Session 1: Introduction to

Credit and Collections

LAW4024: CREDIT AND COLLECTIONS
Terminology
 Acceleration clause
 After-acquired property
 Collateral
 Collection agency
 Consumer debt
 Covenants
 Credit bureau
 Events of default
 Financing statement
 General security agreement
 Guarantee
 Guarantor
 Indemnity
 Letter of Credit
 Letter of Commitment
 Payday loans
Terminology Part 2

 Purchase-money security interest (PMSI)

 Receiver
 Registration
 Secured credit
 Security interest
 Subrogation
 Unsecured credit
Introduction to Debt and Credit

 A business participates on a daily basis in a variety of transactions that involve

credit.
 Some credit arrangements are formal and deliberate, with carefully negotiated
terms, while others are an incidental feature of routine transactions.
 Business can be borrowers (debtors) and lenders (creditors).
 Credit is a contractual relationship, with the lender agreeing to lend money in
exchange for a promise by the borrower to repay the loan, usually with interest
and within a certain time frame.
Contractual Relationships

 Since credit is a contractual relationship, all the fundamental principles of contract

law apply. As well, there are legal regulations and principles which are specific to
credit. The law of credit forms part of what is known as debtor and creditor law.
Secured and Unsecured Credit

 Credit can be either secured or unsecured. Secured credit means the creditor has an interest in
all or some of the property of the debtor in order to secure payment of the debt.
 If the debtor defaults in repaying the loan, the secured creditor can seize the secured property
and sell it to pay down the debt.
 Unsecured credit means that the creditor has only a contractual right to receive payment from
the debtor.
 The unsecured creditor does not have an interest in the property of the debtor that it can
enforce in the event of default by the debtor.
 If the debtor defaults, a secured creditor is in a much stronger position than an unsecured
creditor.
Trade Credit

 Trade credit is usually unsecured. In most cases, payment is made within the
designated time period and collection remedies are not needed.
 Since these transactions are unsecured, if a debtor fails to pay on time, the creditor
may have to sue the debtor, obtain judgment, and then enforce that judgment.
 If the debtor has limited financial resources, the creditor may end up not being
paid.
 For this reason, it is very important for creditors to exercise good judgment when
deciding whether to extend credit.
 Trade credit can be very risky if the parties have not dealt with each other before,
especially if the supplier and the customer are located in different countries.
Borrowing

 A business may also decide to raise a significant amount of capital by borrowing.

 These credit arrangements tend to be more formal and provide more security to
the lender.
 Borrowing a large amount of money to purchase a major asset or to finance an
expansion is an example of a credit transaction in which the rights and
obligations of the parties are carefully negotiated.
Borrowing Criteria

 The bank will then consider two major criteria in evaluating the loan application.
 First, the bank will focus on financial health—in particular, the likelihood that
the expansion plans will succeed and will be able to repay the loan within a
reasonable time period.
 Second, the bank will investigate the security that can be provided.
 If they cannot repay the loan, the lender will want to ensure that it can seize the
business’ property and sell it for enough money to pay the outstanding loan.
 In this way, the lender ensures that it will be repaid, whether the business
succeeds or fails.