Importance of Credit

Credit is a very powerful and excellent device in the economy that accommodates transactions
smoothly and effectively without the use of money in the time of transaction. Credit is considers
to be the “Life-Blood of Business”. A business firm which sells goods in credit confers benefits to
its customers just as it helps the continued operation of its business. Through credit, an increase
in the volume of sales is expected by the firm.

Credit connects our business and financial enterprises in an invisible but mighty chain.
Unfortunately, failure in one sector of the economy generally spreads rapidly to others until they
engulf the whole economy.

It must be emphasized that credit represents the vey force that sustains and aids business in the
attainment of its objectives. This is apparent, if not obvious, to say the least. It is only through
credit that business transactions in large volume become possible. Credit not only finances trade
and commerce in almost every conceivable way, but it also provides the needs of seasonal
business.

Basic Elements of Credit

Based from the definition of credit, the following elements were present:
1. It is the ability to obtain a thing of value — A thing of value may mean cash form of
credit, merchandise or even services.
2. A Promise to pay --- the borrower (Debtor) makes a promise to pay the lender (Creditor).
A promise to pay is valid if it is through writing and acknowledge by both parties wherein
the amount of the loan, interest and maturity is specified.
3. Definite Sum of Money --- Credit involves the exact amount of money loaned or extended
by the creditor to the debtor.
4. Payable on Demand or Future Time --- Credit has specific date when to settle the
obligation. If none, it is considered to be payable on demand or anytime the creditor
demands for payment.

Characteristics of Credit
1. It is a bi-partite or two-party contract. Two parties are involved in the credit agreement,
the debtor and the creditor. The debtor is the party requesting for the loan while the party
extending the loan is the creditor.
2. It is elastic. The amount of credit may be increased or decreased in value by the
creditor, this usually depends on the value of the collateral pledge by the debtor.
3. The Presence of Trust and Faith. The creditor rely more on the debtor’s ability and
willingness to pay his debt. This is also the risk factor in credit particularly when the debtor
was not able to fulfill his obligation.
4. It involves futurity. Credit has its maturity for the settlement of obligation.