Bicol University

College of Business, Economics, and Management

Sagpon, Daraga, Albay

Baluyo, Archie P.
BSBA Financial Management – IIIA
Credit and Collection

I had had this notion that lending/credit is good because money lent returns with
interest but was unaware of the risks it entails. The discussion provided me with
enlightenment on the relevant topics. I had understood and appreciated the significance
of credit and its management.
Extending credit to customers is indeed a way to boost the sales of a business, but
it is not as simple as that. I learned that before approval of credit to a client, it has to
undergo a process requiring thorough examination and evaluation of the application. It is
usually more common in medium and large businesses and companies. Smaller
businesses also practice credit application but not to the extent of what large corporations
do. Nevertheless, the significance of the process weighs as much as the others on their
respective context. The higher the credit value relative to company size, the more critical
it becomes. After all, this is a way of managing credit risk. The best way to minimize it is
to cut them off from the source and not let them get further. It is at the creditor's discretion
in choosing and trusting creditworthy individuals, corporations, and the government
(though I think one cannot say no to the government). With a reinforcement of a well-
crafted credit policy that works for the company and the clients.
Meanwhile, credit rating is not that new to me. I had encountered it in online video
materials and some finance textbooks. However, they were based on foreign land. I used
to associate it with a credit card. The more diligent payor an entity is the better the credit
rating.
On the contrary, a credit report could be made in favor of an entity even though its
record says otherwise. It was mentioned that we might have to manage such scenarios
in the future. One way I have thought of is to request another credit report from a different
credit bureau but suffering additional expense. Another way is to diligently track the record
of how the applicant does business with other businesses, it is cost-effective but needs
to exert extra effort.
To sum it up, credit is a big part of a business and so does the collection. It is one
of the deciding factors of a business's profitability. Based on the liquidity and profitability
trade-off principle. Having good company credit and collection could help meet short-term
obligations by establishing an effective credit policy to help manage the cash gap of the
company. Consequently, it is useful for companies that opted for profitability over liquidity.
It is better not to have an actual sale than to have one but not get paid. The latter suffer
loss. It emphasizes the importance of credit risk management.