounts receivables ties-up working capital/liquidity.
b. Delinquency in accounts receivables disrupts and complicates business
operations.
c. Delinquency in accounts receivables reduces profit targets.
d. Delinquency in accounts receivables does not slow down growth in
business.
e. Delinquency in accounts receivables causes personal and business
failure.
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3. Which of the items below is/are NOT internal causes of delinquency in

accounts receivables?
a. Absence or insufficiency of a credit report.
b. Lack of proper documents or merely the failure to register the debt
documents
in applicable cases.
c. Inadequate or faulty accounting system.
d. Unsystematic collection efforts.
e. None of the above
4. The action or process of collecting someone or something and recovering
amounts owed to a firm by its customers.
a. Collection b. Repayment c. Payment
d. Debt Collection System
5. It is the action to pay back or return the amount borrowed.
b. Collection b. Repayment c. Payment
6. It is a collection process that involves tracking payments of debts or money that
have been owed by individuals or businesses.
a. Collection b. Repayment c. Payment
7. It is a loan arrangement where the principal is paid back over the life of the
loan.
a. Collection b. Repayment c. Debt Repayment
8. It is a credit account when the debtor has failed to make at least the minimum
monthly payment of his credit by the due date.
a. Collection b. Repayment c. Debt Repayment
d. Past due account
9. The process of debt repayment differs based on the type of credit you are
repaying.
a. True b. False c. Maybe d. Not Sure
10. Loan collection is a process that is not highly regulated.
a. True b. False c. Maybe d. Not Sure
Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of collection and
repayment is not enough; what also matters is you should also be able to explain its inter-
relationships. Now, I will require you to explain your answers thoroughly.
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1. Debt Collection s openly connected to "credit" and "credit loan." If you are to choose
one from the other, do you think there is a connection? Explain.
In a Nutshell
Activity 3. The study of collection and repayment is indeed an advantage to becoming a

financial manager. It can be a very complex study that requires more in-depth knowledge
of the financial industry outside the classroom and school.
Based on the definition of the essential terms in the study and the learning activities
that you have done, please feel free to write your arguments or lessons learned below. I
have indicated my discussions or teachings learned.
1. A debt collector or collection agency is an essential part of the financial

industry, and organizations need to focus on the collection payment.
2. A debtor must understand the terms and conditions of any debt contract that
he is entering.
Your Turn
3.
4.
5.
6.
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TABLE OF CONTENTS
Title Page Page

ULOa: Discuss the legal aspects of credit and collection 55
Metalanguage 55
I. The Legal Aspects of Credit and Collection 56
I.1 The Legal Collection Process 56
References 57
Activities 57
ULOb: Explain pertinent laws related to credit and collection operation 60
Metalanguage 60
I. Pertinent Laws Relating to Credit and Collection Operation 61
I.1 The New Bouncing Check Law (B.P. 22)
The Anti-Bouncing Check Law 61
I.2 Obligations 63
I.3 Contracts 66
I.4 Sales 69
I.5 Truth in Lending Act (RA 3765 72
I.6 Letters of Credit (Code of Commerce Arts. 567-572) 73
I.7 Real Estate Mortgage 76
I.8 Chattel Mortgage 78
References 79
Activities 80
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Phone: (082) 2275456 local 131
Requisites: None
Credit: 3

Contact and Non-contact Hours This 3-unit course self-instructional manual is designed for
blended learning mode of instructional delivery with
scheduled face to face or virtual sessions. The expected
number of hours will be 54 of a face or virtual sessions.
Assessment Task Submission Submission of assessment tasks shall be on the 3 rd, 5th, 7th,
and 9th weeks of the term. The assessment paper shall be
attached with a cover page indicating the title of the
assessment task (if the task is a performance), the
professor's name, date of submission, and the name of the
student. The document should be emailed to the professor.
It is also expected that you already paid your tuition and
other fees before the submission of the assessment task.
If the assessment task is done in real-time through the

Blackboard Learning Management System's features, the
schedule shall be arranged ahead of time by the professor.
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(if necessary) assessment tasks are required to be submitted through
Turnitin with a maximum similarity index of 30% allowed.
If your paper goes beyond 30%, students will either opt
to redo her/his paper or explain in writing addressed to
the course coordinator the reasons for the similarity. If
the paper has reached a more than 30% similarity index,
the student may be called for disciplinary action under
the University's OPM on Intellectual and Academic
Honesty.
Please note that academic dishonesty such as cheating

and commissioning other students or people to complete
the task for you have severe punishments (reprimand,
warning, expulsion).
Penalties for Late An assessment item submitted after the designated time
Assignments/Assessments on the due date, without an approved extension of time,
will decrease by 5% of the possible maximum score for
that item for each day or part-day that the assessment
item is late.
However, if the late submission of the assessment

paper has a valid reason, a letter of explanation should
be submitted and approved by the course coordinator.
If necessary, you will also be required to present/attach
evidence.
Return of Assignments/ Assessment tasks will be returned to you two (2) weeks
Assessments after the submission and returned by email or via the
Blackboard portal.
For group assessment tasks, the professor will require

some or a few students for online or virtual sessions to
ask clarificatory questions to validate the originality of the
assessment task submitted and to ensure that all the
group members are involved.
Assignment Resubmission You should request in writing addressed to the professor
his/her intention to resubmit an assessment task. The
resubmission is premised on the student’s failure to
comply with the similarity index and other reasonable
grounds such as academic literacy standards or other
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Re-marking of Assessment You should request in writing addressed to the professor
Papers and Appeal your intention to appeal or contest the score given to an
assessment task. The letter should explicitly explain the
reasons/points to contest the grade. The program
coordinator shall communicate with the students on the
approval and disapproval of the request.
If the professor disapproves, you can elevate your case

to the program head or the dean with the original letter of
request. The dean of the college will give the final
decision.
Grading System All culled from BlackBoard sessions and traditional
contact
2nd formative assessment –10%

Final exam – 40%
Submission of the final grades shall follow the usual

University system and procedures.
Student Communication You are required to create a umindanao email account,

a requirement to access the BlackBoard portal. Then,
the professor will enroll the students to have access to
the materials and resources of the course. All
communication formats: chat, submission of assessment
tasks, requests, etc. shall be through the portal and other
university recognized platforms.
You can also meet the professor in person through the

scheduled face to face sessions to raise your issues
and concerns.
For students who have not created their student email,
please contact the professor or program head.
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Students with Special Needs Students with special needs shall communicate with the
course coordinator about the nature of their special needs.
Depending on the nature of the need, the course coordinator,
with the program coordinator's approval, may provide
alternative assessment tasks or extension of the deadline for
submission of assessment tasks. However, alternative
assessment tasks should still help achieve the desired course
learning outcomes.
Hotline no.: 09513766681
Phone: 09212122846
CC’s Voice: Hello, potential finance manager! Welcome to this course FM 222: Credit and
Collection. By now, I am confident that you already made the career
decision to become a finance manager and visualize yourself already
inside a room with a business scenario.
C.O. Primarily, before becoming a successful finance manager, you have to have a
comprehensive knowledge of the aspects and pertinent laws related to
the credit and collection process, which are significant course outcomes
(C.O.) of this subject. When we talked about credit and collection processes
as
crucial components of credit and collection, assessing learning
outcomes or competencies and financial performance of managers are
firmly attached. Thus, in this course, you are expected to demonstrate
in-depth knowledge of the legal aspects and pertinent laws regarding
the credit and collection process.
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1. Discuss the legal aspects of credit and collection and

2. Explain pertinent laws related to credit and collection operation.
Big Picture in Focus: ULOa. Discuss the legal aspects

of credit and collection
Metalanguage
In this section, the essential terms relevant to the study of the legal aspects and
pertinent laws on credit and collection process is to demonstrate ULO (Unit Learning
Outcome). It will be operationally defined to establish a typical frame of reference as to
how the contents work in your chosen field or career. You will encounter these terms as
we go through the study of credit and collection.
To perform the aforesaid big picture ULO (unit learning outcomes) for the two
(2) weeks of the course, you need to fully understand the following essential knowledge
that will be laid down in the succeeding pages. Please take note that you are not limited
to refer to these resources exclusively. Thus, you are expected to utilize other books,
research articles, and other resources available in the university's library, e.g., ebrary,
1. Legal. Something was adapting to or permitted by law or established rules.

2. Law. The system of rules wherein a specific country or community
recognizes as legalizing the actions of its citizens or members and which it
may enforce penalties.
3. Summon. The notice informs a defendant that a case is filed against him/her
and affirms the court's power to attend to and determine the matter.
4. Deposition. A written declaration of a witness set in the course of judicial
proceedings before a trial on oral examination.
5. Writ of Execution. It is a court order decided to put in force a judgment of
possession obtained by a plaintiff from a court.
6. Plaintiff. The party who initiated a claim action or filed a case against a
debtor.
7. Defendant. It is a party against whom the plaintiff has filed a claim action or
case.
8. Motion. A written or oral appeal by a party for an order to the court.
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Essential Knowledge
I. Legal Aspects of Credit and Collection
Several legal and extra-legal remedies or methods can be used to reduce,

improve, and recover a hopeless money claim arrangement.
Good knowledge and understanding of legal or extra-legal remedies will

increase the creditor's chances of collecting through court action.
However, there are problems encountered in legal collection efforts, namely

among others:
1. Documents
a. Absence of legal documents
b. Insufficient documents
c. Attorney-in-Fact/Special Power of Attorney signed by the principal and
notarized by a notary public
d. A notary public must notarize legal documents
e. Difficulty in accessing the most valuable information
2. Debtor/s
a. Lack of current contact information
b. Difficulty in identifying and contacting
c. Takes too long to locate when sorting through all the data
d. Properties offered as collateral/s are encumbered
e. Have filed for voluntary insolvency
f. Business have been assigned/transferred or acquired by a new company
I.1 The Legal Collection Process
1. Sending of notice of demand for payment to the obligor (the debtor);

2. Gathering, preparation, and review of unlawful documents; and credible,
competent witnesses;
3. Preparation of complaint;
4. Filling of the case;
5. Service of Summons
6. Grounds for the delay (Reply of the parties to the case):
a. Grounds for a motion to dismiss:
1. No cause of action
2. The venue is in issue
3. A prior payment was made
4. Wrong part
b. Motion for bills of particulars (for documents)

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c. Motion for discovery/deposition for evidence and witnesses required

in the speedy resolution of the case.
d. Motion for extension of the time to file an answer with justifiable

reasons
Dr. J.P. Mishra, Dr. S.K. Singh, Public Finance Sahitya Bhawan Publications,
2018 edition ISBN-10: 9351735354 ISBN-13: 978-9351735359
Liu, Mingxing, contributor (2016) Handbook of Public Finance, New Rochelle, New
York: Magnum Publishing, BC 336 H19 2016
J.J. Woo (2018) 3-in-1: governing global financial center New Jersey: World
Scientific
BC 332 W85t
Cornett, Maria M (2019) Finance 4thth edition. BC 332 C81f
Raghbendra Jha (Author) HA R_MODERN THEORY OF PUBLIC FIN. Paperback

2019 ISBN-10: 8122427693 ISBN-13: 978-8122427691
Let’s Check
Activity 1. Congratulations! You just finished learning about the legal aspects of
credit and collection relative to the credit and collection process. Let us check your
understanding of the lesson.
I. MULTIPLE CHOICE. Encircle the letter of your choice. (10pts.)
1. These are the steps in the legal collection process:

a. Sending of proper demands to the party-obligor- debtor(s)
b. Gathering, preparation, and review of actionable documents; and credible,
competent witnesses
c. Complaint preparation
d. All of the above
2. It is not a step in the legal collection process.
a. Filing of the case
b. Service of the Summons
c. Reply to the parties to the case
d. None of the above
3. It is the disclosure of facts, deeds, documents, and other information in the
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exclusive possession or knowledge of a party or witness.
a. Discovery b. Finding c. Intervention d. Agreement
4. A written declaration of a witness set in the course of judicial proceedings
before a trial or hearing upon oral examination.
a. Deposition b. Disposition c. Declaration d. Statement
5. An amicable agreement is also known as:
a. Compromise agreement b. Contract c. Friendly settlement
d. None of the above
6. A court order is granted to force a judgment of possession obtained by a
plaintiff from a court.
a. Writ of Execution b. Writ of Habeas Corpus c. Writ of Judgment
7. It is the party that initiated an action against a debtor.
a. Plaintiff b. Defendant c. Person d. Individual
8. It is the party against whom the plaintiff has filed an action.
a. Plaintiff b. Defendant c. Person d. Individual
9. A party's written or oral appeal to the court for an order or other action.
a. Motion b. Good Course c. Affidavit d. Statement
10. Circumstances are sufficient to justify the requested order or other action as
determined by the judge.
a. Motion b. Good Course c. Affidavit d. Statement
Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of legal aspects
relating to credit and collection is not enough; what matters is you should also be able
to remember what you have learned from the session.
Now, let’s see if your memory recall is effective.
I. Give the six (6) steps in the legal collection process.
1. ____________________
2. ____________________
3. ____________________
4. ____________________
5. ____________________
6. ____________________
In a Nutshell
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Activity 3. The study of legal aspects relating to the credit and collection process is
indeed beneficial to becoming a financial manager. It can be a very complex study that
requires more profound knowledge leading, which will lead your journey to the real
world.
exercises that you have done, please feel free to write your arguments or lessons
learned below. I have indicated my discussions or teachings learned.
1. Why is it important to study the legal aspects of credit and collection?

2. Good knowledge and understanding of legal or extra-legal remedies will
increase the creditor's chances of collecting through court action.
Your Turn
3.
4.
5.
6.
7.
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Big Picture in Focus: ULOb: Explain pertinent laws

related to credit and collection operation
Metalanguage
For you to demonstrate ULOb, you will need to have an operational

understanding of the following terms below. Please note that you will also be required
to refer to the previous definitions found in the ULOa section.
1. Obligation. According to law, it is necessary to give, to do, or not to do.

2. Contract. It is when two parties have a meeting of the minds, and one
party obligates himself concerning the other party, to give a thing or to
render some service.
3. Deceit. It is the deliberate action of misinforming a person of usual
discretion.
4. Passive Subject- (Debtor/Obligor). A person who must perform the
obligation.
5. Prestation. It is the subject or object of whether giving, doing, or not
doing something.
6. Cause. It is the tie that binds the parties to obligation.
7. Fraud. The deliberate or intentional evasion by the debtor/obligor of the
fulfillment of his obligation.
8. Negligence. It is the exclusion of diligence required by the type of
contract and relates to the circumstances of the person of time and place.
9. Delay. It is a non-fulfillment of an obligation concerning time.
10. Lien. It is a right to retain possession of property belonging to another
person until a debt owed by that person is fulfilled.
11. B.P. No. 22. An act punishing drawing and issuance of a check with
insufficient funds of credit and other purposes.
12. Sale. A contract wherein one of the parties, the seller (vendor), obligates
himself to transfer possession and deliver a definitive thing to the other
party, known as the buyer (vendee), who obliges himself to pay the price
specified in money or its equivalent.
13. Active Subject (Creditor/Obligee). It is the person with the right to
demand the performance of the obligation.
14. Voidable Contract. A contract entered into by a person whose consent
has been obtained by violence, mistake intimidation, or undue influence.
15. Unenforceable Contract. A contract that cannot be enforced unless
ratified and only the parties can avail of the defense of enforceability and
cannot be questioned by a third person.
16. Void/Inexistent Contract A contract that is not existing is invalid from
the very beginning and cannot be validated or ratified by the passage of
time.
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17. Public Prosecutor. A law officer who conducts criminal proceedings on
behalf of the government or in the public interest.
18. Draft It is a bill of exchange, written order by a seller instructing the buyer
or its agent (which could be a bank) to pay the amount at a specified time.
19. Letter of Credit It is an engagement by a bank or other person made at
the request of a customer/that issuer will honor a draft of other demands
for payment upon compliance with the condition specified in the credit.
20. Sight draft. A type of draft that is payable upon sight or presentation of
the draft.
21. Time draft. A draft that allows time for payment, which must be from the
date of the said draft, is marked "accepted" by the drawee.
22. Clean draft. A draft with an order to pay without any accompanying
documentation.
Essential Knowledge
I. Pertinent Laws Relating to Credit and Collection Operation
I.1 The New Bouncing Check Law (B.P. 22) THE ANTI-BOUNCING CHECK
LAW
A check usually serves as a replacement for money. It permits transactions to

ensue without cash, actually changing hands. Nevertheless, the convenience provided
by checks needs to be well-adjusted with the threat which unfunded or insufficient
checks pose on commercial transactions. These checks are deemed to have
destructive effects on the integrity of banking and other financial transactions and,
therefore, detrimental to the public interest.
Therefore, to restrain the issuing valueless checks, Batas Pambansa (B.P.) 22

was enacted.
The following essential elements must be present to be liable under Batas
Pambansa 22:
1. The person accused in violation of the law which makes, draws or issues any
check for an account or value;
2. The person knows he issued the check against insufficient funds with the
drawee bank for the settlement of the check as presented for encashment;
3. The drawee bank dishonors the check due to insufficient funds, or if the
check is dishonored with the same reason if the issuer did not order the bank
to stop payment for no valid reason.
The law believes that the issuer knows his funds are insufficient when the check
is dishonored from the date of the check was issued within 90 days. This belief will be
overcome if the issuer pays or payment of the full amount of the check is made within
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five banking days after receiving a notice of its dishonor. Proof must be presented when
the issuer was notified of dishonor and evidence the issuer received the notice of
dishonor.
Even an "accommodation party" is liable under B.P. 22. An accommodation

party has signed the check without receiving value in exchange and issues the check
to lend his name to another person. He is still liable when the holder of the check is
aware that he is only an accommodation party.
In case a check is issued in the name of a corporation or other legal entity, the
authorized person who signed the bounced check is liable.
A criminal complaint must be filed in court within four (4) years from the dishonor
of the check before the public prosecutor's office of any alleged violation of B.P. 22. If
the public prosecutor finds possible cause, and information will be filed before the
proper Metropolitan Trial Court or Municipal Trial Court. The trial will follow.
If the accused is found guilty, B.P. 22 stipulates that the penalty for its violation
is imprisonment for at least thirty (30) days but not more than one (1) year, or a penalty
of at least twice the amount of the check but not to exceed Php200,000.00.
However, in 2001, the Supreme Court (S.C.) issued Administrative Circular

(A.C.) 12-2000 endorsing that penalties be imposed instead of a prison sentence for
verdicts involving B.P. 22. In its later issuance, AC 13-2001, S.C. clarified that
imprisonment under B.P. 22 is still possible. A penalty is only selected over an
imprisonment sentence if it better serves the interests of justice. Such as if the accused
is an offender for the first time or good faith involved.
Moreso, even if only a penalty is enforced, the accused may still suffer lower
imprisonment if unable to render payment.
If the acquittal is the insufficiency of evidence and the accused is acquitted, he

still may be held civilly liable and obliged to pay the bounced check's value. It is
because the civil liability of the accused is not automatically extinguished upon the
criminal case's dismissal on the ground of failure to establish guilt beyond an
unreasonable suspicion.
It must also be considered that a person liable for B.P. 22 under Article 315 (2-
d), Revised Penal Code may be liable for estafa at the same time.
These essential elements must be present:

➢ The check issued is postdated or issued in payment of an obligation
contracted at the time the check is issued;
➢ There exists a lack or insufficiency of funds to cover the check, and

there is damage to the payee.
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It is the deceit or fraud related to the check's issuance, which is punishable by

law. If a proof is presented that the drawer of the check was unable to deposit the
amount sufficient to cover his check within three days from receipt of the notice of
dishonor, a prima facie evidence of deceit exists by law. The pressing issue is whether
the complainant would have separated his property, money, or any other thing of the
transaction were it not for the drawing of the check, which turns out to be of no sufficient
fund.
Thus, one must be careful in issuing checks and being mindful of one's funds
schedule. A bounced check is not merely a reason for troublesome and
embarrassment; it can cause legal complications resulting in the payment of penalties,
which will lead to possible imprisonment.
If under certain circumstances, you have issued a bouncing check, settle the
issue with your creditor. A settlement is a way better choice than litigation.
I.2 Obligations
An obligation, as defined earlier, is a necessity according to law to give, to do,

or not to do.
An obligation is the requirement to do what is imposed by law, promise, or

contract. The obligation is identical with duty, meaning that there is a tie that binds us
to pay or to do something following the laws and customs of the country.
Elements of Obligation
1. Active subject (creditor or obligee). The person with the right to demand the
satisfaction or fulfillment of the obligation.
2. Passive subject (debtor or obligor). The person who is obligated to the
fulfillment of the obligation.
3. Prestation or object. It consists of giving, doing, or not doing. Without a
prestation, there is nothing to perform. An object can be a property or a
thing. Therefore, a prestation is the subject matter of the obligation.
4. Efficient cause (juridical or legal tie) It binds or unites the parties to the
obligation. The tie is an obligation which can easily be determined by being
aware of the obligation's basis.
5. Right and obligation. When it is right, there is an equivalent obligation. The
right
is the active aspect, which is credit, and obligation is the passive aspect, debt.
In simple terms, prestation is the particular behavior of the debtor and may
consist of giving, doing, or not doing something.
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❖ The obligation to give. It consists of the delivery of movable or immovable

property or thing to the creditor or borrower. An example is the obligation to deliver the
thing, e.g., sale, deposit, pledge, donation.
❖ The obligation to do covers all kinds of labor or services, whether physical
or mental. An example would be: Contract for professional services like bookkeeping,
singing, or modeling.
❖ The obligation not to do means stopping doing actions which can be
creating irritating noise, offensive odor, and smoking.
There are two (2) groups of Obligation per Art. 1156, Civil Code and Natural
Obligations Distinguished.
1. Civil
2. Natural
By definition of obligation in Article 1156 refers to civil obligations that are

enforceable in court when violated and does not cover natural obligations.
On the other hand, natural obligations are based on natural law since its
existence is equity and moral justice.
Kinds of Obligations
(1) As to judicial enforceability

➢ A civil obligation is when the debtor or obligor did not fulfill its obligation
to
the creditor or obligee that can be imposed through a civil case
➢ The natural obligation is a distinct kind of obligation that cannot be
imposed
in court but authorizes retaining the voluntary performance or payment
by the debtor.
➢ Moral obligation is a responsibility which one owes and has to perform,
but
not legally have to be fulfilled. It is an obligation from moral law decreed
by the church and not enforced on the court. It covers the spiritual
obligation of a person with his God or Church.
(2) As to the subject matter

➢ The real obligation is the obligation to give
➢ The personal obligation is the obligation to do or not to do.
(3) As to the number of persons obliged to perform

➢ A Unilateral obligation is when only one of the parties is bound to fulfill a
prestation.
➢ A Bilateral obligation is when both parties are bound to perform.
➢ A Reciprocal obligation arises from the same cause, and the party is a
debtor and a creditor of the other.
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(4) As to capacity to fulfill the obligation

➢ A possible obligation is when an obligation can be fulfilled in nature or
law.
➢ An impossible obligation is when an obligation cannot be fulfilled in nature
or law.
(5) As to susceptibility of partial fulfillment

➢ Divisible obligation – Requires the giving of specific things and the same
can be partially performed.
➢ Indivisible obligation – Requires the giving of certain things and the same
cannot be partially performed.
(6) As to their dependence upon one another person

➢ Principal obligation is the primary responsibility formed by the contracting
parties.
➢ The accessory obligation is the secondary obligation created to
guarantee the fulfillment of the principal obligation.
(7) As to the existence of a burden or condition

➢ Pure obligation. It is not subject to any conditions, and no specified date
is stated for the fulfillment but demanded immediately.
➢ Condition obligation – It is subject to conditions, and it can be suspensive
And performance of which depends on improbability.
➢ Obligation with a term – It is subject to the happening of an event that will
inevitably happen, but the date is uncertain. The obligation becomes
demandable only when the time expired.
(8) As to the nature of performance

➢ Positive obligation. It is when the debtor is obliged to give or to do
something in favor of the creditor.
➢ Negative obligation. It is when the debtor is not obliged to give or to do
a thing. Meaning to say, he must refrain from doing something.
(9) As to the nature of the creation of the obligation

➢ Legal obligation. An obligation enforced by law.
➢ Conventional obligation. An obligation established by the agreement of
the parties like contracts.
(10) As to the character of liability or responsibility

➢ Joint obligation. It is when the creditor has the right to demand complete
compliance of an obligation against both of the debtors.
➢ Solidary obligation – Obligation bound together, each liable for the whole
performance, or obligees to be obliged together, all unsettled just a single
performance and entitled to its entirety.
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(11) As to the grant of right to select one prestation out of some, or to replace
the first one.
➢ Alternative obligation – Obligation where the obligor may choose one out
of
several prestation.
➢ Facultative obligation – Obligation where there is only one prestation.
(12) As to the imposition of penalty

➢ Simple obligation – Obligation where there is no penalty imposed for
violation of terms thereof.
➢ Obligation with a penalty – Obligation where there is a penalty imposed
for violation of terms thereof.
Art. 1157. The obligation arises from:

1. Law – for example, payment of taxes
2. Contracts – for instance, lease contract
3. Quasi-contracts - an obligation of one party to another imposed by law
independently of an agreement between the parties.
4. Acts or omissions punishable by law;
5. Quasi-delicts. These are lawful, voluntary acts that give rise to juridical
relations which provides that nobody shall enhance himself at the expense
of another person. These are:
a. Negotiorium Gestio. Voluntary management of the property or
business of another person without his consent or authority. It
creates an obligation to refund the gestor (administrator) for the
necessary and relevant expenses incurred.
b. Solutio Indebiti. It is an obligation wherein payment was made by
mistake. It creates an obligation to return the amount paid.
I.3. Contracts
A contract is an agreement when two parties have a meeting of the minds, and
one party obligates himself concerning the other party to give a thing or render some
service. It is affected by the force of law between the parties and confirmed in good
faith.
The legal aspect of an arrangement as a contract is referred to as the force of

law by definition. It means that a person can go to court and ask for a civil action in
case of non-compliance with the contract. Any agreement without the 'force of law' is
not deemed contracts but merely personal or social contracts.
Likewise, the term “in good faith” represents fairness and honesty of intention in
the execution of the contract, so as not to destroy or injure the right of one of the parties,
For instance, it would not be in good faith when one party has relieved himself from the
contract. At the same time, the other is still obligated to it.
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A contract is one of the bases of obligation. As defined, an obligation is a juridical

necessity that results when a contract is executed or consummated. Therefore, there
can be no contract if there is no obligation, but not all obligations arising from contracts.
The obligation that arises from contracts is termed conventional obligation.
Characteristics of a Contract
The common characteristics of contracts are:

1. Obligatory. The law force between the parties requires them to execute
under
the threat of civil action or lawsuit.
2. Autonomy. The contracting parties create clauses, stipulations, terms, and
conditions may be deemed timely, provided not contrary to
law, public policy, public order, good customs, and morals,
3. Mutuality. A contract must involve both parties so that the legality or
fulfillment of a contract will not be upon the will of only one of the parties.
4. Relativity. By this, effectivity is only between the contracting parties,
their heirs, and assigns. Apart from the case, the contract's rights and
obligations are not transferrable by nature or stipulation or provision of
law.
5. Consensuality. In this, mere consent completes the contract and obliges the
parties to fulfill what has been expressly stated. All the results according
to their nature, maybe in maintaining a practice, good faith, and law.
Nevertheless, real contracts, like deposits, pledges, and commodatum,
are not completed until delivery of the object of the obligation.
Elements of Contract
1. Consent. It is the agreement between the parties according to the cause

and object; there is a specific offer by one party, and there is an
complete acceptance by another party.
2. Object. It is the thing, right, or service to be offered or executed under
the contract.
3. Cause (causa). It is the essential purpose for contracts:

➢ for onerous contracts, the vow of something or service by the other party.
➢ For remuneratory contracts, the benefit or service is rewarded.
➢ For contracts of wholesome generosity, the cause is the simple openness
of the benefactor.
The contract will not be fulfilled until the elements mentioned above or requisites
are settled.
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Classifications of Contract
1. According to form:
➢ The informal contract can be in any form as long as all the requisites or
essential elements for its validity are present.
➢ The formal contract can be in a form required by the law.
➢
2. According to the involvement of the parties:

➢ A unilateral contract is when one party is obliged to fulfill an obligation for
an action by a second party.
➢ Bilateral contract means that both parties are bound to fulfill their mutual
promises or respective obligations to each other reciprocally.
3. According to name or designation:

➢ Nominate contract. It has a specific designation or name in law, such as
commodatum, sale, lease, and agency.
➢ Innominate contract. It has no specific designation or name in law. It shall
be controlled by the terms and conditions of the parties, the Civil Code,
laws governing the utmost equivalent nominate contracts and the
tradition of the place.
4. According to perfection:
➢ Consensual contract. It is consummated by simple consent, such as the
contract of agency, sale, and lease.
➢ Real contract. It is perfected by mere consent and the delivery of the
object,
such as deposit, pledge, and commodatum.
➢ Solemn contract. It is perfected through compliance with the form
required by law, identical to a formal contract.
5. According to cause or purpose:

➢ Onerous contract. Its purpose is the performance of an obligation by one
party as the other party performs or has performed its obligation.
➢ Remuneratory contract. Its purpose is the remuneration or payment by
one party for a service or benefit previously rendered by the other party.
➢ Gratuitous contract. Its purpose is the mere openness or the emotion by
one party that the other party has been kind, such as in free, pure
donation.
6. According to the binding force:

➢ Valid contract - It has terms, conditions, and clauses that are not contrary
to law, public order, public policy, morals, or good customs.
➢ Rescissible contract – If with legal validity, may be revoked in the cases
created by law.
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➢ Voidable/Annullable contract. It has legal validity but may be invalidated

by court action on the grounds of violence, mistake, intimidation, fraud,
undue influence, or incapacity of one of the parties to give consent.
➢ Unenforceable contract. It has legal validity but cannot be enforced
through court action because of defects unless it is ratified according to
law.
➢ Void contract. It has no validity because of certain defects, such as
illegality, and contemplated not in existence from the very beginning and
cannot be ratified according to law. The contracting parties may create
such terms, conditions, stipulations, and clauses as they may be deemed
appropriate, provided they are not in conflict to public order, law, morals,
good customs or public policy.
I. 4 Sales
A contract wherein one of the parties, the seller (vendor), obligates himself to
transfer possession and deliver a definitive thing to the other party, known as the buyer
(vendee), who obliges himself to pay the price specified in money or its equivalent.
Characteristics of Contract of Sale
1. Consensual. It is where mere consent is sufficient to perfect such a

contract.
2. Bilateral. It is wherein both parties are jointly compelled to each other;
the seller delivers the thing being sold, and the buyer pays the price.
3. Onerous. It is wherein one party performs an obligation with the
the expectation that the other party will fulfill an obligation in return.
4. Cummutative. It is wherein the thing sold is the equal of the
price sold, except in the case of aleatory contract as the sale of hope.
5. Principal. It is wherein the existence and validity of such a contract does
not depend on another contract.
6. Nominate. It is wherein the Civil Code gives special designation to such
a contract in 'Title VI: Sales.'
The Elements of Contract of Sale
A contract of sale has the following necessary elements:
1. Meeting of the mind (Consent). It is the express agreement between parties

concerning the thing (object) and price (cause); both parties have legal
capacity.
2. Subject matter Object). It is the definitive thing to be sold.
3. Consideration (Cause). It is the value specified in cash or the equivalent.
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The contract will not be achieved unless the elements mentioned above or
requisites concur.
Besides, a contract of sale also has:

1. Natural elements are part of the contract even if the parties do not
provide (stipulate) them and are presumed by law to exist, such as a
warranty of hidden defects or eviction in the contract of sale.
2. Accidental elements are stipulated in the contract by the contracting parties

as
they may deem appropriate, such as stipulations, terms, conditions, and
clauses
Transfer of Ownership
The real meaning of sales is on the transfer of title (ownership) to property

(object) for a value or price (cause), rather than physical delivery.
The sale and transfer of title can only be made when the life of a contract of
sale. The claim passes from seller to buyer of the thing delivered, or property is fulfilled.
In cases concerning title (ownership), is:
1. Inexistent. The title to the property remained with the same person,
regardless
of the change in the form of ownership.
2. Inoperative or impossible. The title to the property is being possessed by
the
buyer, a third person, not from the seller.
3. Illegal or void. The transfer of title is not the intention of the parties from the
beginning, as agreed but merely to take a risk on price fluctuations.
Effect of Absence of Price in Sale
A contract of sale is considered void and invalid if without a price as a cause.

Such sale is non-existent and non-consumable from the beginning.
There is also an absence of price in case of:
1. fake or fictitious price

2. fraudulent price; as in those prices that appear as paid but was, in fact,
never paid
3. simple valuation submitted by the seller.
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Effect of Non-Payment of the Price
The contract of sale is canceled (by rescission) or sustained (by specific

performance) in case of price is not paid (resolutory condition).
The non-payment of the price in full within a fixed period can:

1. Dissolve a contract of sale when there exists an agreement that payment
on time is essential.
2. Defaulting a contract of sale in the nonexistence of any agreement paid

on time is necessary; such default is on the buyer’s part, and the seller
may use legal remedies.
Kinds of Contract of Sale
According to the existence of conditions:
1. Absolute sale - not subject to any terms whatsoever, and the transfer of title
is upon the delivery of the thing sold.
2. Conditional sale - subject to evident conditions, and the transfer of title upon
the fulfillment of the requirements enforced.
Contract of sale may also depend on:

1. The nature of the object. (real or personal, movable or immovable)
2. The mode of payment of the price. (credit, installment or cash)
3. The validity of the contract. (valid, void, rescissible or unenforceable,)
Contract of Sale vs. Contract to Sell
In the contract of sale in terms of transfer of ownership, title passes to the buyer
upon delivery of the thing. The title shall remain with the seller and only be passed to
the buyer upon payment in full in contract to sell.
In a contract of sale, in terms of non-payment of the price, non-payment of the

price (resolutory condition) cancels (by rescission) or continues (by specific
performance) the obligation.
In contract to sell, the non-payment of the price (suspensive condition) prevents

the lawful necessity of the transfer of title.
In a contract of sale, in terms of ownership by the seller, the seller losses the
title of the property sold and delivered, nor can it be recovered. Constructively, until
the contract is fulfilled or extinguished.
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In a contract to sell, the seller retains the title until full payment by the buyer of
the price conforms with pre-conditions stated in the contract.
I.5 Truth in Lending Act (R.A. 3765)
I. The Purpose of the Law
To protect users of credit from a lack of consciousness of the actual fee of such
credit disclosing the cost or fee fully.
According to R.A. 3765, a creditor shall provide to a person to whom credit is

granted, before the consummation of the transaction, a clear statement in writing
setting therein, to the point applicable and in consonance with regulations and rules
recommended by the Monetary Board of the Bangko Sentral ng Pilipinas, information
as follows:
1. The cash or price delivered on service to be attained or property;

2. The amount, if any, to be credited as a down payment or exchanged;
3. The variation between the amount indicated under items (1) and (2);
4. The charges, separately itemized, paid by the person in relation with the
transaction and not related to the credit extended
5. The total amount financed;
6. The finance charges equivalent in pesos and centavos; and
7. The fraction the finance charges transfer the total amount to be funded, stated
as a simple yearly rate on the remaining unpaid balance of the obligation.
The contract to be acknowledged and signed by the debtor, covering the

transaction or any other document shall indicate the above seven (7) items of
information. Moreso, the contract or document shall specify additional charges, if the
debtor does not comply with any, which will be collected in case-specific stipulations in
the contract.
The following be posted by the entities concerned in prominent parts in their

principal place of business and branches:
a. An abstract of the requirements of R.A. No. 3765 in the form as prescribed

by the Monetary Board, which shall be duplicated in a format sixty (60) cm. Wide and
seventy-five (75) cm. Long
b. Data regarding interest and other charges on loans such as:
1. Type of loan;
2. The simple rate of interest per annum;
3. The mode of interest payment; i.e., whether collected in advance
or otherwise; and
4. Other fees imposed by the bank in connection with the loan.
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Likewise, under Section 6 of said Act, any creditor who is unable to reveal
on any credit transaction to any person any information in violation of this act or any
regulation released shall be liable to the person an amount equivalent to Php100.00.
Or an amount equal to twice the finance charged required by the creditor

concerning the transaction, whichever is greater, except such liability shall not be over
Php2,000.00 on any credit transaction.
I.6 Letters of Credit (Code of Commerce Arts. 567-572)
One merchant issues letters of credit to another or to attend to a commercial

transaction.
It is an instrument issued by a bank on behalf of a customer authorizing a

beneficiary to draw a draft/s. Upon presentation to the bank, it will be honored if drawn
under the terms and conditions specified in the letter of credit.
The Parties to a Letter of Credit:
1. The applicant of the Letter of Credit.

➢ The applicant is one of the main parties involved in a Letter of Credit
(L.C.).
➢ He is the party who opens the Letter of Credit.
➢ The buyer of goods is the applicant, opens a letter of credit.
➢ It is opened as per his instruction and necessary
➢ payment is arranged to open a Letter of credit with his bank.
➢ The applicant opens a letter of credit per the terms and conditions of
the purchase order with the bank and business contract between
buyer and seller.
2. L.C. Issuing Bank

➢ The bank opens a letter of credit.
➢ It is created by issuing bank who takes responsibility to
➢ pay amount on receipt of documents from the supplier of goods
(beneficiary under L.C.).
3. Beneficiary Party
➢ The beneficiary of a Letter of credit gets the benefit under a Letter of
credit.
➢ The beneficiary is the party under the letter of credit who receives the
amount under the letter of credit. The L.C. is opened on the
Beneficiary party's favor.
➢ The beneficiary party under the letter of credit submits all required
documents with is a bank per the terms and conditions under L.C.
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4. Advising Bank
➢ As part of the letter of credit, the bank takes responsibility to
communicate with necessary parties under the letter of credit and
other required authorities.
➢ The bank is the party that sends documents under the Letter of Credit
to the opening bank.
5. Confirming Bank
➢ As a party to the letter of credit, the bank confirms and guarantees to
accept accountability of payment or acceptance under the credit.
6. Negotiating Bank
➢ It is the bank that negotiates documents delivered to the bank by the
beneficiary of L.C.
➢ The bank verifies documents and confirms the terms and conditions
under L.C. on behalf of a beneficiary to avoid discrepancies
7. Reimbursing Bank
➢ The bank authorized to honor the reimbursement claim
of negotiation/ payment/ acceptance.
8. Second Beneficiary
➢ The second beneficiary who represents the first beneficiary or original
beneficiary in their absence, wherein the credits belongs to the
original beneficiary, is transferable as per terms.
Types of Letters of Credit
(1) Revocable
✓ can be canceled or amended at any time before payment
✓ act as a means of planning payment but not is a guarantee of
payment
(2) Irrevocable
✓ the issuing bank is obliged to honor drafts drawn in compliance
with
the credit
✓ cannot be canceled nor altered without the consent of the
parties, including, in particular, the beneficiary/exporter.
(3) Confirmed
✓ it is a letter of credit released by one bank can be confirmed by
another,
in which case the two banks are obliged to honor in compliance
with the credit the drafts are drawn
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(4) Unconfirmed
✓ it is a letter of credit which is the responsibility only of the issuing
bank
(5) Revolving
✓ is one that is acceptable for numerous transactions over a given
✓ time
such as a week or a month
✓ most are issued in the revocable form
(6) Non-Revolving
✓ is one that is valid for one transaction only
(7) Cumulative
✓ in which undrawn case amounts carry over to future periods
(8) Non-Cumulative
✓ with specific time
✓ cannot be drawn against a period in the future
(9) Standby
✓ It is the L.C. that is an option issued by a bank on a loan which
involves three (3) parties:
a. the issuing bank of the credit,
b. the requesting party for the issuance (otherwise known as
account party) and
c. the beneficiary
Important Points to Remember:

❖ A fundamental principle in letters of credit states that the bank deals only
with documents.
❖ Apart from certain conditions, the seller will be required to submit certain
documents and the draft that he draws for collection.
❖ The documents shall be negotiated and agreed upon between the buyer
and the seller.
❖ Typically, the seller submits together with the draft the commercial
invoice, a bill of lading, and the packing list.
❖ Since banks deal with documents only, they are not authorized to deal
with the products. They are not competent to deal with a thousand and
one types of goods. They will act based on the documents only.
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I.7 Real Estate Mortgage (Arts. 2124-2131, NCC)
In Art. 2124, the property as follows may be the object of a mortgage contract:
1. Immovables;
2. Alienable real rights per regulations enforced on immovables.
Moreso, movables or properties which can be transferred from one place to

another may be the object of the chattel mortgage.
Mortgage
A contract wherein the borrower secures the lender completion of a principal

obligation, especially replacing the security of immovable property or real rights over
the immovable property. The obligation shall be fulfilled with the earnings of the sale of
said property or rights in case the obligation is not fulfilled with at the agreed time.
Examples: accessory, unilateral, real and subsidiary contract
Important Points to Remember:

❖ As a general rule, the property is held by the mortgagor or borrower.
• The mortgaged property is subjected only to a right to retain
possession of property belonging to the borrower until a debt owed
by that person is discharged (lien) by the mortgagee, but the
mortgagor maintains ownership.
❖ Payment of Interest on Mortgage Credit

• The mortgagee or lender shall be subject to the obligation of an
antichresis creditor concerning fruits or interest.
❖ Subject Matter of Mortgage

1. Alienable real rights and immovables over immovables
2. Future property is not the object of a mortgage.
3. Future property is not the object of a mortgage contract.
However, a stipulation subjecting the lien on the mortgage, properties that the
mortgagor may consequently obtain, connect, or use concerning the real property
mortgaged already, which belongs to the mortgagor, is valid.
The persons have no other authority than to demand the document's effect and
documentation in which the mortgage is validated in whose favor the law determines.
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Essential Requisites of a Mortgage

1. Execution of the principal obligation is assured
2. The rightful owner of the property mortgaged should be the mortgagor
3. The mortgagor is allowed to dispose of the property
4. The mortgaged property when the principal obligation is due may be

alienated to guarantee payment
5. The mortgage should be recorded with the Registry of Deeds for a
mortgage to be established validly and to prejudice third persons,
Procedures in Entering into A Contract of Mortgage:

1. Implement the document of mortgage
2. Visit a notary public for the notarization of the document.
3. Settle the documentary stamp tax in the first five (5) days of the
following
month. The documentary stamp tax is a fraction of the price of the
mortgaged property.
4. Proceed to the Office of the Register of Deeds and to pay the required
registration fees. The government will require to update the payment of
real estate taxes on the property before payment of the registration fees.
After registration fees have been paid, mortgage deed will be annotated or
marked at the back of the title.
Effect of Invalidity of Mortgage on Principal Obligation

a. Principal obligation is enforceable
b. Deed of Mortgage shall remain as proof of the principal obligation
Effects of Mortgage
1. It creates a real right if:

a. The mortgagor sells the encumbered property, and it will
remain the the subject of the principal obligation secured by it;
b. The mortgagee has a right to depend on good faith what seems
to be indicated on the title certificate of the mortgagor of the
property offered as collateral. In the absence of whatsoever
to provoke doubt, and he is in no obligation to check outside
the certificate of title;
c. Until action for expropriation has ended, ownership overthe
property will be with the registered owner;
d. Banking institution must practice due diligence before entering
the contract of a mortgage;
e. If a person is the first mortgagee over a property which was
sold in an auction by the second mortgagee, the only right left
to him is to collect his mortgage credit from the purchaser
thereof during the sale conducted;
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f. In a suit to nullify a certificate of title, the mortgagee is an

indispensable party
2. Creates merely an encumbrance.
I.8 Chattel Mortgage (Arts. 2140-2141, NCC)
A chattel mortgage is a loan agreement in which an item of the movable

personal property acts as security for a loan.
According to Art, 2140, Civil Code, personal property is documented in the

Chattel Mortgage Registry as security in a chattel mortgage for the performance of an
obligation.
Chattel mortgages are governed primarily by Republic Act No. 1508, and the
provisions of the Civil Code on a pledge as far as they do not conflict with R.A. No.
1508.
Purpose of Chattel Mortgage Law
The purpose of chattel mortgage law is to support business and trade and give
incentives to the country's economic development.
The Essential Requisites of a Chattel Mortgage
1. It involves personal property;

2. It is instituted to secure the fulfillment of the principal obligation;
3. The mortgagor is wholly owner of the thing being mortgaged;
4. Persons representing the mortgage can dispose freely of the property
and authorized legally or in the absence thereof.
Note that recording the chattel mortgage with the Register of Deeds, while
necessary to bind 3rd persons, is not an essential requisite.
In the preparation and implementation of a chattel mortgage, the following

formal requirements are for compliance:
1. Extensive compliance with the form prescribed in Sec. 5 of Act No.

1508;
2. Signature to the chattel mortgage in the presence of at least 2

witnesses;
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3. Affidavit of good faith. An affidavit of good faith cites that the parties
jointly attest that the other mortgage is executed to secure the
obligation detailed in the terms after that. For no other purpose, that
same is a proper and valid obligation, and not entered into for fraud.
4. Certificate of the oath / Notarial acknowledgment;
5. Sufficiency of description
Kind of property subject of a chattel mortgage
As a general rule, the subject of a chattel mortgage can only be tangible

movable personal property like cars, jewelry, appliances, and furniture.
De Leon and De Leon, Jr. (2014) Law on Obligations and Contracts.Manila:

Rex Bookstore
De Leon, H. (2016) The law on sales, agency, and credit transactions. Manila:
Rex Bookstore
https://lawphil.net/?fbclid=IwAR0A_X9LCSFrImzRy4hvhEkzBHNj8F1ev868TG5fZKh1
X6iSJfRBkEMFt6A
https://divinalaw.com/checks-and-crosses/
https://philawgov.wikia.org/wiki/Contract
https://www.trans-lex.org/602450/_/philippines-republic-act-386-/
https://www.chanrobles.com/civilcodeofthephilippinesbook4.htm
http://www.bsp.gov.ph/regulations/regulations.asp?type=2&id=2055
https://definitions.uslegal.com/m/movables/
https://howtoexportimport.com/8-parties-involved-in-an-LC-Letter-of-Credit-LC-
423.aspx
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https://batasnatin.com/law-library/civil-law/obligations-and-contracts/822-real-estate-
mortgage-articles-2124-2131.html
https://www.investopedia.com/terms/c/chattelmortgage.asp
Let’s Check
Activity 1. Congratulations! You just finished learning about the legal aspects of
credit and collection relative to the credit and collection process. Let us check your
understanding of the lesson.
I. MULTIPLE CHOICE. Encircle the letter of your choice. (30pts.)
1. A juridical need to give, to do, or not to do.

a. Sale b. Contract c. Obligation
2. It is when two parties have a meeting of the minds, and one party
obligates himself concerning the other party, to give a thing or to render
some service.
a. Sale b. Contract c. Obligation d. Novation
3. The crime of estafa under the law is a form of swindling through:
a. Deceit b. Forgery c. Cheating d. Dishonesty
4. An act punishing drawing and issuance of a check with insufficient funds
of credit and other purposes.
a. B.P. No. 2 b. B.P. No. 22 c. B.P. No. 20
5. A juridical need to give, to do, or not to do.
6. It is the deliberate action of misinforming a person of usual discretion by
providing a wrong impression.
a. Deceit b. Fraud c. Negligence d. Delay
7. It is the change or modification of terms and conditions of an obligation
by another. It is either by; changing the object, conditions, or substituting
the person or subrogating a 3rd person in the creditor's rights.
8. A contract wherein one of the parties, the seller (vendor), obligates
himself to transfer possession and deliver a definitive thing to the other
party, known as the buyer (vendee), who obliges himself to pay the price
specified in money or its equivalent.
9. These are the elements of a contract:
a. Consent of the parties b. Object (subject matter of the contract
c. Cause (consideration) d. All of the above
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10. One is not an essential element of sale:

a. Consent of the parties b. A determinate subject matter
c. A definite, specific price in money or equivalent for the thing
d. period or time
11. A person who has the right to demand performance of the obligation.
a. Active Subject (Creditor/Obligee)
b. Passive Subject- (Debtor/Obligor)
12. A person who must perform the obligation.
a. Active Subject (Creditor/Obligee)
b. Passive Subject- (Debtor/Obligor)
13. It is the subject or object of whether giving, doing, or not doing something.
a. Prestation b. Cause c. Intention d. Contract
14. It is the tie that binds the parties to obligation.
a. Prestation b. Cause c. Consent d. Contract
15. The deliberate or intentional evasion by the debtor/obligor of the
fulfillment of his obligation.
a. Fraud b. Delay c. Negligence
d. Contravention of the tenor (condition) of the obligation
16. It is the exclusion of that diligence that is required by the type of contract
and relates to the circumstances of the person of the time and place.
17. It is a non-fulfillment of an obligation concerning time.
18. A contract entered into by a person whose consent has been obtained
by violence, mistake intimidation, or undue influence.
a. Voidable Contract b. Unenforceable Contract
c. Void/Inexistent Contract
19. A contract that cannot be enforced unless ratified and only the parties
can avail of the defense of enforceability and cannot be questioned by a
third person.
20. A contract that is not existing is invalid from the very beginning and
cannot be validated nor ratified by the passage of time.
21. It is a bill of exchange, written order by a seller instructing the buyer or its
agent (which could be a bank) to pay the amount at a specified time.
a. Letter of Credit b. Draft c. Bank Check
22. It is an engagement by a bank or other person made at the request of a
customer/that issuer will honor a draft of other demands for payment
upon compliance with the condition specified in the credit.
a. Letter of Credit b. Draft c. Bank Check
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23. It is a type of draft payable upon sight or presentation of the draft.

a. Sight draft b. Time draft c. Clean draft
24. A draft that allows time for payment, which must be from the date of the
said draft, is marked "accepted" by the drawee.
25. A draft with an order to pay without any accompanying documentation.
26. A document issued by a bank and binds itself to honor any drafts drawn
against the letter of credit. It cannot be modified or canceled without the
consent of all the parties, including the beneficiary or seller.
a. Irrevocable L/C
b. Revocable L/Cs
c. Confirmed L/C
d. Revolving L/C
e. Cumulative L/C
27. A letter of credit which may be modified or committed at any time before
any payment.
a. Irrevocable L/C
b. Revocable L/C
c. Confirmed L/C
d. Revolving L/C
e. Cumulative L/C
28. A confirmation made by a bank on the L/C issued by another bank having
the obligation that the draft issued against the letter of credit be honored
and paid.
a. Irrevocable L/C
b. Revocable L/C
c. Confirmed L/C
d. Revolving L/C
e. Cumulative L/C
29. A letter of credit which is valid or useful for several transactions over a
given period.
a. Irrevocable L/C
b. Revocable L/C
c. Confirmed L/C
d. Revolving L/C
e. Cumulative L/C
30. A letter of credit in which undrawn case amounts carry over to future
periods.
a. Irrevocable L/C
b. Revocable L/C
c. Confirmed L/C
d. Revolving L/C
e. Cumulative L/C
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Let’s Analyze
Activity 2. Getting acquainted with the essential terms in the study of different
pertinent laws relating to credit and collection is not enough; what matters is you should
also be able to remember essential articles, chapters, or sections of the laws.
Now, let’s see if your memory recall is functioning.
I. Give ten (10) kinds of Obligations

1. ____________________ 6. _______________________
2. ____________________ 7. _______________________
3. ____________________ 8. _______________________
4. ____________________ 9. _______________________
5. ____________________ 10. _______________________
In a Nutshell
Activity 3. The study of some pertinent laws related to the credit and collection process
is indeed beneficial to becoming a financial manager. It can be a very complex study
that requires more profound knowledge leading, which will lead your journey to the real
world.
1. Why is it important to study the laws discussed earlier?
2. How will you gain more profound knowledge of the pertinent laws relative to
the credit and collection process that can aid credit managers?
Your Turn
3.
4.
5.
6.
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TABLE OF CONTENTS
Title Page Page

ULOa: Explain financial measures to gauge sales-credit and
collection operation 89
Metalanguage 89
I. Financial Measures To Gauge Sales-Credit And Collection
Operation 90
I.1 Credit and Collection Measures 90
References 92
Activities 93
ULOb: Discuss social, cultural, and psychological aspects of credit
and collection 95
I. Social, Cultural and Psychological Aspects of Credit and
Collection 95
I.1 Filipino Traditional Practices 95
I.2 Filipino Buying/Borrowing Practices 96
References 97
Activities 98
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Phone: (082) 2275456 local 131
Requisites: None
Credit: 3

task.
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Turnitin submission In ensuring honesty and authenticity, all assessment
(if necessary) tasks are required to be submitted through Turnitin with
a maximum similarity index of 30% allowed. If your paper
goes beyond 30%, students will either opt to redo her/his
paper or explain in writing addressed to the course
coordinator the reasons for the similarity. If the paper has
reached a more than 30% similarity index, the student
may be called for disciplinary action in accordance with
the University's OPM on Intellectual and Academic
Honesty.
Please note that academic dishonesty such as cheating

and commissioning other students or people to complete
the task for you have severe punishments
(reprimand, warning, expulsion).
Penalties for Late An assessment item submitted after the designated time
Assignments/Assessments on the due date, without an approved extension of time,
will be decreased by 5% of the possible maximum score
for that assessment item for each day or part-day that the
assessment item is late.
However, if the late submission of the assessment

paper has a valid reason, a letter of explanation should
be submitted and approved by the course coordinator.
If necessary, you will also be required to present/attach
evidence.
Return of Assignments/ Assessment tasks will be returned to you two (2) weeks
Assessments after the submission and returned by email or via the
Blackboard portal.
For group assessment tasks, the professor will require

some or a few students for online or virtual sessions to
ask clarificatory questions to validate the originality of the
assessment task submitted and to ensure that all the
group members are involved.
Assignment Resubmission You should request in writing addressed to the professor

his/her intention to resubmit an assessment task. The
resubmission is premised on the student’s failure to
comply with the similarity index and other reasonable
grounds such as academic literacy standards or other
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Re-marking of Assessment You should request in writing addressed to the professor
Papers and Appeal your intention to appeal or contest the score given to an
assessment task. The letter should explicitly explain the
reasons/points to contest the grade. The program
coordinator shall communicate with the students on the
approval and disapproval of the request.
If the professor disapproves, you can elevate your case

to the program head or the dean with the original letter of
request. The final decision will
come from the dean of the college.
Grading System All culled from BlackBoard sessions and traditional
contact

Final exam – 40%
Submission of the final grades shall follow the usual

University system and procedures.
Preferred Referencing Style Harvard Referencing Style
Student Communication You are required to create a umindanao email account,

a requirement to access the BlackBoard portal. Then,
the professor shall enroll the students to access the
materials and resources of the course. All communication
formats: chat, submission of assessment tasks, requests,
etc. shall be through the portal and other university
You can also meet the professor in person through the

scheduled face to face sessions to raise your issues
and concerns.
For students who have not created their student email,

please contact the professor or program head.
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Students with Special Needs Students with special needs shall communicate with the
course coordinator about the nature of his or her particular
needs. Depending on the nature of the need, the course
coordinator, with the program coordinator's approval, may
provide alternative assessment tasks or extension of the
deadline for submission of assessment tasks. However, the
alternative assessment tasks should still be in the service of
achieving the desired course learning outcomes.
Phone: 09090618789
Hotline no.: 09513766681
Phone: 09212122846
CC’s Voice: Hello, would-be finance manager! Welcome to this course FM 222: Credit and
Collection. By now, it is with high confidence that you already made the
career decision to become a finance manager very enthusiastic about
graduating.
CO Mainly, before becoming a successful finance manager, you have to

obtain a comprehensive knowledge of financial measures to gauge sales-
credit and collection operation and social, cultural, and psychological
aspects of credit and collection, which are significant course outcomes
(CO) of this subject. When we discuss these topics, assessing the learning
outcomes or competencies and financial performance of managers is
firmly attached. Thus, in this course, you are expected to demonstrate in-
depth knowledge of these two (2) topics.
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Week 8-9: Unit Learning Outcomes (ULO): At the end of the unit, it is expected
from you to:
a. Explain financial measures to gauge sales-credit and collection

operation;
b. Discuss the social, cultural, and psychological aspects of credit and
collection.
Big Picture in Focus: ULOa: Explain financial measures to

gauge sales-credit and collection operation
Metalanguage
In this section, the essential terms relevant to the study of financial measures to
gauge sales-credit of credit and collection is to demonstrate ULOa (Unit Learning
Outcome). It will be operationally defined to establish a typical frame of reference for
how the contents work in your chosen field or career. You will encounter these terms
as we go through the study of credit and collection.
To perform the aforesaid big picture ULO (unit learning outcomes) for the two (2)
weeks of the course, you need to fully understand the following essential knowledge
laid down in the succeeding pages. Please note that you are not limited to refer to these
resources exclusively. Thus, you are expected to utilize other books, research articles,
and other available resources in the university's library, e.g., ebrary,
Definition of Terminologies
1. Financial Performance. It is a subjective measure of how well a business

can use assets from its primary form of business and generate revenues.
It is also a measure of a business overall financial health over a period.
2. Sales. It is a transaction between two or more parties in which the buyer
receives tangible or intangible goods, services, or assets in exchange for
money.
3. Past Due. It means overdue.
4. Index. It is an indicator, gauge, or measure of something.
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5. Receivables. Accounts receivables which are debts owed to a company by

its customers for goods or services that have been delivered or consumed
but not yet paid.
Essential Knowledge
I. Financial Measures To Gauge Sales-Credit And Collection Operation
The sales-credit and collection operation comprises not only assessing the effects of
credit extension and collection efforts. One must take into account that maximizing
sales through credit helps in the decision to approve or not approve credit applications
and enforce prompt payment of accounts. It means that the company should consider
the issue of not losing sales; or, to promote new credit sales in coordination with credit
and collection operation.
In this way, credit managers plan and direct the credit, collection, and accounts
receivable functions to increase sales and profits. While following these objectives,
they use their decision-making capabilities to promote growth, improve cash inflows,
and enhance the quality of work performed by credit, collections, and accounts
receivable personnel.
Making use of effective measures of performance is vital in this process. For

years credit and finance professionals, along with academic researchers, have been
searching for accurately measuring performance in credit, collections, and accounts
receivable. Most of the measures that are presently in use have value. Sadly, they also
have defects.
Further, the challenge is to understand the individual measures and use them
properly. Credit managers should have a clear understanding of the importance of
using the necessary time and effort to comprehend the different measures of
performance and implement the appropriate steps to meet the needs of their business.
I.1 Credit and Collection Measures
1. Collection Effectiveness Index (CEI)

Definition: This percentage expresses the effectiveness of collection efforts over
time: the more effective the collection effort, the closer to 100 percent. It is a
measure of the quality of the collection of receivables and not of time.
Formula:
Beginning Receivables + (Credit Sales/N*) - Ending Total Receivables
Beginning Receivables + (Credit Sales/N*) - Ending Current Receivables X 100
*N = Number of Months or Days

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2. Days Sales Outstanding (DSO)

Definition: This expresses the (aggregate) average time, in days, that
receivables are outstanding. It helps determine if the change in receivables is a
change in sales or another factor, like a change in sales terms. An analyst
compares the days' sales outstanding with credit terms as an indication of the
company manages its receivables efficiently.
Formula:
Ending Total Receivables x Number of Days in Period Analyzed
Credit Sales for Period Analyzed
3. Days Average Collection Rate

Definition: This figure expresses, in days, the average time from the invoice date
to the date paid.
Formula:
Total Flow of Funds
Total Funds Applied
4. Prior Month's Past Due Collected

Definition: This percentage expresses the amount collected in the current month
from the previous month's past due amount.
Formula:
Current Months Past Due Age Categories
Beginning Receivables of Prior Month
5. Percent Over 61 Days -- or Percent of Any Age Category

Definition: This figure expresses the percentage of Total Receivables that is 61
Days or more past due.
Formula:
Sum of the 61 Days and Older Categories
Total Receivables
6. Bad Debt to Sales

Definition: This expresses the percentage of credit sales written off to
bad debt. A lower percentage indicates that effective credit policies and
procedures are employed.
Formula:
Bad Debt Net of Recoveries
Credit Sales
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7. Active Customer Accounts per Credit and Collection Employee (Total Department)
Definition: This represents the total number of active accounts per
employee per department. Generally, the higher the number of accounts per
employees, the more efficient the use of technology and people.
(This is a departmental measure.)
Formula:
Number of Active Customer Accounts
Number of Total Department Employees
8. Active Customer Accounts per Credit Representative or Collector

Definition: This represents the total number of active accounts for an
employee in the Collection Department. Generally, the higher the number of
accounts per employee, the more efficient the use of technology and people.
(This is an individual measure.)
Formula:
Number of Active Customer Accounts
Number of Total Credit Representatives or Collectors
ASIN : 0130827835
Steven M. Bragg (2017) Credit & collection guidebook Centennial, Colorado:

https://www.investopedia.com/terms/f/financialperformance.asp
https://www.investopedia.com/terms/s/sale.asp
https://www.merriam-webster.com/dictionary/past%20due
https://www.investopedia.com/terms/r/receivables.asp
Rob Olsen, CCE from https://www.crfonline.org/orc/ca/ca-7.html
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Let’s Check
Activity 1. Congratulations! You just finished learning about the—financial measures

to gauge sales-credit. Let us check your understanding of the lesson.
I. MATCHING TYPE (10 pts.)
INSTRUCTIONS: Match the ff. Statements concerning financial measures to gauge

sales-credit and collection operation by answering in letters:
1. This percentage expresses the effectiveness of collection efforts over some

time.
2. It expresses the (aggregate) average time, in days, that receivables are
outstanding.
3. This figure expresses, in days, the average time from the invoice date to the
date paid.
4. This percentage expresses the amount collected in the current month from the
previous month's past due amount.
5. This figure expresses the percentage of total receivables that are 61 Days or
more past due.
6. It expresses the percentage of credit sales written off to bad debt.
7. It represents the total number of active accounts per employee per department.
8. It represents the total number of active accounts for an employee in the
Collection Department.
9. It is a subjective measure of how well a business can use assets from its primary
form of business and generate revenues.
10. It is an indicator, gauge, or measure of something.
a. Financial Performance
b. Index
c. Collection Effectiveness Index (CEI)
d. Days Average Collection Rate
e. Percent Over 61 Days
f. Days Sales Outstanding (DSO)

g. Bad Debt to Sales
h. Prior Month's Past Due Collected
i. Active Customer Accounts per Credit and Collection Employee
j. Active Customer Accounts per Credit Representative or Collector
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Activity 2. Getting acquainted with the necessary knowledge in the study of financial
measures to gauge sales-credit and collection operation are not enough; what also
matters is you should also be able to remember important financial measures and
ratios.
Now, let's see if your memory recall is functioning. Please enumerate the
following:
I. Give five (5) Credit and Collection Measures with corresponding formulas:
1. ________________________________________________________________
2. ________________________________________________________________
3. ________________________________________________________________
4. ________________________________________________________________
5. ________________________________________________________________
In a Nutshell
Activity 3. The study of financial measures to gauge sales-credit and collection

operation is valuable to becoming a financial manager. With this supplementary
knowledge of this lesson, you should be able to relate to your customers' needs for a
better business relationship.
activities that you have done, please feel free to write your arguments or lessons
1. How can the knowledge of the topics learn to aid in dealings with customers?
2. Can a more in-depth understanding of the financial measures to gauge sales-

credit related aid to the success of a credit manager in his professional career?
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Your Turn
3.
4.
5.
6.
7.
Big Picture in Focus: ULOb: Discuss social, cultural, and

psychological aspects of credit and collection.
Essential Knowledge
I. Social, Cultural and Psychological Aspects of Credit and Collection
I.1 Filipino Traditional Practices
1. Five-Six Credit. It is so-called because of how they lend, five-six (5-6)

moneylenders charge a nominal interest rate of 20 percent over an agreed time.
A person who borrows 5 pesos from a 5-6 moneylender over one week repays
6 pesos, including 1-peso interest.
2. Hiya Syndrome. In Philippine culture, hiya is generally described and

translated to mean "shyness" or "shame." The feeling is similar to
embarrassment and avoided at all costs.
3. Utang Na Loob (Visayan: utang kabubut-un) It is a Filipino cultural trait

which, when translated literally, means "a debt of one's inner self (loob)." It is
also often translated as a "debt of gratitude." The essence of utang na loob is
an obligation to repay a person who has done one a favor appropriately.
4. Pakikisama. It is the concept of a smooth relationship and being non-

confrontational and vital for Philippine business people to conduct negotiations
without conflict. It is related to saving face—the best advice we can give to avoid
conflict in the Philippine business.
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5. Bahala Na. It is a socio-cultural value in the Philippines and a phrasing in

the Filipino language that is either said to be an expression of a fatalistic attitude
towards life or as a determined one in a challenging situation where things are
risky uncertain.
6. The Compadre System. It is also called the "Extended Family" is the basis
of Filipino social structure. When they say "Extended Family," that doesn't mean
that there is a blood relationship or even a marital relationship, some "family
members" are chosen, rather than being truly related.
7. Mañana Habit. It is postponing to do something until tomorrow, which things

you can do today.
8. Ningas Cogon. The phrase "ningas cogon" is a Filipino idiom that describes
someone who is only doing well, in whatever it is that they're doing, during the
beginning. ... It figuratively means that the individual cannot maintain the quality
of his/her work any better than a Cogon grass maintains its burn (ningas).
I.2 Filipino Buying/Borrowing Practices
1. Hulugan, Paiyakan, or Salary Deduction. The practice of buying on

Installment with payment in a specified time.
2. Tawad Practice. The tendency to asking a low amount.
3. Dagdag/Bawas Practice. The practice of asking an amount a little more or a

little less by adding or subtracting from the regular price.
4. Suki system. The method of buying goods, obtaining services, or loans

from a favorite seller/creditor.
5. The Pasiklab Syndrome. The tendency to imitate the habits and practices
of one’s neighbors, friends, or relatives.
6. Using Shame or Hiya as a tool of collection. Loss of face or shame

(hiya) by embarrassing, humiliating, or insulting the person.
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Fidelito R. Soriano. 2019 edition. Manila, Philippines: IC Enterprises & Co.

2019BFI Sales, agency and credit transactions: law and application: for
business and law students: 346.072 So6s 2019
ASIN 0130827835
Steven M. Bragg (2017) Credit & collection guidebook Centennial, Colorado:

Mari Kondo is an associate professor at the Asian Institute of Management

from:https://kyotoreview.org/issue-4/the-bombay-5-6-last-resource-
informalfinanciers-for-philippine-micro-enterprises/
https://www.veem.com/library/how-hiya-can-make-or-break-your-business-in-the-
philippines/
https://www.google.com/search?q=bahala+na+attitude&oq=bahala+na&aqs=chrome.
3.69i57j0l4j46j0l2.5727j0j4&sourceid=chrome&ie=UTF-8
https://en.wikipedia.org/wiki/Bahala_na
Bob Martin is the Publisher & Editor in Chief of the Live in the Philippines Web
Magazine from:
https://liveinthephilippines.com/sir-the-compadre-system/
https://www.google.com/search?q=ningas+cogon+meaning&oq=.+++Ningas+Cogon
&aqs=chrome.2.69i57j0l7.10094j0j4&sourceid=chrome&ie=UTF-8
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Let’s Check
Activity 1. Congratulations! You just finished learning about the social, cultural, and
psychological aspects of credit and collection Let us check your understanding of the
lesson.
I. MATCHING TYPE
A. INSTRUCTIONS: Match the ff. statements with the Filipino Traditional Practices
Related to Sales-Credit and Collection by answering in letters:
1. It is defined and translated to mean "shyness" or "shame."

2. It is lending charging a nominal interest rate of 20 % over an agreed time.
3. It is the concept of a smooth relationship and being non-confrontational.
4. It is a socio-cultural value in the Philippines and a phrasing in the Filipino
language that is either said to be an expression of a fatalistic attitude towards life
or
as a determined one in a challenging situation where things are risky uncertain.
5. It is also called the “Extended Family” is the basis of Filipino social structure.
6. It is a Filipino idiom that describes someone who is doing well, in whatever it is
that they’re doing, during the beginning.
7. Postponing until tomorrow the things one can do today.
8. It is a Filipino cultural trait which, when translated literally, means "a debt of one's
inner self (loob)”
A. Pakikisama
B. Five-Six Credit
C. Hiya Syndrome
D. Compadre System
E. Bahala Na
F. Utang Na Loob
G. Mañana Habit
H. Ningas cogon
B. INSTRUCTIONS: Match the ff. statements with the Filipino Buying (Credit)
Practices
by answering in letters:
1. The practice of buying on installment and paying for a long time.

2. The tendency to asking an unfair amount.
3. The practice of requesting a little more or a little less by adding or subtracting from
the regular amount.
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4. The practice of buying goods, obtaining services, or loans from a favorite

seller/creditor.
5. The tendency to imitate the habits and practices of one's neighbors, friends, or
relatives.
6. The loss of face or shame (hiya) by embarrassing the person, humiliating the person,
or insulting the person.
A. Using Shame or Hiya as a tool of collection

B. The Pasiklab Syndrome
C. Suki system
D. Dagdag/Bawas Practice
E. Tawad Practice
F. Hulugan, Paiyakan of Salary Deduction
Activity 2. Getting acquainted with the necessary knowledge in the study of social,
cultural, and psychological aspects of credit and collection is not enough; what also
matters is you should also be able to remember the social, cultural and psychological
aspects of Credit and Collection
Now, let's see if your memory recall is functioning. Please explain.
I. Is it important to know the Filipino social, cultural and psychological practices in

relation to Credit and Collection?
________________________________________________________________
________________________________________________________________
_________________________________________________________________
_________________________________________________________________
In a Nutshell
Activity 3. The study of social, cultural, and psychological aspects of credit and
collection is indeed valuable to becoming a financial manager. With this supplementary
knowledge of this lesson, you should be able to relate to your customers beliefs and
traditional practices for a better business relationship.
99
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1. How can the knowledge of the topics you have learned to aid in dealings with
customers?
2. Can a more in-depth understanding of the social, cultural, and psychological

aspects of credit and collection helps to the credit manager's success in his
professional career?
Your Turn
3.
4.
5.
6.
7.
8.
100

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UNIVERSITY OF MINDANAO

College of Business Administration Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning

Course/Subject: FM 222 – Credit and Collection

Name of Teacher: Maria Julieta R. Torres

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR

Title Page Page

Course Outline: FM 222 – Credit and Collection

Professor: Maria Julieta R. Torres. CPA, MBA,

Course Outline Policy

Areas of Concern Details

Turnitin submission In order to ensure honesty and authenticity, all

Please note that academic dishonesty such as

However, if the late submission of the

For group assessment tasks, the professor will

Assignment Resubmission You should request in writing addressed to the

If the professor disapproves, you can elevate

All culled from on-campus/onsite sessions (TBA):

Submission of the final grades shall follow

Student Communication You are required to create a umindanao email

You can also meet the professor in person

For students who have not created their student

Course Information – see/download course syllabus in the BlackBoard LMS.

CO Mainly, before becoming a successful finance manager, you have to deal

Let’s get started!

Big Picture in Focus: ULOa: Explain credit collection management

1. Credit Collection Management. It is a set of typical business applications that

I. Overview of Credit and Collection Management

Credit & Collections Management (CCM), as defined in a metalanguage, is a set

I.1. Six (6) Key Functional Areas of CCM:

1. Credit Facilitation. It comprises credit scoring, credit application

I.2. Why Use CCM?

I.3. Who Needs CCM?

I.4. Benefits of CCM

__________ 1. It is a set of common business applications covering a company's

__________ 6 It is the lending of money by one or more individuals, organizations,

1. Explain the importance of Credit Collection Management to a business entity.

2. If Credit Collection Management is vital to a business entity, explain its benefits to

Activity 3. The study of credit collection management is indeed an advantage to

1. What is the impact of Credit Collection Management to the credit collection

Big Picture in Focus: ULOb. Discuss the various types of credit,

II. How Credit Works

One of the means to a satisfactory credit is understanding credit reports and

III. Importance of Credit

There are two enormous disadvantages to AR.

2. Any amount in the company’s books of accounts is outstanding; there is a risk

At a glance, the solution is simple: not to extend credit to customers. If a customer

surely will go to your competitors. It creates credit management as a critical process. In

Likewise, it is easier said than done. Credit management is a relevant and

Steven M. Bragg (2017) Credit & Collection guidebook Centennial, Colorado:

Jim Akin, October 3, 2019. What is Credit? from

1. How does credit works?

2. How important is a credit to a business entity?

Activity 3. The study of credit collection is indeed an advantage to becoming a financial

Big Picture in Focus: ULOc: Analyze credit and collection policy,

I. The Credit Policy

What is a Credit Policy?

The following considerations should be taken into account in the preparation of

1. Objectives of establishing credit policies:

2. Key factors to consider in formulating credit and collection policy:

A restricted policy may have a shorter credit period, whereas a relaxed

The highest amount of credit a financial institution extends to a client is termed a

How Do Credit Limits Work?