the power or ability to obtain money,

goods and services at the present time in

exchange for a promise to pay at a future

determinable time

(a)  

the reason for credit is the need or desire to

obtain economic goods ahead of the capacity

to pay

(a)  

Different Views on Credit

(a)  

the ability to obtain goods,

services or money in exchange of a future promise to

pay

(a)  

the trust and confidence of the (a)   on

the borrower’s ability and willingness to pay

the exchange of actual reality against

the future probability

(a)  

creates a legal right in favor of the creditor

against the debtor who is under obligation to pay

(a)  

according to anthropologist _____

and in his book _______ extending credit is a practice that

goes back thousands of years (around ______ to the dawn of human civilization

(a)  

• It serves as a medium of exchange and is

substitute of money

▪ It facilitates the production and consumption

of goods and usually results to economic growth

▪ It is faster, safer and more convenient form

of obtaining goods and services

• It elevates the moral standard of people

▪ Induces people to save

▪ Enables businessmen and corporations to gather

large amount of capital to undertake large-

scale production

▪ Allows wealth to be fully utilized

▪ Helps in expansion and contraction of the

money supply

(a)  

CHARACTERISTICS OF CREDIT

(a)  

Credit always involves two parties: the debtor who

obtains the money, goods or services in exchange of

his promise to pay at a future date; and the

creditor who lends his money, goods or services

for the right to collect on demand or at a future

determinable time.

(a)  

Credit is always expressed in terms of money. When

(a)  

when you buy goods on credit from a retail store or borrow

money from a bank or any financing institution, it is

understood that such obligation shall be paid by

money.

(a)  

Since credit has always been based on trust

and confidence, the debtor must always be able to

merit and confidence of the creditor. Without this,

there can be no credit transactions.

(a)  

▪ There is always the possibility of the obligation not

being paid. For instance, the debtor loses his

income, or dies or becomes bankrupt, or there

may be other unforeseen events, which may

prevent him from paying his obligations.

(a)  

▪ Payment on credit is always done at a future date. In

actual accounting practice, futurity means a day or

more after the credit is obtained.

(a)  

Significance of Credit

(a)  

Firms stand ready to finance its operation through

credit, depending on its capacity.

(a)  

When business opportunities appear and

businessmen forecast profitable market

possibilities, they are willing to expand

credit and vice versa.

(a)  

▪ Since big quantities of goods move through the

marketing channels, a great bulk of such goods is

financed through credit.

(a)  

It provides a financial means for businessmen who

take advantage of market opportunities in the

domestic and foreign markets.

(a)  

▪ Credit allows consumer to buy goods and services

beyond their ability to buy or what they can actually

afford.

(a)  

This increase in consumption will automatically

increase employment of labor.

(a)  

All credit’s

function, as

(a)   of

the fluctuations

in the business

cycle.

Classifications of Credit

(a)  

types Personal Credit

(a)  

3 Retail Credit

(a)  

____paid within days after the

billing)

______ (paid as installments and in longer

periods)

________ (same as revolving charge, and

requires most of the time a downpayment)

(a)  

credit extended by one businessman to another

(Ex. Manufacturer to Wholesaler; Wholesaler to

Retailer)

(a)  

the credit given by commercial banks to

businessmen instead to assistthem in the operation

of theirbusiness

(a)  

obtained to finance the selling of

goods outside the country

(a)  

obtained to finance the buying of

goods from other countries

(a)  

utilized by a business organization for the

purchase of fixed assets or to carry minimum

business operations.

(a)  

It consists of advances intended for the purchase

or construction of necessary plant and equipment.

(a)  

intended for the acquisition of fertilizers,

pesticides, seedlings, and any instruments,

machinery and other movable equipment used in

the production, processing, transformation,

handling or transportation of agricultural products

(a)  

nakapaloob sa agricultural loan

4

(a)  

Obtained to financing the production of a particular crop. Hecannot sell the crops unless he notifies the creditor.

(a)  

obtained to finance the raising of pigs, ducks, cows, chicken,

goats and other animals for breeding purposes. Collateral arerequirement to avail loan, the livestock is also offered as

(a)  

Used to finance the development/improvement of farmland.

Collateral are usually the land and farm equipment owned by borrower/farmer. Used to finance acquisition of farm equipment.

(a)  

Obtained to finance the selling and distribution of farm crops which are kept in a warehouse with warehouse receipts.

(a)  

loans granted to industries to finance the

acquisition of equipment/machineries to finance the

construction of a plant or factory and to some

extent to the purchase of raw materials for

manufacturing capital goods for consumption

purposes

(a)  

loans purposely for construction, acquisition,

expansion or improvement of real estate properties

(a)  

paid off by installment over a long period of time

(a)  

those credits, which are covered by

properties of value, called collaterals to guarantee

loans.

(a)  

▪ credits obtained from any of the government

institutions or their instrumentalities. The Debtor

maybe the national, provincial, or local government.

(a)  

those credit which are covered by properties of value called (a)  

the Borrower has merited the

full trust & confidence of the Creditor, that is the

creditor is willing to part w/ his money,

goods/services for just a mere promise to pay.

(a)  

payable within one year from the

date of acquisition, and usually covers the purchase

of consumers’ goods.

(a)  

range from

one year to five years in maturity. This is usually

given for the number or purposes, like the

financing of improvements on a firm or industry.

(a)  

Which are intended from five

years up to 15-20 years. This type of credit covers

those loans intended for investment purposes.

(a)  

loans whose interest payments are

made at the time the loan matures. Here, the

Borrower gets the entire amount applied for, and

upon maturity of loan, he pays the principal PLUS

the interest

(a)  

loans where interest payments are

deducted at the time the loans are granted. The

Borrower obtains only the proceeds of the loan; that

is the principal MINUS the interest. Upon the

maturity, the Debtor pays the entire amount loaned.

(a)  

an agreement between the Debtor &

the Creditor wherein the Debtor is allowed to obtain

funds from the Creditor up to a certain amount

(a)  

Types of Credit Lines

(a)  

One in w/c the debtor is allowed to draw funds from

creditor up to an amount agreed upon and the funds drawn

when paid can be borrowed again.

(a)  

▪ In this case, the Debtor repeatedly borrows these funds

from the Creditor as long as these funds are paid when

due. The loan becomes automatically renewed.

(a)  

The borrower can obtain funds from the creditor up to a

certain amount agreed upon.

(a)  

▪ Borrowed funds even when paid cannot be availed

anymore.

(a)  

In this type of loan, the most that the borrower can avail

of is the limit agreed upon.

(a)  

A credit line in w/c the bank allows its depositors to

draw from the bank beyond their actual deposits.

(a)  

Used to be the most popular type of credit line from the

banks.

(a)  

Criteria for Granting Personal Credit

(a)  

The “Truth in Lending Act” is an act

designed to protect consumers against unfair

billing practices of people who extend credit

to a purchaser of goods on installment basis.

Through it, citizens become aware of the real

cost of credit.

(a)  

The law requires creditors furnish each

customer the following information before

transaction is consummated.

(a)  

1. The cash price of the property to be serviced or acquired.

2. The down payment if any or the trade-in price

3. The differences between the amounts under 1 and 2

4. The charges individually itemized, which are paid or

to be paid in connection with the transaction and

which are not incidental to the extension of credit.

5. The total amount to be financed

6. The finance charged expressed in terms of pesos

7. The percentage that the finance charge bears to the

total amount to be financed which is expressed as a

simple annual rate on the outstanding unpaid balance.

(a)  

Sources of Credit

(a)  

financial institution that accepts

deposits from the public and creates credit

Most of the commercial credits, industrial and

agricultural credits are obtained from bank.

(a)  

classification of bank

(a)  

specializes in giving commercial

loans to businessmen.

(a)  

designed primarily to mobilize rural

savings by accepting savings and time deposits and

provide channel for funds from urban areas and

government sector for agriculture and individual

activities in the country side.

(a)  

these banks are primarily concerned with

mobilization of savings in loans, and provide short-term

working capital, medium and long-term financing and

diversified financial and allied services for its chosen

market and constituencies especially for small and

medium enterprises and individual.

(a)  

Saving and Mortgage bank,

Stock saving and loan association, and Private

Development bank

(a)  

is one of the biggest sources of personal

credit.

(a)  

cooperative organizations that lend

money saving of their members to other members who

are in need.

(a)  

individual who have

excess funds and who are usually lend such funds to

others who are in need.

(a)  

such individuals could borrow

from their insurance companies on amount equivalent

to the cash surrender value of their policy.

(a)  

one of the biggest sources of

consumer’s credit. They extend credit facilities to

industrial, commercial and agricultural enterprises

either discounting or factoring commercial papers or

account receivable.

(a)  

an individual or business that offers secured

loans to people, with items of personal property used as

collateral.

(a)  

Refers to the possibility of non-payment of the

obligation when it falls due.

(a)  

5 C’ of Credit

(a)  

Honesty, reliability, trustworthiness. Integrity.

Credit worthiness.

Track record, if any, in business. Business skills and acumen.

(a)  

Financial strength. Quality of assets. Liquidity of assets. Debt-equity ratio.

(a)  

General economic outlook.

Conditions in your industry.

Implications for profitability and debt servicing

(a)  

Ability to service the loan and meet other commitments. Ability of your business to withstand a setback.

Your capacity to manage the business profitability

(a)  

Your willingness to pledge security. Nature and acceptance of security offered. Adequacy of security

(a)  

a quality of a credit risk, which makes the debtor pay or

intent to pay when his debt is due.

(a)  

is the aspect that an individual’s track record

of managing credit and making payments indicates their

“character” as relevant to the lender.

(a)  

A person’s character is the sum total of his mental &

moral qualities.

(a)  

is the financial strength of a business.

(a)  

represents the overall pool of assets under the

name of the borrower

(a)  

refers to the environment in the customer’s industry,

economically, legally and politically in relation to growth.

(a)  

It may refer to the specifics of any credit transaction,

such as the principal amount or interest rate, and lenders

assess risk based on how the borrower plans to use the

money, should they receive it.

(a)  

signifies the ability of a debtor to pay his obligation.

(a)  

a debtor may be willing to pay his debt, but may not

have the cash which he has to pay when it falls due.

(a)  

A borrower’s to repay the loan is a necessary

factor for determining the risk exposure for the lender,

and indicated by one’s income amount, history of

employment, and current job stability.

(a)  

are properties of value pledged to secure a loan.

(a)  

Improper use of credit on non-productive goods

may encourage consumption without a

corresponding increase in production and, thus, may

result to (increased) inflation

(a)  

It may lead to an excessive increase in money

supply, overstimulation of business activities, and

may cause (increased) inflation, which may necessitate

a corrective action by the BSP.

(a)  

Our creditors and debtors should recognize

their individual responsibilities.

(a)  

By having a better understanding of the nature and

role, which credit plays in the economy, this will

definitely lead to the proper care and use of credit.

(a)  

element of credit risk management

8

(a)  

It is important for the credit

man to gather information

about his prospective debtors.

(a)  

For every good credit

decision, we must consider

the basic and necessary part

known as

(a)  

SOURCES OF CREDIT INFORMATION

(a)  

the relationship between

the creditor and the debtor, also known as the best

(a)  

a direct contact with the

customer enables the creditor to assess the customer

or debtor personally; and allows him the creditor to

explain all the requirements of the company in the

way the customer can understand it best.

(a)  

it’s a specialized

organization engaged in supplying information on the

credit worthiness and financial strength of business

firms.

(a)  

It provides credit information it has assembled from all

parts of its business field of operation.

(a)  

Its main purpose is to have updated and complete

information regarding the status of all business concerns

in which its subscribers are interested.

(a)  

it’s also known as trade

agencies. Their scope of coverage is limited to a single

trade or limited to a number of allied trades.

(a)  

Its major functions are to disseminate credit information

through reports, periodic supplement sheets and rating

books.

(a)  

They are also engaged in collecting delinquent accounts

for their members.

(a)  

FACTORS TO CONSIDER IN GETTING THE

SOURCES OF CREDIT INFORMATION

(a)  

_____We must assure that the account is

financially profitable before we start any credit

investigation. Why? It’s because getting credit

information is costly.

________It’s considered because we all know that in

every aspect of life, if we need to make decision

quickly, we can just get only few sources.

(a)  

It is also possible that some

information were deliberately fixed by people

for a price. Note that the more correlation of

information from different sources, the more

reliable the information is.

(a)  

Credit information changes very often and

therefore, be sure that the information obtained is not

obsolete. It is a must that we have to search for the most

updated or current credit information.

(a)  

it is possible that the financial statement

given by your customer is inaccurate or lacks pertinent

(a)  

one of the best sources of credit information.

(a)  

They can

furnish trade ownership and operating information that

may be difficult to obtain elsewhere.

(a)  

Care must be

taken in requesting information from a bank because

their foremost obligation is to their depositors.

(a)  

References indicated in the information sheets

and obtained from the interview could give

light on the prospective customer’s credit

worthiness.

(a)  

When all data have been gathered, the credit report

is now compiled and would

include:

4

(a)