GROUP 1 REPORTING

I. CREDIT QUALITIES TO INVESTIGATE

A. CREDIT INFORMATIONS (For individuals)

1. INCOME
⮚ The amount of income should be ascertained, its regularity of receipt
established, and the probability of its continuance estimated.
⮚ During the investigation, the specific facts sought should be simply the amount
and source of the income.

2. EMPLOYMENT
⮚ Should seek the name of the employer, the type of business, and the position
occupied by the subject of inquiry.
⮚ The record should be established for at least a five-year period.

3. PAYMENT RECORD
⮚ Most important factor revealed by the investigation
⮚ Shows the payment habits.
⮚ The investigation should seek facts as to the type or types of account involved,
the amount currently owed, the amount past due, and the highest recent
credit.

- The manner of payment should be stated specifically. The date of the

experience should also be established.

4. RESIDENCE
⮚ The information should show the length of time at that location and, if less than
five years in duration, should reveal the previous residence.
⮚ Should determine the status of the credit applicant as owner or tenant of the
property.

5. MARITAL STATUS
⮚ Significant quality in most consumer credit transactions.
⮚ Married, single, widow, widower or separated.
⮚ The happiness or unhappiness associated with the status is also important to
consider.

6. AGE
⮚ The investigation should establish that legal capacity to contract is present.
Some lenders do not lend to individuals under 25 years of age nor to
individuals over 65.
7. REFERENCES AND REPUTATION
⮚ The investigation also may seek information about the reputation of the credit
applicant and to secure information adequate for evaluating the credit data
reported by references.
⮚ References and reputation + payment record Investigation of character.

8. RESERVE ASSETS
⮚ Additional surety which both debtor and creditor hope there will not be a need to
use.
⮚ The investigation of reserve assets may be essential with aged customers who
are living upon a pension or income from investments.

9. EQUITY IN PURCHASE
⮚ An additional credit quality that is a major concern especially under the
installment method of consumer processing.
⮚ The proportion of initial equity or ownership may reflect the attitude of the
buyer. toward the obligation.

10. COLLATERAL
⮚ Collateral in the form of some tangible asset owned by the individual and offered
as additional security to the loaning institution.

B. CREDIT FACTORS (FOR PARTNERSHIP, CORPORATIONS, AND SIMILAR

ENTITIES:

1. Antecedent history of the company ●

Date of inception of the business.
● Form of organization and changes, if any.
● Record of mergers or consolidations
● Summary of the company's past operating record.

2. Experience and ability of the company's management

● Ages of the executive
● Their experience
● Their outside business affiliations
● Opinions with respect to the integrity of the management
● Outside Financial Interest of the Officers
● Understudies of the principals
● Life insurance on the lives of the executives

3. Exact nature of the company's operations ●

Knowledge of the products handled
● Extent or nature of fabrication of its products
● Selling methods employed
● Economic need for its products
● Territory and customers served
● Unusual hazards of business
 ● Buying and selling terms Sources of raw materials ● Proximity to labor supply,
materials, and markets:
● Labor situation
● Importance of company in its industry

4. The company's present financial condition and the

condition that has existed for the past three or five
years including a review or knowledge of:
● Balance sheets, operating statements, and supplementary statements and
schedules.
● Contingent liabilities and Insurance coverage of insurable risks.

5. Condition of the company's plant ● Its location.

● Condition of properties and machineries.
● Plant layout Work-flow.
● Productivity; low-cost or marginal.

6. Experience and opinion of banks of accounts and/or other banks regarding

the company
● Account experience and Loan experience.
● General comments regarding:
1. Management
2. Financial condition
3. Prospects
4. Method of operation

7. Trade opinions and ledger experience of the concerns from which the
company has been purchasing
● Manner of paying its bills
● Present outstanding bills and lines, if any.

8. Trade competitors' opinions, if advisable.

9.Condition both within and without the industry

● General conditions
● Conditions within the industry

10. Extent and nature of government competition and regulation, and effect of
present or prospective legislation.

II. CREDIT INVESTIGATION PROCEDURES AND REPORTS

In the field of Investigation:

1. A habit of before going out to the field of investigation, check internal records
thoroughly for any information on the subject of the investigation
❖ Internal Records to be checked:
a. Credit files, court cases records, current accounts records, signature
control records, central liability files, etc.
 b. Check with the "Credit Index" at the office of the Association of Bank
Credit Investigators for possible pertinent credit and personal
references.
2. During investigation procedures, you should ask for references from banks,
commercial firms and from individuals who happened to have come across the names
of the subject of investigation.
⮚ These references are a good source for possible leads to pertinent information
and needed facts about the subjects of investigation.
3. If any derogatory information is received, follow it through immediately and
thoroughly. Get confirmation or denial of the report as much as possible.
4. During the investigation procedures, an analytical mind should be focused on
fundamental matters about the subject and endeavor concerned in establishing
factual results through a rigid scrutiny of events as the information are gathered.
5.When reporting the bank or company's experience in credit dealings of the subject
of investigation, credit investigator should not settle with the standard statement
"Experience satisfactory."
⮚ Instead, investigator should obtain more meaningful insight on the customers
credit worthiness by asking pertinent questions on the credit relationship of the
customer with banks/companies.
6. On Insurance Companies
A. Credit Investigation procedure:
a. Check the credit standing and financial ability of the insurance company
with the office of the Insurance Commissioner.
b. Check also with three or four local insurance companies with whom the
said insurance company maintains reinsurance treaty agreement
relationship.
c. Consult the list of insurance companies who are blacklisted by the office
of the sheriff of the cities and the Department of Justice of the
Philippines.
B. Credit Investigation Report:
a. Should be supplemented with a condensed audited financial statement of
the insurance company examined by the Office of the Insurance
Commissioner.
b. Obtain information about its Total Assets, Total Ledger Assets, Total
Admitted Assets, Total Liabilities, Net Worth, Gross Income and Net
Income for the Period.
7. For individuals and Commercial Firms:
A. Get the financial statements of individual or commercial firms other that
insurance companies from outside sources and obtained its Total Current
Assets, Total Assets, Total Liabilities, Net Worth, Gross Income or Gross Income
on Sales and Net Profit.
8. After checking all the information stated above in reply to the inquiry of the subject
of investigation: Obtain a statement from the current banker/s or credit
companies, whether a credit relationship may be recommended by them and under
what terms such as credit limit, terms, security, etc.
9. In case of re-checks, the investigation requires greater attention to details
including
 a. Obtaining explanation on Reduction of Line, Cancellation of Line, Increase in
Line, Increase in Collateral Value, Decrease in Collateral Value and Added
Guarantors.
10. Any change in previous terms of relationship should be satisfactorily
explained. The investigator's inquiring mind and respect for details will be evident
by his handling of these matters. For this reason, only more skilled investigators
are assigned.

III. Preparation of Report

1. In preparing the Credit Investigation Report and other investigation reports,

indicate the name of or quote the person from whom the information was obtained.
Use quotation marks in narrating the information gathered.

2.Information gathered from banks and in trade should be arranged in the following
order:
a. Banks who reported current dealings should be reported ahead of those
banks who reported past dealings, followed by those banks who reported
no dealings.
b. Commercial firms in trade who reported current dealings should be
reported ahead of those who reported past dealings, followed by those
who reported no dealings.

3. In conducting credit checking on a business firm together with the name/s of the
firm's principal/s. The credit investigation report should be prepared in a manner
that information about the firm should be reported ahead of this information about
the principal/s in the order indicated in No. 2 above.

4. Every report should indicate (by way of a footnote) all relationship, if any, the
subject of inquiry has with this bank; the origin and the basis of investigation
conducted; and, in the case of other reports with a different nature of investigation,
such reports should indicate likewise, footnote disclosing pertinent data.

5. In reporting, use credit language for proper tone. Avoid high sounding English; it
has no place in the Credit Report. Be brief but complete.

6. Bear in mind always: Your credit report is an important basis of a credit decision,
either here or abroad.
GROUP 2 REPORTING

SOURCES OF CREDIT INFORMATION

Loans are sanctioned based on the loan application. Loan cases are not processed merely
by observing the loan amount or the purposes mentioned in the loan application form. Rather,
bank examines whether the purposes of loan are acceptable to banks.

Internal Sources of Credit Information

 1. Application
Bankers may get information from the client by analyzing the filled-in credit
application form. It will be the first source of information for a new client.

2. Interview
A banker can also get information by interviewing or directly contacting the client and
asking them the reasons for seeking credit, reviewing the present financial position, types and
nature of the collateral, etc., that are proposed to be offered.

3. Financial Statements
Any business firm must submit its financial statements to take a bank loan. From the
financial statements, banks can get information regarding the trend of the firm’s financial
position.

4. Bank’s Own Record

If the client had previous transactions with the bank, ban tan g information from the
documents/ records kept in the bank. The related information may be the practice of
repaying the loan, the amount of deposit in the bank, the nature of banking activities, etc.

External Sources of Credit Information

Banks can also collect various information from external sources. These sources are:

1. Government or regulatory authorities

Government sets and establishes rules and regulations for controlling the country’s
business activities. Records of such offices of the government may serve as the source of
required information:

2. Income tax office

If a bank wants information regarding the tax payment by the potential borrower, it
may seek information from the income tax. In such returns amount, sources of income &
expenditures are shown to assess the tax liability of the particular assessee(s).

3. Government Gazette
Banks can get periodic information if any government contact from the published
gazette by government.

4. Records from the other government office

Bank can also get other information regarding the potential borrower from relevant
other government offices. The loan applicant had to move around for business connections.

5. Registrar of joint-stock companies

Companies must get permission from the registrar of joint-stock companies to
commence. Apart from this, public limited companies must also submit their annual financial
statements duly audited to the registrar of joint-stock companies. The bank may seek
information about the client from the joint-stock registrar’s office if necessary.

Other Sources

1. Inspection
Bank may send one of its officials to visit physically and inspect the potential
borrower’s working place or factory. By inspecting and physically investigating, bankers may
collect necessary client information.
 2. Market report
Banks may analyze the market potentiality of the client’s business from the report of
the stock. The trends of share prices/dividend payouts, etc., help banks know the success of
the borrower’s venture, which ultimately ensures repayment of the loan and interest.

3. Credit information bureau

CIB preserves the loan information of large business institutions or people who
frequently approach loans. CIB can be another source of information for banks.

4. Newspaper
Bank may carefully analyze newspaper reports on the commercial/ financial page to
find information regarding the potential borrower. Sometimes, exceptionally strong/ weak
information regarding the clients may be published in newspapers. This information may
affect the creditworthiness of the client positively or negatively.

5. Audit firm
Audit firms can also provide necessary information to the bank if that auditor audited
the potential borrower’s financial statements.

6. Other bank’s report

Banks may collect information from other banks where the potential borrower
maintained transactions earlier. From these previous banks of a potential borrower, the bank
can get information regarding the track record of the Ioan repayment practice of the borrower.

I. REAL AND PERSONAL PROPERTY APPRAISAL

Appraisal is a professional examination of real or personal property to determine its market

value.

Real property is land and any property attached directly to it. It is any subset of land
that has been improved through legal human actions. In land law, where the term is most
commonly used, real property also entails the right of use, control and disposition of the land
and its attached objects. Real properties can include buildings, ponds, canals, roads and
machinery, among other things.

Personal property is a type of property which can include any asset other than real
estate. The distinguishing factor between personal property and real estate is that personal
property is movable; that is, the asset is not fixed permanently to one location as with
real property such as land or buildings. Examples of personal property include vehicles,
furniture, boats, and collectibles.

Appraising Real Property

Appraisal is conducted by a real estate appraiser, who is specifically trained to
estimate the market value of real estate, and is licensed to do so. When buying a house or
selling a house, a real estate appraisal is a useful tool, but it is also used by mortgage lenders to
determine whether the property has a high enough market.

Real Estate Appraiser

A real estate appraiser estimates the value of a single building or piece of land. His or her
job is similar to that of an assessor, who instead considers the values of several
properties at once. An appraiser may specialize in either commercial or residential property. He
or she will be called upon to appraise a property before it is sold, mortgaged, taxed, insured, or
developed. After visiting a site and observing its characteristics and the characteristics of the
location, the appraiser analyzes the property compared to comparable homes.
Personal Property Appraising
Personal property appraisers’ value personal items of all sorts: antiques of any kind, glass,
furniture, pottery, primitives, metals – everything, in fact, except real estate and buildings. In
addition to traditional antiques, fine arts and collectible items, appraisers are also needed to
evaluate vehicles of all types, heavy equipment, even furnishings for entire businesses.

The list of personal property is virtually endless, and the field is in need of thousands of
appraisers with basic knowledge who can specialize in one, two or more of the hundreds of
special areas.

VALUE OF PROPERTY

• There are many values pertaining to the property such as follows:

• CASH VALUE — refers to the price of the property in an all—out sale.

• BOOK VALUE — is the original cost of an asset or property less accrued depreciation.
• LOAN VALUE — is the maximum level of value against a property that may be mortgaged
to secure payment of the loan. A loan-to—value rate is usually fixed by the lending
institution or bank.
• RENTAL VALUE - refers to the price fixed for the right to use a certain property
for a specified period of time.
• INSURANCE VALUE — is the cost of insurance coverage of the building or improvement
to cover its loss due to earthquake, fire, or another calamity.
• LIQUIDATION VALUE ~ corporations under receivership may sell its asset as Liquidation
Value.
• CONDEMNATION VALUE — is the estimated value of a property that is the object of
expropriation for public use. Just Compensation is the fair and full equivalent, in money,
for the loss sustained
• ASSESSED VALUE — is the value of land and/or improvements for ad valorem tax
purposes. The assessed value is multiplied by the tax rate to produce the amount of tax
due for payment. It is synonymous to Taxable Value.
• ZONAL VALUE – is the fair market value of land in a specific zone or area established.
• By the Bureau of Internal Revenue.
• SALVAGE VALUE – is the amount that may be recovered minus cost of disposal when the
assets will be retired or disposed of at a future time.
• SCRAP VALUE — is the value of a depreciated building, or the materials recovered from
it.
• PLOTTAGE VALUE — when one or more parcels are consolidated so that its increment in
value as a whole is much more than the total sum of the value of each parcel of land
separately owned

CHARACTERISTICS OF VALUE

• UTILITY - it is the power of a good to render a service or fill a need. It is the

usefulness of a thing to an owner or potential buyer.

• SCARCITY - a positive characteristic of value; it refers to the fact that if the

goods/service is abundant and free, its value will naturally be reduced accordingly.

• EFFECTIVE DEMAND — implies that a need exists and there is a corresponding monetary
power to fulfill that need. Wishful buyer thinking on necessity alone, no matter how
strong, does not constitute a demand.

• TRANSFERABILITY — is a legal concept that must be considered in the estimation

of property value. Even though the characteristics of utility, scarcity, and demand are
 present, if the property cannot be transferred in whole or in part, market value
cannot exist.

APPRAISAL FUNCTIONS
1. In connection with the transfer of ownership.
2. In connection with the financing and credit.
3. To establish just compensation in condemnation proceedings.
4. To establish a basis for taxes.
5. Others, like repossession or foreclosure of collaterals.
APPRAISAL PROCESS

COMPLETION OF INITIAL DOCUMENTS NEEDED

• All Account Officer who will request for an Appraisal of Property should
initially submit the following for Pre-Study of the subject collateral. Together
with the Authorization.
• Copy of Title
• Updated Tax Receipt
• Updated Tax Declaration
• Updated Tax Clearance
• No real estate security shall be accepted unless the title deed is accompanied by
the necessary documents needed.

APPRAISAL REQUEST
• To maximize the time of bank appraiser, all Account Officer must request for appraisal or
through verbal advice two (2) days before the inspection.

PRE-STUDY OF PROPERTY
• These include plotting using excel template attached as “Annex B”, identification of
neighbors through manual plotting for verification of shape, boundaries and location of
road and searching the location of property via online.

VERIFICATION
• After the subject collateral has been studied, it will be verified at City/Town Assessors
Office and Registry of Deeds where the property is located and assigned. Activities include
verification of ownership for both subject property and neighbors, Trace back of Title of at
least 3 cancelled titles must be performed for a new account. Consultation of Market
Value and verification of Title authenticity by checking the existing title as well as the
restrictions stated thereon, if any.
• Verification at City/Town Assessors may assist the appraiser to easily locate the property
using Property Index Number (PIN) and further check if the payment is updated.

OCULAR INSPECTION
• The assigned appraiser must prepare first a checklist before physical inspection.
• Visitation and validation of physical condition of subject property.
• Progress Inspection must also be done to further forecast its maximum use.
• Identification of establishments nearby within the vicinity.
• Collateral Inspection

TAKING OF PHOTOGRAPHS
• All appraisal/inspection reports must be accompanied by photographs showing
the
• condition of the security/support held or the progress of project implementation.
 • Photographs shall include the following:
• Vicinity
• Front and rear view of the property
• Interior
• Developments made to the property

VALUATION
The bank will be using market data approach:
• Market Data Approach - This approach involves analysis of similar comparable
properties to the property being appraised and employing weighted adjustments to
compensate for the difference. The basic principle underlying this approach is the
Principle of Substitution, which states that “the maximum value of the property
tends to be set by the cost of purchasing an equally desirable and valuable
replacement for such a property”. It assumes that no prudent buyer will pay more
than what it will cost him to acquire an equally desirable substitute property.
PREPARATION OF APPRAISAL REPORTS
• Information gathered will be compiled and summarized on the appraisal report. The report
should have an attachment such as the descriptions of subject property, photographs and
copy of documents pertaining to the latter. Further, to prove that the collateral was
physically visited and inspected, a copy of image of property together with the bank
appraiser should also attach on the report.
• The bank may adopt the valuation of other appraisal company as long as the report was
made within the same year and concurrent to the loan application of the borrower.

BASIC APPROACHES TO VALUE

• Cost Approach
• Income Approach
• Market Data or Sales Comparison Approach

1. COST APPROACH
• A valuation method based on the principle that no prudent purchaser will pay more than
what it will cost him to acquire an equally desirable substitute site, and to build a similar
improvement of equal desirability and utility.
➢ Sets the upper limit of value.
➢ Weakness of this approach lies in the difficulty of estimating accrued depreciation
accurately.
➢ Cost value – The value of land derived by sales comparison plus the current cost of
reproduction or replacement of a property, less depreciation from all causes.

PROCESS:
➢ Estimate and justify the value of the land.
➢ Estimate the reproduction cost of the building and other improvements.
➢ Estimate the loss in value from depreciation.
➢ Deduct depreciation from replacement cost of estimate.
➢ Sum up value estimates to arrive at an indication of “cost value”.

2. INCOME APPROACH
➢ A method of evaluation based on the principle that value tends to be set by the present
worth of the rights to future net benefits that may be derived from ownership.
➢ Economic or investment value – the value which the property’s net earning power will
support based upon a capitalization of net income.
 ➢ Sets the lower limit of value.
➢ Weakness of this approach lies in the proper selection of the capitalization rate.

PROCESS:
➢ Analyze the gross income as to quantity, quality, and durability.
➢ Prepare a forecast of gross income.
➢ Analyze past and current operating costs.
➢ Prepare a forecast of operating costs.
➢ Compute net income.
➢ Select or justify a capitalization rate.
➢ Analyze probable future behavior of income stream.
➢ Select the appropriate method of capitalization.
➢ Carry through the capitalization computations to arrive at an indication of ➢
“economic or investment value”.

3. MARKET DATA OR SALES COMPARISON APPROACH

➢ This method of valuation is based on the principle that no property is worth more at a
given date than the amount of money necessary to purchase a similar property of like kind
with equal utility and desirability.
➢ Comparative or exchange value – he value indicated by actual sales of comparable
properties in the market.

PROCESS:
➢ Survey the area to locate comparable properties.
➢ Gather and validate pertinent information about each comparable property.
➢ Analyze sales and leases with regard to – o Date of Sale o Length of time property was
offered o Advertising and sales effort involved o Terms of sales
o Motives of buyer and seller
➢ Compare subject property in detail with comparable properties, applying plus and minus
adjustments to arrive at an indication of “comparative value”.
➢ Weakness of this approach lies in the difficulty of ascertaining the circumstances
surrounding each comparable sale, and the availability of truly comparable sales.

II. CODE OF ETHICS IN EXCHANGE OF CREDIT INFORMATION

• Associates Code of Ethics is the ethical standard for conduct in the exchange of
commercial credit information.
• The Code of Ethics was first adopted in 1916 in recognition of the importance of the free
and responsible exchange of information in the credit-based American economic system.
• Through the years the Code has been reviewed and amplified several times, but none of
the basic principles has been changed.
• This Code is designed for commercial transactions, and its use is subject to applicable
federal and state laws affecting the exchange of credit information. In particular
circumstances, these could include laws relating to defamation and the right to privacy,
antitrust laws, credit reporting regulations, and limitations on the use of confidential
records and customer information or computerized data. Such laws also include securities
statutes regulating disclosure of material inside information. Since under the securities
law, "material inside (nonpublic) information" may, in some cases, not be disclosed - and
in other cases may not be withheld - as to transactions "in connection with" the "sale or
purchase" of a "security," and such transactions may involve bank financing, care should
be exercised and the advice of counsel sought where any such material inside information
may be in the possession of the respondent, and the sale or purchase of a security may be
involve.
Article 1.
There are two cardinal principles in the exchange of credit information: confidentiality and
accuracy of inquiries and replies. This includes the identity of inquirers and sources which
cannot be disclosed without their permission. Adherence to these and the other principles
embodied in this Code is essential, since offenders jeopardize their privilege to participate
further in the exchange of credit information.

Article 2
Each inquiry should specifically indicate its purpose and the amount involved

Article 3
Responses should be prompt and disclose sufficient material facts commensurate with the
purpose and amount of the inquiry. Specific questions should be given careful and frank replies.

GROUP 3 REPORTING

CREDIT INSTRUMENT
➢ a written document evidencing the existence of a credit obligation which defines the
responsibility of the debtor towards his creditor and the right of the creditor to
collect from the debtor on the date designated.

CLASSIFICATION OF CREDIT INSTRUMENTS (Broad Classification)

A. Credit Instruments with GENERAL ACCEPTABILITY

➢ widely acceptable without questioning the integrity of the one offering it.

Examples: bank notes, treasury certificates, fiduciary paper money

B. Credit Instruments with LIMITED ACCEPTABILITY ➢

accepted only by a few people.
a. for investment purposes (for the accretion of wealth)
b. for commercial purposes

1. Credit Instruments for Investment Purposes

a) Stock Certificates - evidences of ownership in a corporation.

• Preferred stock (shares) - have special privileges and carry certain
limitations.
 Preferred as to dividends - receive their dividends ahead of the common
stockholders.
 Preferred as to assets - have prior claim on the assets of the corporation
over that of the other stockholders.
• Common stock (shares) - owners of t are entitled to residual claim on the
business; represent simple ownership, but they have voting rights.
 b) Bond certificates - evidences of indebtedness of a corporation to bondholders
and is widely accepted among banks and financing institutions.
➢ may be issued by the public or government sector.
➢ safer than investment in stocks (bondholder has prior claim over the
stockholders on the undivided assets of the corporation in the case of
forced liquidation.
➢ transferable by endorsement and delivery or by delivery.
➢ can be used as collaterals.

Kinds of Bonds
1. Debenture Bonds - these are unsecured bonds issued against the general credit
standing of the issuer. Usually has high interest rates because of the greater
risks involved. May be attractive because of special features.
2. Collateral Trust Bonds - these are secured by a pledge of corporate stocks and
bonds, and evidences of indebtedness of other corporations which are owned by
the issuing corporation.
3. Mortgage Bonds - these are secured by a mortgage on real property of the
corporation. In case of default of issuing corporation, claims of the bondholders
may be satisfied out of the proceeds from the sale of the assets given as
collateral.
4. Sinking Fund Bonds - these bonds require maintenance of a sinking fund for the
redemption of the bonds at maturity.
• SINKING FUND - reserve accumulated from the annual income of the company
for specific purpose.
5. Registered Bonds - these are issued in the name of the particular person or
entity. - names of the bondholders are registered in the books of corporation.
6. Guaranteed Bonds - these are bonds whose principal and interest payments are
guaranteed by a company other than the issuing corporation.
7. Convertible Bonds - these could be exchanged with the other securities of the
corporation within the duration of the bonded indebtedness.
8. Redeemable Bonds - these are subject to call, redemption or purchase before
they are due.
- may be optional or mandatory.
9. Serial Bonds- indebtedness of single issue but are divided into groups of
different maturity dates and could possibly have variable terms and conditions.
10. Income Bonds - interest payments of bonds are fixed obligations of the
corporation regardless of earnings.
11. Coupon Bonds - these are bonds with detachable coupon which evidence interest
obligations payable at specified periods.
12. Profit-Sharing Bonds - these are bonds allowed in the company in addition to
the interest payments.

2. Credit Instruments for Commercial Purposes

a) Promise-to-pay - involves a debtor and a payee/ receiving party creditor.

• Promissory notes - written promise of one person to pay another a sum of
money on demand or at a determinable future time.
  Negotiable - one that is transferable, can be discounted, used as a
collateral and can be disposed of in the financial market.
 Non-negotiable - non-transferable
➢ known as IOU (I owe you); negotiability depends on how well the
public earned the trust of the issuer of the note.
 Secured - guaranteed with properties of value.
➢ If not paid when due, collateral may be disposed by the creditor. 
Unsecured - depend upon character of the borrower.
• Financial Institution Deposits - promises of certain institutions to return
money deposited with them (savings, demand, time).
➢ The primary functions of these institutions are to accept deposits and to
use the money collected for lending purposes.
• Letter of Credit (Documentary letter) - letter made by one bank addressed
to another bank, requesting to honor drafts drawn against it in behalf of a
third party, under specific terms and conditions specified in the letter.
➢ document from a bank guaranteeing that a seller will receive payment
in full as long as certain delivery conditions have been met. In the
event that the buyer is unable to make payment on the purchase, the
bank will cover the outstanding amount.
 Commercial- used in international trade, includes import and export
letter of credit.
 Traveler - bank substitutes its credit for that of the borrower.

• Open book accounts - supporting documents (sales slip or invoice, delivery

receipt or signature).
➢ method used by companies to debit the account of a customer for a service
or product and then bill the customer at a later date.

b) Orders-to-pay - second type of commercial credit instruments, including checks,

drafts and money orders.
Checks - the most common used as bills of exchange to settle obligations. It
is an order of depositor to his bank requesting to pay the person named
therein a certain amount of money. He could write any name including him.

Checks are classified as crossed check, postdated check, stale check, manager's
check, cashier's check, treasurer's check, bouncing check, counter check, certified
check, falsified check, personal check & business check, cancelled check,
and returned check.

KINDS OF CREDIT INSTRUMENTS

There are 2 broad kinds of Credit Instruments.

1. NEGOTIABLE INSTRUMENTS

➢ According to the negotiable instruments Act under Section 13-A, A negotiable

instrument means a cheque promissory note and a bill of exchange which are
payable to the bearer of the instrument or the person to be ordered.
 Features or Negotiable Instruments
✓ It must be conditional.
✓ It must be in writing.
✓ It is payable on demand or the period for the payment which is determined.

2. NON-NEGOTIABLE INSTRUMENTS

➢ Non-Negotiable Instruments cannot be transferred or the documents which are

restricted to transfer by the issuer e.g. Money Order, Postal Order, Shares
Certificate etc. Such documents appear at the name of the beneficiary and the
payments are made only to those persons to whom the instruments are made
payable.

HOW CREDIT INSTRUMENTS ARE NEGOTIATED

UCC 3-104(a) specifies that in order for an instrument to be negotiable, it must:
1. Be in writing.
2. 2.Be signed by the maker or the drawer.
3. Be an unconditional promise or order to pay.
4. State specific sum of money.
5. Be payable on demand or at a definite time.
6. Be payable to order or to bearer.

KINDS OF NEGOTIABLE INSTRUMENTS

1. Drafts
➢ a draft, also known as a bill of exchange, is an instrument that orders
someone else to pay.
2. Checks
➢ is a draft on which the drawee is a bank that is ordered to pay on demand
3. Notes
➢ a note, or promissory note, is a written promise by one party, called the
maker, to pay money to the order of another party, called the payee.
4. Certificate of Deposit
➢ is an acknowledgement by a bank of the receipt of money and its promise to
pay the money back on the due date, usually with interest.
NEGOTIATION OF COMMERCIAL PAPER

• Assignment
Commercial paper that's not fully negotiable can only be transferred through
assignment, adhering to regular principles of contract law. The transfer is done
either by a person transferring the instrument without endorsement or by
transferring the instrument to another party that doesn't satisfy the requisites of
negotiability, and such transfers confer the transferee with rights of an assignee
only.
 • Negotiation
Negotiation is the transfer of an instrument in a manner that the transferee
becomes a holder. A holder must be the person who possesses an instrument
issued or endorsed to them, to their order or to the bearer in blank.

• Endorsement
An instrument is endorsed when the holder of a negotiable instrument, such as a
check, signs it to transfer ownership to another person. The form of endorsement
has no impact on the nature of the instrument itself, but it determines the holder's
right to negotiate the instrument and how the negotiation should be carried out.

GROUP 4 REPORTING

Kinds of Endorsement & The Credit Management

I. ENDORSEMENTS & KINDS OF ENDORSEMENT

Endorsements
An instrument is endorsed when the holder signs it, thereby indicating
the intent to transfer ownership to another. Endorsements may be written in
ink, typewritten or stamped. They may be written on a separate piece of paper
that becomes part of it. Although the UCC does not require endorsements to be
on the back of the instrument, they are usually placed on the back of the
instrument for convenience purposes. Each endorsement of a negotiable
instrument is a separate contract, standing apart from that of the maker or any
other endorser. Once an instrument qualifies as a negotiable instrument, the
form of endorsement will have no effect on the character of the underlying
instrument. Endorsement relates to the right of the holder to negotiate the
paper and the manner in which negotiation must be done.
Kinds of Endorsements

Blank Endorsement
A blank or general endorsement consists merely of the signature of the payee and
converts the instrument into a bearer instrument and may be transferred by delivery
alone. No particular endorsee, person to whom an instrument is endorsed, is named. If
the instrument is lost or stolen and gets into the hands of another holder, the new
holder can recover its face value by delivery alone.

When an instrument is made payable to a person under a misspelled name or a

name other than that person’s own, the payee may endorse in the incorrect name, in the
correct name or in both. Signatures in both names may be required by a person paying
or giving value to the instrument.

Special Endorsement
A special endorsement, also called an endorsement in full, is made by writing the
words “pay to the order of” or “pay to” followed by the name of the person to whom it is
to be transferred (the endorsee) and the signature of the endorser. A special
endorsement is one that specifies to whose order an instrument is payable.

Restrictive Endorsement
A restrictive endorsement limits the rights of the endorsee in some manner in
order to protect the rights of the endorser. An endorsement is restrictive if it is
conditional; attempts to prohibit further transfer of the instrument; includes the words
“for collection,” “for deposit,” “pay any bank” or like terms signifying a purpose of deposit
or collection; or otherwise states that it is for the benefit or use of the endorser or of
another person.
Conditional Endorsement
A conditional endorsement, a type of restrictive endorsement, makes the rights of
the endorsee subject to the occurrence of a certain event or condition.

Qualified Endorsement
A qualified endorsement is one in which words have been added to the signature
that limit the liability of the endorser. By adding the words “without recourse” to the
endorsement, the endorser disclaims liability on the instrument and cuts off their
obligation to future endorsers and holders to pay on the instrument. The mere use of the
words “without recourse” does not wholly relieve the endorser from liability. Under UCC
3-417, it is provided that every person who signs their name as a qualified endorser of a
negotiable instrument warrants, by their signature, that:
1. they have good title to the instrument or are authorized to obtain payment or
acceptance on behalf of one who has good title and the transfer is otherwise
rightful;
2. all signatures are genuine or authorized;
3. the instrument has not been materially altered;
4. they have no knowledge of any defense of any party that is good against them;
5. they have no knowledge of any insolvency proceeding instituted with respect to the
maker, acceptor or drawer of an unaccepted instrument.

Endorsements for Deposit or Collection

Endorsements for deposit or collection are designed to get an instrument into the
banking system for the purpose of deposit or collection. When a check is endorsed “for
deposit only,” the amount of the instrument is credited 16-12 Principles of Business
Credit to the endorser’s account before it is negotiated further. Retail stores often stamp
each check “for deposit only” when it is received. This wording provides protection in the
event the check is stolen. Checks mailed to a bank for deposit should always be
endorsed in this way.

Facultative
Here, the endorser gives up some right to which they have entitlement. For
instance, endorsees are responsible for giving notice of dishonor to the endorser. In case
they fail to provide this notice, the latter will be free from their liability.

Partial
This arrangement allows the transfer of only a portion of the amount payable on
an instrument to the endorsed.

Sans Recourse
This type of endorsement relieves the endorser from all the liability against
subsequent holders of the negotiable instrument.

II. CREDIT MANAGEMENT

Credit management refers to the process a business uses to extend credit to

customers for the purchase of goods and/or services. It involves overseeing the
credit extended to customers and ensuring the timely payment of invoices.

The credit management process flow typically involves a series of steps that are
intended to help businesses manage their credit and debt in a responsible and
effective manner. Here are some of the key steps in the process flow:

1. Credit application: The credit management process begins with the credit
application process. A credit application for a business typically includes a range
of information about the company and its owners, as well as financial information
that is used to assess the company's creditworthiness.
2. Credit analysis: Once a credit application is received, the next step is to perform a
thorough credit analysis. This involves reviewing the customer's credit history,
income, and other financial information to determine their ability to pay. Based on
this analysis, the credit manager approves or denies the credit application.
3. Credit monitoring: Once a credit application is approved, the credit manager
needs to monitor the customer's credit usage and payment history. This involves
tracking the customer's payments, sending out reminders for overdue payments,
and following up with the customer if necessary.
4. Debt collection: If a customer fails to make payments on time, the credit manager
may need to initiate debt collection activities. This can involve sending out
collection letters (dunning letters), making phone calls, and negotiating payment
plans with the customer.
5. Legal action: In some cases, the credit manager will need to initiate legal action to
recover the debt. This can involve filing a lawsuit, obtaining a judgment against
the customer, and garnishing bank accounts.
 6. Reporting: Throughout the credit management process, the credit manager must
keep accurate records of all credit transactions and debt collection activities. This
information is used to generate reports and analyze the effectiveness of the credit
management process.

Six ways that businesses can improve their credit management process:
1. Establish clear credit policies: One of the most important steps in improving
credit management is to establish clear policies and procedures for extending
credit. This includes setting credit limits, establishing payment terms, and
determining the consequences of late or missed payments. By establishing clear
credit policies, businesses can ensure that customers understand their
responsibilities and reduce the risk of payment disputes.
2. Conduct thorough credit checks: It’s essential to conduct a thorough credit
check before extending credit to a customer. This involves reviewing the
customer's credit history, income, and other financial information to determine
their ability to pay. By conducting thorough credit checks, businesses can reduce
the risk of bad debts and minimize the need for debt collection activities.
3. Monitor credit usage and payment history: Once credit has been extended, it is
important to monitor the customer's credit usage and payment history. This
involves tracking payments, sending reminders for overdue payments, and
following up with customers if required. Monitoring credit usage and payment
history can help businesses identify potential payment issues early on and take
proactive steps to address them.
4. Use technology to streamline processes: There are a variety of software
solutions available that can help businesses streamline their credit management
processes. This includes tools for automating credit checks, tracking payment
history, and sending out payment reminders. By using technology to streamline
processes, businesses can save time and reduce the risk of errors
5. Train staff on best practices for credit management: Businesses should invest
in training their employees on credit management best practices. This includes
educating employees on the importance of credit management, providing training
on credit policies and procedures, and offering guidance on how to handle
payment disputes and debt collection activities. This ensures that everyone is
working together to improve the credit management process and minimize bad
debts.
6. Regularly review your credit management processes: Businesses should
continuously monitor and evaluate their credit management processes to identify
areas that need improvement and to adjust policies and procedures accordingly. A
proactive approach can help prevent potential credit risks and ensure that the
company's financial stability is maintained.

Functions of Credit Management

1. Supervision of credit departments operation
2. Gathering and sorting of credit information
3. Analyzing credit information
4. Credit checking and authorization
5. Recording and filing
6. Credit adjustment
7. Credit follow-ups and collections
GROUP 5 REPORTING

CREDIT POLICY AND CREDIT PROCEDURE

CREDIT POLICY

A. CREDIT POLICY DEFINITION

A credit policy is a formal document that outlines a company's procedures

for extending credit to its customers. It establishes the requirements that
customers must meet in order to be eligible for credit, as well as the terms and
conditions of credit sales.

A well-defined credit policy is essential for any business that sells goods or
services on credit. It helps to protect the company from bad debt, while also
ensuring that credit is available to customers who need it.

B. BENEFITS OF HAVING A CREDIT POLICY:

• Reduces bad debt: By establishing clear credit terms and conditions, you can
reduce the risk of customers defaulting on their payments.
• Improves cash flow: By setting credit limits and payment terms, you can
ensure that your company receives payment for its goods and services in a
timely manner.
• Increases sales: By making it easier for customers to obtain credit, you can
increase your sales.
• Improves customer relationships: By having a clear and consistent credit
policy, you can build trust and goodwill with your customers.

What should be included in a credit policy?

• Credit terms: This includes the credit limit, payment terms, and any discounts
that are offered for early payment.
• Creditworthiness criteria: This outlines the factors that your company will
consider when evaluating a customer's creditworthiness, such as their credit
history, financial statements, and business references.
• Collection procedures: This outlines the steps that your company will take to
collect outstanding debts, such as late payment fees, collection agencies, and
legal action.
• Dispute resolution procedures: This outlines the process for resolving any
disputes that may arise between your company and its customers regarding
credit matters.

C. TYPES OF CREDIT POLICIES

There are two main types of credit policies:
• Lenient credit policy: This type of policy is more likely to approve credit to
customers, even if their creditworthiness is not ideal. However, it also comes
with a higher risk of bad debt.
• Restrictive credit policy: This type of policy is more selective in its approval of
credit. It is a safer option for companies, but it may also limit sales growth.
 How to create a credit policy
• Identify your business goals. What do you hope to achieve with your credit
policy?
• Evaluate your customer base. Who are your typical customers? What are
their credit risks?
• Research industry standards. What credit policies are other companies in
your industry using?
• Develop your credit terms and conditions. What are your credit limits? What
are your payment terms? What discounts do you offer?
• Establish your creditworthiness criteria. What factors will you consider when
evaluating a customer's creditworthiness?
• Develop your collection procedures. What steps will you take to collect
outstanding debts?
• Document your policy. Clearly and concisely write down your credit policy so
that it is easy for everyone to understand.

The financial manager must consider the variables that influence the credit policy
of a firm. The following are important variables of credit policy:
• Credit Standard;
• Credit Period; • Cash Discount; and • Collection Efforts.

D. COMPONENTS OF CREDIT POLICY

A well-defined credit policy is crucial for any business extending credit to

customers. It helps manage financial risk, maintain cash flow, and build positive
customer relationships. Here are the key components of a credit policy:

1. Credit Application Process:

• This establishes the steps customers take to apply for credit, including required
documentation and information.
• Streamlined process with clear instructions and efficient communication.
• May involve credit checks, financial statements, and trade references.
2. Creditworthiness Standards:
• Define the criteria for approving or denying credit applications based on
financial health and risk assessment.
• Consider factors like credit score, payment history, debt-to-income ratio, and
business performance.
• Establish different risk categories and corresponding credit limits.
3. Credit Terms:
• Specify the duration of credit, payment terms, and discounts offered.
• Common terms include net 30, net 60, or 2% discount for early payment.
• Clearly define late payment penalties and interest charges.
4. Credit Limits:
• Set maximum credit amounts for individual customers based on their
creditworthiness and business relationship.
• Regularly review and adjust limits as necessary.
• Implement controls to prevent exceeding credit limits.
 5. Collections:
• Establish procedures for timely and effective collection of outstanding
receivables.
• Outline steps for late payment reminders, escalation procedures, and potential
legal action.
• Consider offering payment plans for struggling customers.
6. Monitoring and Control:
• Regularly monitor credit performance and identify potential problems.
• Implement internal controls to ensure compliance with the credit policy.
• Conduct periodic reviews and update the policy as needed.
7. Risk Management:
• Develop strategies to mitigate credit risk and protect the company's finances.
• Consider credit insurance, collateral requirements, and diversification of
customer base.
• Regularly evaluate the effectiveness of risk management strategies.
8. Clear Documentation:
• Ensure all aspects of the credit policy are clearly documented and readily
accessible to employees and customers.
• Use simple and understandable language.
• Include contact information for inquiries or disputes.
9. Training and Communication:
• Train employees involved in credit decisions to understand and apply the policy
consistently.
• Communicate the policy clearly to all customers through contracts, website, or
other means.
10. Review and Update:
• Regularly review and update the credit policy to reflect changing business
conditions, regulations, and market trends.
• Consider external factors that may impact risk tolerance and creditworthiness.
By implementing these key components, businesses can develop a
comprehensive credit policy that balances risk management with customer
satisfaction and contributes to long-term financial success.

Conclusion
A well-defined credit policy is essential for any business that sells goods or
services on credit. By following the tips in this report, you can create a credit policy
that protects your company from bad debt while also ensuring that credit is available
to customers who need it.

CREDIT PROCEDURE
Credit procedures are the steps taken by businesses or lenders to assess the
creditworthiness of potential borrowers and determine whether to extend credit.
These procedures help to mitigate risk and ensure that borrowers are able to repay
their debts.

A. IMPORTANCE OF CREDIT PROCEDURE

A well-defined credit procedure offers several benefits to businesses, including:
• Reduced risk of bad debt: By carefully evaluating customers' creditworthiness,
businesses can minimize the risk of incurring losses from unpaid invoices.
• Improved cash flow: Efficient credit procedures can help businesses collect
payments faster, improving their cash flow and liquidity.
• Stronger customer relationships: Establishing clear credit expectations and
terms upfront can foster trust and transparency between businesses and their
customers.
• Enhanced business decision-making: Credit information can inform various
business decisions, such as pricing, marketing, and inventory management.

B. PURPOSE OF CREDIT PROCEDURE

• Evaluate the ability and willingness of a borrower to repay a debt.

• Underwrite the risk involved in extending credit.
• Price the loan appropriately.
• Ensure the loan fits the lender's portfolio.
C. KEY STAGES OF CREDIT PROCEDURE

1. Application: The borrower submits an application for credit, which typically

includes information about their income, employment, debt, and credit history.
2. Verification: The lender verifies the information provided in the application.
This may involve contacting the borrower's employer, bank, and credit bureau.
3. Analysis: The lender analyzes the borrower's creditworthiness using a variety of
factors, such as their credit score, debt-to-income ratio, and employment
history.
4. Decision: The lender makes a decision about whether to approve or deny the
application. If the application is approved, the lender will determine the loan
amount, interest rate, and terms.
5. Disbursement: The lender disburses the loan funds to the borrower.
6. Monitoring: The lender monitors the borrower's account activity and
creditworthiness. This may involve reviewing their credit report and payment
history.
7. Collection: If the borrower becomes delinquent on their payments, the lender
may take steps to collect the debt. This may involve contacting the borrower,
sending late notices, or taking legal action.

D. COMPONENTS OF CREDIT PROCEDURE:

• Credit policy: A document that outlines the terms and conditions for extending
credit, such as credit scoring criteria, payment terms, and collection
procedures.
• Credit application: A form that collects information about the borrower, such
as their name, address, income, and employment history.
• Credit scoring: A process of assigning a numerical value to a borrower's
creditworthiness based on their credit history.
• Credit report: A report that contains information about a borrower's credit
history, such as their payment history, debt levels, and credit inquiries.
• Loan agreement: A contract that outlines the terms of the loan, such as the
loan amount, interest rate, repayment schedule, and default provisions.

E. FACTORS INFLUENCING CREDIT PROCEDURE:

 • Type of credit: Different types of credit, such as mortgages, auto loans, and
personal loans, may have different credit procedures.
• Lender's risk tolerance: Lenders with a higher risk tolerance may be more
willing to approve applications with lower credit scores.
• Economic conditions: Economic conditions can affect the availability of credit
and the creditworthiness of borrowers.

F. BENEFITS OF A STRONG CREDIT PROCEDURE:

• Reduces risk of bad debt
• Improves the financial health of the business
• Encourages responsible lending practices
• Protects consumers from predatory lending

Additional notes:
• The specific steps involved in credit procedure may vary depending on the
lender and the type of credit being applied for.
• It is important to understand the credit procedure before applying for credit.
• Consumers should shop around for the best credit terms and conditions.
• Consumers should take steps to improve their credit score before applying for
credit.

GROUP 6 REPORTING

COLLECTION POLICIES AND PROCEDURES

COLLECTION POLICIES
• set of procedures and guidelines designed to ensure bills are paid on time and in
full, and to collect on past-due payments (payments that have not been made by
the cutoff time on the due date).
• All collection efforts should be made in line with the policy of the business firm,
that is, collection must be kept within reasonable limits: good-will of customers
must be cultivated and maintained: and, risks must be reduced to the minimum.

TYPES OF DEBTORS

While all debtor who are unable to pay their obligations on time may all be lumped
up under the broad class of delinquents, nevertheless they may be further classified and
distinguished according to the attitudes and behavior they manifest and display.

A. The Cooperative debtor

• This type of debtor will not hesitate to settle his financial obligation as soon as
he is provided with the opportunity to do so. As such, he is a good moral risk.
B. The chronic complainer
• They do not feel happy unless they are able to air certain grievance or
complaints, fabricated, flimsy or otherwise.
 C. The politician types
• This type of debtor has a number of reasons kept under his sleeves which
explain one way of the other why he cannot pay on time being. Hence, the
necessity for postponement in the settlement of the obligation.
D. The uncooperative and indifferent debtor
• This type of debtor does not pay on time, not because he cannot pay but rather
because he finds it difficult to part with his money. He is “makunat” which in
English is synonymous with “stiff” of hard.
E. The paranoiac
• They keep on promising that they will settle their obligations although the
question that remains unresolved is: When?
F. The Belligerent or pugnacious type
• Just as there are individuals who think that society owes them a living, so it is
equally true that there are those who think they are entitled to the use of the
credit regardless of their poor credit standing.
G. The elusive type
• Some debtors are as elusive as eel. It is hard to find them in their offices or in
their homes.
PAYING HABITS
A. Prompt payors
This group consist of individuals and business entities that are conscious of their
financial obligations which they discharge promptly without the need of being reminded
about them.
B. Delinquent Debtors
Delinquent debtors are not merely a poor prospect for business. He is not a
prospect at all.

FAIR CREDIT
• Careless borrower-merely needs reminding regularly.
• Complainer- he has grievances after he falls behind.
• Unforeseen - unemployment shrunk income, medical expenses.

SLOW CREDIT
• Poor manager of his finances, over-indebted.
• Martial problems may quit his job, skip, or hit the bottle.
• Coward-afraid to face the creditors.

GOOD CREDIT
• Lives beyond his income. Credit passed unknown.
• Gypsy in residence or employment.
• Crook - directly attempting to defraud.

COLLECTION PROCEDURES

It is utterly meaningless. If not senseless, to classify accounts of costumer without

any valid purpose or philosophy behind, such as for instance, "honest" or "dishonest" or
as "prompt payor" or "slow payor" and the like. Rather, such a classification is intended
to help the company formulate collection procedures for each category, as well as a guide
for future courses of action when to refuse further accommodation or grant extension of
credit.

THE COLLECTION FUNCTION

Proper management of the investment in receivables implies the existence of a

collection function. Collection work is at times, done directly by the credit department.
At times, by an independent agency which offers and renders collection service for a fee.

THE COLLECTION DEPARTMENT

To say that collection is a major and important activity of any credit- granting
concern is to elaborate on the obvious. In fact, so important is it that the success of the
credit-granting concern hinges, by and large, on the efficient functioning of its collection
machinery. Collection is really a part of the credit function although it should be placed
in the charge of a separate individual or subordinate division.
Qualities of A Good Bill Collector

Just as the manager of a collection department is competent and capable, so must

the men under his charge be those who possess certain desirable qualities to be assets
to their department in particular and to the company in general.

1. Industry - While industry alone does not guarantee the success of man in his
undertaking, nevertheless, it brings commensurate rewards.
2. Persistence - Persistence is the twin brother of industry. A good bill collector is
never tired and afraid of making repeat calls until the amount owned by the debtor is
turned over to the company.
3. Tact - The job of a bill collector is both taxing and at the same time a thankless
one. To succeed, one must as much as possible avoid offending the delinquent debtor
while making the collection for the company, if this is possible Thus. He should possess
tact - prudence and good judgment.
4. Resourcefulness - Good bill collectors have demonstrated quite aptly why they are
a success in their chosen occupation. Possessing many desirable qualities, one thing
basic to their success is their resourcefulness. This may be considered as synonymous
with need for achievement.

COLLECTING DELINQUENT ACCOUNTS

Notwithstanding the extreme care adopted in the grant of credit, there are
occasions when some borrowers get into financial trouble and thus find it difficult, if not
impossible, to discharge their obligations.

COLLECTION DEPARTMENT PROCEDURES

1. Not all customers pay their bills without asked to do so. This is the rationale for
the existence of a collecting arm.
2. The primordial responsibility of every collecting department is to bring in the
money owed the company with least cost and efforts.
3. It is imperative as well as sound practice to bill customers as soon as their
obligation become due.
4. Collection efforts should be always in time with company policy pegging down
collection cost within reasonable limits preserving good will of customers and minimizing
risk.
5. In very subtle and tactful manner, the collection department should be able to
show the customers that is to their advantage to pay their obligation to the company
and thus avoid the attendant embarrassment of court suit and impaired reputation.
6. Collection letters should be worded in a personal fashion and make customers feel
that they are important and moreover friends of the company with whom they transact
business.
7. Every collection effort should be properly recorded in the credit file so that a
complete history is available at all times and moreover kept up to date.
8. The collection department should periodically review its policies and procedures,
and evaluate against results.

BENEFITS FROM EFFECTIVE COLLECTION EFFORT

1. Reduction in the volume of accounts receivables.
2. Freeing capital for carrying the business operation.
3.Increasing profits through decreased expenses.
4. Shortening of credit period
5.Establishing a line of customers who are financially sound.

COLLECTION LETTERS

Are beyond question the most difficult to the writer. In fact, failure on the part of
the writer to prevent offending the customer cause more harm than good.

IMPORTANCE OF COLLECTION LETTERS

1. To collect the money due to the company.
2. To keep and retain good will of the customer

QUALITIES OF A GOOD COLLECTION LETTER

1. It should be short and direct.
2. It should use dated action.
3.It should be written from the customers viewpoint.
4.It should not provide any cause or occasion to arouse the anger and bitterness of the
customer.
5. It should be revised periodically.
6.It should have a humanistic approach.
7. It should follow a definite pattern.
8. It should be written in such a way as to make it appear as if it were the last to be sent
to debtor.

TYPES OF COLLECTION LETTER

1. Reminder letter in cases where a creditor is forced to bring to the attend of a
debtor about his existing obligations to the company, the presumption is that owing to
the busy world of debtor.
2. Follow up letters when one or two reminders fail to bring any response from the
debtor collection letters which are still friendly, but nevertheless firmer tone, should be
sent.
3. The discussion Letter when the customer chooses to ignore the reminder letter
the stage is ripe for the next step is to find out from the customer the reason why he has
not taken any action on his existing obligation.
4. The appeal letter not infrequently there are times when a company may decide to
forego send a discussion letter to its customer and instead proceed to from the reminder
letter to sending an appeal letter when such is the case the letter has the characteristics
of both discussion letter and appeal letter.
5. The Demand letter when reminders follow ups and appeal letter fail to produce
the desirable results the creditor is made to realize that he has a problem in his hands.
He cannot collect the account simply through the use of collection letters short of any
drastic action.

EFFECTIVE TECHNIQUES

• Registered letters
When a delinquent pays no attention to letters and is not accessible to personal
calls the collector may occasionally use the registered letter to good effect. The creditor
may call attention to the fact that such other letters have not been answered.

• Collection through the use of drafts

In enforcing the settlement of an obligation such instrument is commonly used by
wholesalers and manufacturers.it is represent one of the more urgent steps in the
collection series.

• Bad Debts
As borne by experience on the part of many businesses man notwithstanding
measure and efforts to collect accounts receivable not in frequently there are occasions
wherein debts could not be collected for one reason.

GROUP 7 REPORTING
COLLECTION FUNCTION AND COLLECTION SYSTEM

Objectives:
❖ To know the difference between collection function and collection system
❖ To understand the role of collection functions in the credit and collection department.
❖ To explore the key components and process involved in the collection system breaker.

COLLECTION FUNCTIONS
➢ The collection function refers to the specific tasks, roles, and responsibilities performed by the
collection department or team within an organization.
➢ It encompasses the activities involved in managing and recovering outstanding debts from customers
or clients.

Key Functions:
A. Monitoring and Tracking
B. Communication and Follow-up
C. Negotiation and Payment Arrangements
 D. Collection Actions
E. Documentation and Reporting

Monitoring and Tracking

• Regularly monitoring customer accounts to identify overdue payments and outstanding
balances.
Communication and Follow-up
• Engaging in effective communication with customers to remind them of payment obligations
and resolve any payment-related issues.
Negotiation and Payment Arrangements
• Collaborating with customers to establish suitable payment plans or arrangements for
outstanding debts. Collection Actions
• Initiating appropriate collection actions, such as sending demand letters, engaging in phone
conversations, or escalating to legal proceedings if necessary.

Documentation and Reporting

• Maintaining accurate records of all collection activities and generating reports to track
progress and performance.

Comprehensive Overview of Collection Functions

1. Credit Investigation and Approval

• Gather and analyze information about a customer's creditworthiness.
• Assess factors like credit history, income, debt levels, and payment patterns.
• Determine appropriate credit limits and terms based on risk assessment.

2. Invoice Generation and Distribution

• Create accurate and timely invoices for goods or services provided.
• Distribute invoices to customers through preferred channels (mail, email, online portals).
• Ensure clear communication of payment terms and due dates.

3. Accounts Receivable Monitoring

• Track outstanding invoices and customer payment activity.
• Identify overdue accounts and prioritize collection efforts.
• Generate aging reports to visualize receivables status and potential risks.

4. Customer Contact and Negotiation

• Initiate contact with customers who have overdue payments.
• Negotiate payment arrangements or extensions when appropriate.
• Employ persuasive communication techniques to encourage timely payment.

5. Collection Letters and Reminders

• Prepare and send a series of collection letters or emails, escalating in tone and urgency.
• Outline consequences of continued non-payment, such as late fees or legal action.
• Adhere to legal guidelines and ethical practices in collection communications.

6. Dispute Resolution
• Investigate customer disputes regarding invoices or payments.
• Gather evidence and work with customers to resolve issues fairly.
• Rectify errors promptly and adjust accounts as necessary.
 7. Bad Debt Management
• Assess the likelihood of collecting severely delinquent accounts.
• Determine when to write off uncollectible debts to comply with accounting standards.
• Consider debt collection agencies or legal action for specific cases.

8. Reporting Analysis
• Generate reports on collection performance, aging of receivables, and bad debt trends.
• Analyze data to identify areas for improvement and implement process changes.
• Track key metrics to measure the effectiveness of collection strategies.

9. Compliance with Laws and Regulations • Understand and adhere to applicable laws governing debt
collection practices, such as the Fair Debt Collection Practices Act (FDCPA) in the United States.
• Respect consumer rights and avoid unfair or deceptive practices.
• Maintain accurate records and documentation for compliance purposes.

COLLECTION SYSTEM
➢ The collection system, refers to the technological infrastructure, tools, and processes utilized to
support and optimize the collection function.

Key Systems:
A. Customer Database
B. Payment Tracking
C. Communication Channels
D. Workflow Management
E. Integration

Customer Database
• A centralized database containing customer information, credit history, payment terms, and
contact details. Payment Tracking
• Systems to track and record payments, including due dates, amounts, and payment methods.
Communication Channels
• Utilizing various channels (e.g., email, phone, online portals) for effective and timely
communication with customers.
Workflow Management
• Establishing workflows and processes to ensure smooth operations and task allocation within the
collection team. Integration
• Integrating with accounting systems, customer relationship management (CRM) software, and
other relevant tools to facilitate data synchronization and streamline processes.

Diverse Collection System Options and Considerations

1. Manual systems
• Rely on physical documents, spreadsheets, and manual processes.
• Often used by smaller businesses with limited resources or simple collection needs.
• Can be time-consuming and prone to errors.

2. Automated Software Systems • Utilize specialized software to

manage collection activities.
 • Automate tasks such as payment tracking, account aging, reminders, payment processing, and
reporting. • Improve efficiency, accuracy, and visibility into collection efforts.
• Offer integration with accounting systems and other business software.

3. Debt Collection Agencies

• Third-party companies that specialize in debt collection.
• Engaged by businesses to collect delinquent accounts on their behalf.
• Possess expertise in collection techniques, laws, and regulations.
• Typically charge a percentage of the amount collected as a fee.

4. Legal Action • Involves seeking a court judgment to enforce

payment collection.
• Used as a last resort for severely delinquent accounts that have not responded to other collection
efforts.
• May result in wage garnishment, asset seizure, or other legal remedies.

5. Internal Collection Departments • Established by larger

businesses to manage collections in-house.
• Employ dedicated staff to handle collection tasks, including customer contact, negotiations, and
legal proceedings.
• Offer more control over the collection process and customer relationships.

Choosing the right collection system depends on factors such as:

• Business size and complexity

• Volume of collections
• Available resources
• Budget constraints
• Industry best practices
•Regulatory compliance requirements

5 Traits Any Debt Collector Should Master

1. Communication.
Effective communication is pivotal in successful debt collection. By skillfully conveying the
debt message, you not only bridge gaps but also foster trust with clients. This rapport not only
elevates your standing but also streamlines issue resolution. Being perceived as a problem solver
hinges significantly on your adeptness in communicating and resolving matters in debt collection.

2. Negotiation.
Successful debt collection involves adept negotiation skills. Negotiation, rooted in Latin, is
the art of handling people, pivotal in problem-solving stemming from unmet needs. Solutions must
prioritize clients’ needs, employing assertive negotiation sans judgment or blame. The goal is a
winwin outcome where satisfaction for all parties is paramount. Reflecting genuine eagerness to
assist should permeate your attitude towards the client in negotiations.

3. Empathy
Empathy, crucial for successful debt collection, relies more on logical understanding than
emotions. It involves adopting the clients’ perspective by setting aside your own, fostering openness
instead of hostility. The concept of "mirror neurons" explains how our actions influence others'
 responses. A skilled debt collector prioritizes empathy as it holds the key to productive outcomes.
Treating clients as you wish to be treated cultivates cooperation and drives desired actions.

4. Goal Oriented
Goal orientation involves prioritizing the end results over the efforts required, emphasizing
the accomplishment's impact. A strong focus on achieving tasks characterizes a goal-oriented person,
channeling all efforts toward completion. Successful debt collectors grasp the connection between
personal and organizational success, striving to achieve their goals for mutual success.

5. Persistence
Persistence is key for a successful debt collector, knowing that overnight success is a myth.
Setting defined goals and consistently pursuing them day by day is crucial. Successful individuals
share a common trait of unwavering commitment to their goals, persisting despite past failures. They
rise above challenges, showcasing resilience in the face of difficulty or opposition.

Tools and Aids in Collection

1. Statement of Account
• It must request payment
• Inform the debtor how much he owes
• Itemize the loan or debt
• Easy to understand
• States due date, interest rates and penalty charges

2. Collection Letters
• It must be concise and direct to the point
• Should give the debtor a chance to state his repayment problems
• Should request the debtor to give his repayment plan at the same time his commitment to
comply with it.
• It should contain details of the loan
• It should mention any penalty under the law if the loan remains unpaid.

3. Telephone or cell Phone Calls

• Plan your calls and strategize on how to persuade the debtor to pay
• Speak clearly and talk at the debtor’s language level
• Pay attention to the debtor’s story and do not interrupt
• Persuade the debtor to commit to a time-bounded repayment plan
• Remember to persuade the debtor to do the next step in the process of loan collection