CREDIT and

COLLECTION
NATURE of Credit

L#1 Nature of Credit

Definitions:
Borrowers viewpoint:
represented both as a
power and as an obligation
Creditors viewpoint:
signifies the existence
of a legal and moral right and an expectation of
the fulfillment of a promise
Economists viewpoint: the exchange of actual
reality against future probabilities
Legalistic viewpoints:
creates a legal right in
favor of the creditor against the debtor

CREDIT - a transfer of goods, services or funds

giving rise to obligations that must be discharged
in the future
ITEMS Provided by the Lender or Creditor
1.Goods - groceries, appliances, medicines,
hardware
2.Services car repair, beauty parlor services
3.Funds - cash loan from a pawnshop, bank, ind.
4.Property - a good for temporary use by another, a
beach house to be used over the weekend
5.Rights - possession or use of a commercial store
space, stocks, commercial paper

ELEMENTS of Credit
1.
2.

3.

4.

5.

Trust & confidence essence of credit

Futurity - time involved specified in the
document
Risk the uncertainty whether he gets paid or
not
Credit is elastic could be expanded or
contracted
It gives rise to creditor-debtor relationships

#M FOUNDATIONS of a System of Credit

1.
2.
3.

4.

Creditors must have absolute confidence in the

debtor to repay their debts
Proper facilities must exist for performing credit
operations
The money standard must be stable enoughpurchasing power equal to the value of money
advanced
The government must assist creditor in
enforcing payment of his debt

Question:
is credit wealth?
Ass.: How does credit influences the business cycle?

#M FUNCTIONS of Credit
Economic function:
a. Serves as a medium of exchange; expansion of
the purchasing power
b. Makes capital available
c. Multiplier effect
2. Social function
- provides uses for capital to
alleviate social conditions of people
3. Business promotion:
a. A tool of business promotion
b. Enables the businessman to adjust his volume
of capital to the varying needs of his business
1.

Advantages:
1.Credit benefits the entire economy -More employment opportunities
- establishment of larger enterprise enabling
them to achieve economies of scale
- newly-generated profits means higher taxes
for public works development
- bigger inventory
- better marketing practices

2. expansion of the purchasing power of the

consumers
3. Savings in time and transactional expenses
4.It has the multiplier effect
Ex. financial advantage CCM p25
cost of credit CCM p26

#L Disadvantages of Credit
Misused credit leads to disaster
- Business
bank
economy
2. Credit leads to over-speculation and
overtrading
Lender and borrower should control the use of
credit
3. The pleasure of having consumption goods
ahead of time may be offset by the burden of
forced savings or loss of consumption
4. Credit is a threat to our private property
5. Governments with heavy borrowings may
reduce future operations
1.

COSTS of Using Credit:

1.
-

Interest
Charge paid in terms of percent and quoted on
an annual basis
Interest is a price which is affected by
competition

2. Operating expenses
- Cost of daily operation, investigation and
collection of payment

3.

Risk

Uncertainty of payment resulting to losses

represents an added cost of doing business

How CREDIT Affects PRICES

-

Credit expands the use of money and therefore

increases the rapidity with which money is used
Increases and decreases in credit affect prices
similar to increases and decreases in the
supply of money

Impact of Credit Upon the Creditor and Debtor

rise in the value of money - harms the debtor
Fall in the value of money - harms the creditor

#L

#L The Credit CONTRACT

Characteristics:
1. A bi-partite contract
- two parties are
involved thus is viewed from two points:
A. creditor gives the right to collect or compel
the debtor to perform his obligation
B. Debtor it stresses his duty to fulfill his promise
2. A pecuniary contract
- final settlement of
transaction is in terms of money
3. Creates a legal obligation creditor acquires a
right of recourse against the debtor upon
default of payment

4. Has the fiduciary element contract is based on

trust
5. Based on personal factors based on credit
standing
L#6 CLASSIFICATION of Credit
A.
-

Credit of General Acceptability

forms of credit which all persons within a
country are willing to take in payment for goods
and services
Known as credit money or bank notes

B. Credit of Limited Acceptability

-

1.
2.
3.
4.

Issued under conditions that make them

acceptable means of payment only within a
restricted field
Promissory note
Bill of exchange
Bank credit
Open book account

According to FORM
1.

2.

3.

Direct loan - exact amount as contained in the

PN is given to borrower; interest collected at
maturity or periodically
Discounted loan - interest is collected in
advance and balance is given to borrower
Overdraft loan
- the bank honors a check
issued by the depositor with a negative balance
account

As to type of USER
1. Consumer or Personal credit
Extended to individual; short-term and non selfliquidating
a. Retail credit either charge or installment credit
2. Mercantile or Commercial credit
Extended to businessmen to finance the
purchase of inventories
Short-term and is self-liquidating

3. Bank credit
loans extended to businessmen for
working capital purposes
4. Investment credit
long-term funds obtained by businessmen via
intermediary financial institutions
Used to obtain fixed capital
funds are from savings and no transfer of goods
As to MATURITY
1. Unsecured loan
2. Secured loan

As to USE
A. Agricultural credit
Intended for the acquisition of farm implements
used in the production and marketing of the
products
B. Commercial credit [mercantile credit]
- Finance the production & distribution of
commodities either by wholesale or retail, in
storage or in transit to foreign or domestic
market

C. Industrial credit
- to finance the needs of industries;
long-term
D. Export credit
- Needed when sales are made in foreign markets
E. Real Estate credit
- Secured for construction, acquisition, expansion
or improvement of real estate properties

Part 1
A#1 LAWS of Credit in the Philippines [ more to
the advantage of the debtor]
a. USURY Law [CA 2655]
b. TWO INSTALLMENTS DEFAULT Rule Under
Civil Law [Art. 1484, RA 386]
- At least two installments must be overdue before
sale payable in installments can be cancelled

c. NO DEFICIENCY Judgment Rule in Foreclosure

of Chattel Mortgage
In case the value of the chattel foreclosed is
less than the account, the judgment creditor
cannot recover the deficiency
d. Laws on Bouncing Checks
e. Court Procedures in Replevin Cases
- Sheriffs cannot seize property under mortgage
without a court warrant of seizure [ expenses
includes a bond to the court]

f. Justice System
A#2 CREDIT & COLLECTION UNIT
Primary function:
maximize profits and
minimize bad debts losses through proper credit
evaluation of each application and through
efficient and consistent collection follow-ups
Maximize profits
a. Maximize sales
b. Cooperation with other departments

Credit Department as a Profit Center

Support to sales effort
- Sales increase against accounts receivables
2. Customer counseling
- Wise counseling leads to saving of many
customers and preserving profitable sales
3. Contribution to finance
- To insure continuity of business operations
4. Task force assignments
- Assignments outside of credit function
1.

A#3
Credit
- refers to the processing, evaluation and
extension of credit
Collection - refers to activities related to collection
of accounts
#4 The Credit Manager
- Responsible for:
a. the formulation of credit policies
b. administration of credit operations that will
maximize sales & profit, minimize loss & maintain
a satisfactory turnover of investment in account
receivables

Research into economic conditions & business

practices
Establish policies, procedures & practices with
respect to sales terms, financing arrangement,
types of credit & use of capital
Must make contribution in the overall company
planning
directs all credit & collection activities and
responsible for the interpretation and application
of policies
Plans, executes and coordinates programs for
the operation of the credit department

Approve major credit extensions, decide

borderline cases, reactivate dormant accounts
Lower position:
Extension of credit in analyzing requests
Conducting credit investigations
Evaluating credit risks
Setting credit limits
Referring credit to higher authority

Operational Management
-

gather, organize and retain detailed information

pertinent to accounts
Judgment and discretion, fair & just in his dealings

Departmental Management
- Risk research and appraisal
- Credit extension & collection supervision
- Office management
- Personnel selection & training
- Contact with other departments & institutions

Cardinal Cs of Credit Personnel

1.

2.

3.

4.

Competence & capability awareness of the

area of responsibility
Communication
- ability to convey his ideas:
reports, correspondence, delegation of duties &
corresponding authority to subordinates
Constructiveness - approach must be positive
and constructive to both credit and collection
management
Creativity
- concerned with creative answers
to questions on marketing & finance

5. Conscientiousness- serve as a catalyst of the

members of the credit team: cooperation,
coordination
6. Consistency - performance is consistent with
company goals and objectives, policies &
guidelines
7. Certitude & celerity
- credit checking, analysis,
evaluation & appraisal must be done with certainty
& accuracy
8. Contact - within and outside business organizations
9. Cost-consciousness
- minimum production cost
in credit evaluation, remedial account management

10. Character - must have honesty, integrity &

reliability
11. Confidence - debtor should also have trust &
confidence in his creditor
12. Computer literate - basic knowledge of the ins
& outs of information technology
13. Congeniality
- pleasing personality,
composed & deliberate but firm and
uncompromising
14. Considerateness - consideration in dealing
with clients
15. Common sense -

#5

Credit and Collection POLICIES

Reasons why Credit Business is Good Business

1. do most of their trading with stores where they
have an account
2. Not so price-conscious as cash customers
3. Do not shop around so much
4. Easier to make a sale
5. Among the best people in town
6. Advertise merchandise, service & quality not
conscious with promotions
7. Stay with a store for a longer period of time

8. Customers with Credit limit kept within become

good accounts
9. Marginal cases can be induced to pay their bills
promptly
10. Accounts not paid on due date have penalties
11. Credit customers are your customers; cash
customers are anybodys customers
Installment
- Helps small marketers to increase their sales &
profits; can give an edge
- Carries certain operating expenses

QUESTIONS Marketers Need to Answer before

Offering Installment Selling
1. what goods am I offering
2. What type of credit do my customers want
3. What are my financial resources
4. Are my competitors offering installment credit
5. What laws regulate installment selling
Process: downpayment
term: 90 days or longer
signs a contract

FACTORS Affecting Decisions

1.

2.
3.

4.

5.

Kinds of goods sold durable items with

repossession value
Customers desire
Financial resources available turn-over of
money is longer
Action of competitors - offer better payment
schemes
Regulatory laws -

POLICIES of Installment Credit

Goods to sell
Confine to high value lines considered as major
purchase
2. down-payment
The lower the down-payment the greater is the
collection expenses, repossessions & losses
The greater the down-payment the greater is
the customers sense of ownership
3. Amount and schedule of payment
- Amount and time should be in relation to
customers income & other debts
1.

4. Installment terms
- should be as short as possible
adjusted to the useful life of the goods
5. Carrying charges
- Sometimes referred to as finance charge or
service charge
- Discuss the prepayment privileges & refunds
6. Credit investigation
- Allows refusal of undesirable credit risks before
sale is made
7. Form of contract
- Allows repossession of the item in case of default
of payment

Check laws on:

a. filing & recording requirements
b. conditions to repossess
c. costs
d. other provisions
8. Expenses and Profits in Installment selling
Expenses:
a. Manpower salaries
b. Office space, supplies & utilities
c. Collection & repossession expenses
d. Interest on capital

Credit Plan:
1.
2.

3.
4.

5.

Forecast of the credit & collection

Objectives a percentage of sales allocated for
credit & collection expenses
Design credit policies & procedures
Programs to meet objectives: qualify & quantify
collection targets
Budget for the operation

Thus credit department:

1.

2.
3.

#6

Decides on the financial responsibility of

customers
Determines the terms of credit
Approves credit & collects them
FINANCING Installment Accounts

Carrying own Accounts Receivables

- Carrying the AR takes more cash

Selling the Accounts Receivables

a.
b.

Finance company
Commercial bank

Determinants:
a. Gross profit
b. Ability to get cash cheaper than the discount
charge
c. Extent of other expenses
d. Volume of installment sales versus cash sales

Three ways to sell Installment Paper:

1.

2.

a.

b.

non-recourse
plan firm is not responsible
if customer defaults in his payment;
repossession is the responsibility of the bank.
Recourse plan of repurchase the firm is liable
for any unpaid balance & responsible for
repossession, reconditioning & reselling
With full recourse - total amount of receivables
sold may be collected from the seller in case of
non-collection
With partial recourse seller guarantees
collection of a stipulated amount and pays the
uncollcted receivables

Other sources of funds

1.
2.
3.
4.
5.

Internal accumulation of funds

Borrowings
External accumulation of funds
Conversion of assets into cash
Mergers or tie-ups

#7

Recording & Accounting in C&C

Accounting Receivables
Open accounts with customers arising from the
sale of goods & services
Known as trade debtors or trade receivables
Trade accounts that are expected to be
converted into cash
Title of goods passes to the buyer
For services: the portion of work completed

Non-trade Receivables
a.

b.

c.

d.
e.

f.

Claims arising from the sale of securities or

property other than goods or services
Advances to stockholders, directors, officers,
employees & affiliated companies
Deposits with creditors, utilities & other
agencies
Purchase prepayments
Deposits to guarantee contract performance or
expense payment
Claims for losses or damages

g. Claims for rebates & tax refunds

h. Subscriptions for capital stock
i. Dividend receivables
Documentation
Documents serve as tools for collection
Required documents: AR
a. Credit application duly filled-up and signed
b. Approved credit line: limit & T&C
c.
Purchase order/ letter order/ purchase
requisition/ telegram orders/ sales order/ vale
slip duly signed by authorized signatories

Required documents: notes receivables

a.
b.
c.

Credit application duly filled and signed

Approval letter/memo
Promissory note duly signed

Collaterals
1. Chattel mortgage 7. pledge
2. Real estate mortgage 8. cash deposits
3. Surety agreement 9. guaranty
4. Surety bond
5. Deed of assignment
6. Letter of credit

Recording of AR / NR
-

With subsidiary ledger for each account

General ledger for summary

Dr amount of invoice sold

Cr payment, discounts, refunds
Statement of Account
a. Monthly statement
b. Detailed statement
c. Reconciled statement

mt#8 MONITORING & CONTROLLING the C&C

Required accounting documents
Aging of AR
Accounts are aged from due dates regardless of terms of
payment:
0-30, 31-60,61-90, 91-180, 181-360, 360 plus past
due
Aging analysis:
a. Per branch outlets
b. Per product lines
c.
Per dealer
d. Per regional or collection areas
e. Per extent of credit and collection control
1.

2. Statement of Account for each

a. In terms of amount
b. In terms of number of accounts
OR
a. Per branch outlets
b. Per product lines
c.
Per dealer
d. Per regional or collection areas
e. Per extent of credit and collection control

Analysis of Receivables
Computation of accounts receivables turnover
ratio: relationship between the average balance
of the book of accounts and the credit sales for
the period
- Bad debts, adjustments for returns and
allowances must be deducted prior
Ex. Credit sales for the mo. P90,000
average daily balance - 45,000
Monthly turnover = 2 or 200%
Significance - ?
-

Determining the Efficiency of the C&C System

Collection efficiency
- percentage of money
collected as against the outstanding
2. Aging of accounts receivables percentage of
past due accounts against the outstanding
3. Turnover
- receivables versus total sales
[ compare with competitive & related industry
sources]
1. Bad-debts-loss ratio ratio between total credit
sales/loans versus bad debts
1.

Accounts Receivable Performance Indexes

1.
2.
3.
4.
-

Turnover
Collection efficiency
Aging analysis
Bad debts
The uncollected amount due to a customers
inability to pay because of bankruptcy, gone
out of business, assets have been liquidated,
with out-of-court arrangement with their
creditors
Exceptions: product claims, pricing
discrepancies, back charges

5. Bad debts reserve

- must be established according to
current practices & reviewed periodically for
changes
6. Bad debt write-off
Deemed uncollected, previously recognized as
doubtful after a collection effort has been
made
Recommended by the credit manager
Corrective Measures:
a. Review credit policy and standards

b. case-to-case review of delinquent accounts

7. re-organizing, revitalizing, resetting
a. Hire additional personnel
b. Train staff to improve respective skills
c. Overall objectives could affect credit policy
d. The company might have a high level of
inventory it wants to unload
e. It might have obsolete stocks which could be
disposed of at greater risks or at lower prices
f.
Competition
g. Tighter money situation

Part II
#1

PRACTICES & PROCEDURES

Credit Application and Other Requirements

Credit application form:

- Initial credit information
- Leads to start credit investigation
- Information on which to further interview the
applicant

Required Documents for Loan Processing

Individual/ single Proprietorship
a. DTI certificate
b. Mayors permit
c. Municipal or city license
d. ITR
e. Audited/unaudited FS

2. Partnership
a.
b.
c.
d.
e.
f.

DTI certificate
Articles of Partnership [with the SEC]
Audited & unaudited FS
ITR
City license
Resolution of the partnership authorizing the
negotiation of the loan

3. Corporation
a.
b.
c.
d.
e.
f.
g.
h.

DTI certificate
Articles of Incorporation & By-Laws [ with SEC]
Audited & unaudited FS
List of stockholders
List of incumbent officers
Board resolution [with Corp. Sec.s certification
Business license
Alien registration certificate of alien officers

For Purposes of Inspection and Appraisal:

Real estate
Titled
Copy of the title
Location plan
Tax declaration: lot & improvement
Latest realty tax receipts
1.

Properties under Administration

a.
b.

Letter of administration
Court order authorizing the guardian to
mortgage the property of the minors & sign all
credit documents

Interstate Estate
a. Appointment order of the administrator of the
estate of the deceased [P.U.A.]
b. Effect an extrajudicial partition of the estate and
transfer ownership in the name of the heirs

2. Chattels [with affidavit of ownership]

Machineries & equipment
- number of units,
location, description of each, evidences of
ownership
b. Office furniture & equipment -doc. Motor vehicle
- LTC registration, OR
d. Merchandise inventory - description, # of units,
price for each
3. Pledge on Shares of Stocks/Marketable Bonds
a. Stock certificate/ bond
b. Audited FS of issuing company
a.

4. Assignments on cash deposits

a. SA, TCD, BA
b. Letter of credit
5. Signatories
a. co-makers statement
b. ITR
#2 Credit Interview
Importance
- To obtain, confirm and verify information about
the applicant which is reliable, acceptable and
complete to facilitate sound credit decisions

Determine the following:

1. Old enough to qualify
2. Mature enough to understand the responsibility
3. Recognizes the seriousness of the obligation
4. Regular income for the repayment
5. Financial condition
6. A need for endorser or security
7. True identity and status
8. Neighbourhood reputation
9. Credit experience

Factors to consider:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Income
Employment
Payment record
Residence
Marital status
Age
References and reputation
Reserve assets
Equity in purchase
collateral

Apollo2.2
Preparing for the Interview
1. Plan ahead know what you are looking for
2. Know the account
3. Plan & schedule
4. Eliminate interferences observe courtesy
5. Appreciate differences use sound principles
when interviewing
6. Know your personality
7. Time consider the needs, the must of knowing
the account & its requirements

#4 Sources of Credit Information

salesmans reports
2. Customer supplied info
3. Bank information
4. Credit interchange
Credit reporting agencies
1. Interchange bureaus
2. Court and securities & exchange commission
3. National and local newspapers
1.

Credit data Bank where data and credit

information are stored

#6

Appraisal of Real and Personal Property

Appraisal
-

An estimate or opinion of value in writing of a

described property as of a specified date and
supported by a presentation and analysis of
factual and relevant data

Purpose: to find the market value

find also the: insurable value,
going-concern value, liquidation value,
assessed value
Appraisal functions:
1. Related to transfer of ownership
2. Related to financing and credit
3. Establish just compensation in
condemnation proceedings
4. Repossession or foreclosure of collaterals

Appraisers main job:

verify
ownership and determine actual possession
Factors on Account of the Market Value:
1.Comparison with the most recent sale in the
same area
2.Estimates of residents in the area
3.Opinions of other appraisers from financial
institutions
4.Recent published foreclosures

5.Zonal valuation of the BIR

6. Most recent loan amount granted
Cite example

foreclosed property is P3M/ P3.7M

- Zonal valuation: 1K sqm - P1.9M
Note: Improvements are to be Appraised
depreciated over 25 years
Cite example

Cases of Fraud or Deceit in Collateral:

Spurious titles
2. Property claims on government lands
Examples
1.

Part III
Credit Evaluation, Financial Analysis
and Credit Decisions
Credit Evaluation the process of finding out via
proper analysis of what constitutes the degree
of risk the company is willing to undertake
Credit Investigation
1. Personal interview
2. Documentary verification
3. Inquiry from third parties

Credit Investigation Report [CIR] report for the

necessary credit information
CREDIT POLICIES
Policy
- general statements used as guides for
the organization
- a reflection of the organizations
philosophy
-

General Policies on Credit

1.
2.
3.
4.
5.
6.
7.
8.

Approval authority
Credit limits
Loan-to-market value ratios
Past due limits
Territorial limits
Single proprietor vs. corporation
Other side agreements imposed by lender
Separation of credit from marketing operations

1. Approval authority
Is based geographically or rank/title
Significance - ?
2. Credit limits
The maximum amount that could be granted
to one borrower
Ex. single borrowers limit
purpose - ?

Determinants for a credit limit:

a.

b.
c.

d.
e.

Average total purchase amount per customer

per order
Nature of the product being sold
The geographic distance between the branch
and the approving authority
Nature of the companys competitors
Credit quality of its customers

3. Loan to market value ratios

Secured loans: represents the maximum loan
that could be granted based on the propertys
market value
Durables:
pre-established as the difference
between the retail selling price and
downpayment

4. past-due limits
-

Imposed as a performance measurement tool

of branches
Banks PD limit is 25%

5. Territorial limits
- Areas where credit could be granted
Factors: peace & order, availability of public
transportation, prevalence of crime, travel
time, road conditions

6. Single prop vs. corporation

Unlimited liability vs. limited liability
Corporation:
board resolution, principally
liable
-

7. Separation of credit from marketing operation

Marketing: to sell
Credit department: to ensure that credit
resources are used properly

Loan PAYMENT TERMS

Pay on demand
2. Payment required after completion or
occurrence of an event
Ex. COD
1.

3.
a.
b.

Payment required after merchandise is sold

Consignment only
Trust receipt PD 115

4.
-

Payment with specific due dates

Due dates in calendar days
Fixed for one year with renewal
Payments after availments
Interest only and balloon payment at the end
of term
Amortized payments of equal amounts
Graduated payment schemes
Decreasing payment schemes
Acceleration clause


1.
2.
3.
4.

Factors to consider in determining the term:

Nature of the product
Sellers mark-up
Loan value vs. market value
Terms used by competitors

Questions:p141
INTEREST RATES
Art 1956 - No interest shall be due unless it has
been expressly stipulated in writing

Art. 1959 Interest due and unpaid shall not

earn interest. However, the contracting parties
may by stipulation capitalize the interest due
and unpaid which as added principal shall earn
new interest
Simple and Compound Interest
Principal
Interest
Balance
1 P10,000
P1,200
P11,200
2- 11,200
1,200
12,400
312,400
1,200
13,400

Compound interest
Principal interest
balance
1 P10,000
P1,200
P11,200
211,200
1,344
12,544
3 - 12,544
1,505
14,049
Modes of Interest
1. Simple interest
2. Add-on interest rate
3. Compound interest amortized
4. Fixed rate and variable rate

Simple interest
Example: NR, ER

Add-on interest rate

- For consumer loans
Ex. Retail price
P10,000
down payment
2,000
amount to be financed 8,000
Add: interest @ 3%/ mo x 30 mos. P7,200
Amount due
P15,200
Divided by 30 months
P506.67

Period
3%
4%
5%
6%
1 .971
.962
.952
.943
25 17.413
15.622
12.783
11.654
30 19.601
17.292
15.373
13.765
Objective: match the present value of future
installment

Compound interest Amortized

Loan: P100K

ER 18%p.a.

Annuity table
Pd

17%

.855

2.743
5 3.199
Result:
4

18%

19%

.847

.840

2.690
2.639
3.127
3.058
annual amortization

Fixed and Variable rates

Fixed
period

- does not change during the credit

Floating/ variable rate interest rate varies with

the prevailing rate
Questions: p149

5 Cs of Credit
Character
- evaluation of the borrowers integrity,
reliability & moral character
look at his social/family background,
education, vices, habits & personal traits,
credit history
No credit history: attachment to the
community, job or business, thing purchased
Ex.
1.

2. Conditions
-

the general business condition in

particular industry in which the applicant is
engaged

3. Capital
- the financial strength or networth
of the person or business
how much of the owners money is at
stake relative to that provided by creditors

4.

Collateral

the property used as mortgage to secure

the loan
Purpose: ?
-

Effect of over-appraised property?

Collaterals accepted:

5. Capacity
2.

a persons wise use and control of credit

funds and his ability to pay
this includes a judgment about management
itself
Views:
a. Employed applicant: disposable income vs.
the monthly installment
b. Self-employed: net income, stability of the
enterprise, management capacity of the
owner

c. corporation: management abilities of

executives, marketability of product lines,
stability of the enterprise, technology used
Case problems:
Employed
The applicant, Rosa Rosal with one child in
Grade 3 at a Catholic school has only one
source of income
Gross income per payday
P10,000
Deductions
2,000
Loans
500
Union dues
100

Self-employed
Same example: personal living expenses,
disbursements, monthly installment the same.
The applicant owns a feed store with the
following information:
Daily sales, feeds
P7,000
Daily sales, medication
1,000
Gross profit, medicines 15%; feeds 18%
Feeds [50kg bag] costs P430.00 sold P10.50
per kg.

Corporate business
Mega corp.
2010 2011 2012
NI after taxes 102K112K 124K
Mega applies for a loan that requires 5 annual payments
of P97,000 amortized
Q: is it possible? Considering the NI; DI/MI
Net income after taxes
P124,000
Projected income from proposed 100,000
Sub-total
224,000
Loan amortization
97,000

DI/MI ratio

-?

Non-quantifiable indicators:
a. Quality of machinery, equipment,
technology
b. loyalty of customers
c. Quality of inventory
d. Ownership of patents and copyrights
e. Competence of officers

#2

Financial Analysis

Short term loan: current flow of funds

Long-term loan: earning capability [past and
present]
Liquidity Ratios:
a. Current ratio- Current Assets/Current Liabilities
- it indicates the extent to which the claims of ST
creditors are covered by assets of which
maturity corresponds to the maturity of the
claims
CA: cash, marketable securities, accounts
receivables, inventory

CL: accounts payable, ST notes payable, income

taxes payable, accrued expenses
b. Quick ratio CA Inventory/ CL
- a measure of the extent to which the company
could pay off its ST obligations without relying on the
sale of inventories
c. Acid Test ratio -

cash + GS + cash equivalent /

CL
- a measure of liquidity by eliminating inventory and
AR which have greater potential shrinkage in value
upon liquidation

d. Cash velocity - cash + cash equivalent /

yearly sales
- indicates the number of times cash has been
turned over in conducting operations during the
year
e. Cash to cash payments - cash + market
securities / average daily cash payments
- indicates the number of operating days which
the company could sustain without replenishing
its cash and near-cash accounts

f. Inventory to working capital - variable / CA CL

- shows the proportions of net CA
- indicates the potential loss to the
company from declines in inventory values
g. Receivables to sales - AR/ credit sales
Receivables: trade accounts receivables, trade
notes receivables
- A lower ratio indicates a more rapid collection of
sales during the period and greater liquidity of
the receivables

h. Payable turnover - average AP / total purchases

- indicates slowing up or speeding up a
payment
Leverage Ratios
- Measure the contribution of funding by owners
compared with the financing provided by
creditors of the firm
a. Current liabilities to net worth
- CL / TA-TL
- High ratio indicates ST gap financing

b. Coverage of Fixed Charges - Net Profit before

IT / Fixed Charges
- Measures the extent of the decline in earnings
without resulting in financial embarrassment due
to inability to meet annual fixed cash outlays
c. Debt-to-Equity ratio

- total debt / total

equity
- Measures the firms obligations to creditors in
relation to the funds provided by the owners

d.

Fixed Assets to Networth

- Fixed Assets /
Total Assets Total Liabilities
Shows the extent to which ownership funds are
sunk in assets with relatively slow turnover

e. Debt to Assets ratio

- total debt / total assets
- The extent of debt financing provided by
creditors

Proper Use of Ratios

Standards used in Ratio analysis:
a. Absolute
- generally recognized as being
desirable regardless of the type of company,
time, stage of business cycle
b. Past record - either conditions are constant or
varied become standards for current or future
operations
c. Other companies or industry average
- useful
in indicating areas whether further analysis and
study should be made

Issues: no two companies are alike

varied accounting method could lead to
differences in ratios
variability of product mix, geographic
location, corporate objectives lead to a lack of
comparability
d. Budgeted standard
- budget is the
statement of what the company intends to do
during a stated period of time

Selective Uses of Ratios

ST creditors
Concerned with the ability of a borrower to meet
current obligations promptly
Current ratio, acid-test ratio, turnover of
inventory & receivables
2. LT creditors
Interested in the working capital position to
indicate ability to pay principal and interest
TL to OE, OE to TA, FD to NWC, FA to OE, FD
to TC, FA to FD
1.

3.

Management
- the above ratios, comparative for a
certain period and the situation of competing
companies in the same industry indicates if
performance improvement is possible

4. Stockholders
- shareholders are interested in per share
ratios; rate of return and yield, capital
appreciation measured by market value

#8 Account Management
Aging of Accounts
- Refers to the age in relation to the due date and
the account is classified according to current or
past due
Ex. P179

Note:
the higher the ratio of the accounts that
are current, the better is the overall health of the
accounts
the older an account gets the more difficult it is
to collect, the lesser the probability of recovering

Collection Policies and Procedures

Legal basis: article 2236 of the PHL Civil Code
the debtor is liable with all his properties,
present and future, for the fulfillment of his
obligations
Causes of Non-payment
1. Natural calamities
2. Unrealistic payment schedule
3. Unproductive investment

4. Unproductive expenditures
5. Extended hospitalization w/o health
insurance coverage
6. Large educational outlays
7. Death of family provider w/o life ins
coverage
8. Product defects
9. non-compliance with warranties
10. Constant breakdown and inefficient repair
service

General Collection Policies

Consideration:
1. immediate recovery of the credit granted
2. Appliance industry: ER is 50%-70% per year
Reason: high cost of collection
higher bad debts risk
Areas where collection policies have to be
formulated
1. Hiring of collectors

Job requirements
b. Protection against the loss of cash collections
thru selective hiring and surety undertakings
c. Customer orientation
a.

2. Procedures in the handling of collections

a. Collection for cash
b. Other collection techniques
3. Surcharges and penalties

4. Field motorized collection vs. collection letters

5. When to send collectors/collection letters
6. Collection incentive program
7. Insurance policy to be assigned by debtor
8. Using service charges
9. Use of acceleration clause
Type of intensity of collection effort:
1. Reminder stage
- Statement of account, communication via
technology

2. Request stage
- Installment account: polite approach by field
collector; bank loan reminder letter
3. Appeal stage
- Installment account: strong reminder by field
collector; bank loan strong letter of appeal
[penalties, surcharges]
4. Threat stage
- IA: threat of repossession or legal action;
- Bank loan: threat of foreclosure

5.
-

Friendly efforts at recovery

IA: deposit at the branch
BA: ch 10

6. Drastic recovery efforts: repossession,

foreclosure, attachment, garnishment
Collection Goal:
Total amount that must be collected to bring all
accounts up-to-date or in current status

#10 Recovery of Credit Granted

Assumptions:
1. Credit transaction has been consumed
2. Complete transfer of possession [by delivery]
or both ownership and possession
3. The seller has discharged with his obligation to
deliver a determinate thing but the buyer
refuses to or cannot pay
4. no product defects or violations of warranties
on the part of the seller

Factors that determine what recovery efforts to

undertake in case of non-payment
1. Nature of the object of credit
2. Loan is secured or unsecured
3. If secured, nature of property used as security
4. Nature of the documents used
5. Nature of the relationship between buyer and
seller
6. Nature of the lender/sellers main business
7. Special circumstances attending the sale or
credit transaction

Friendly Recovery Efforts

1.
2.
3.
4.
5.
6.
7.
8.
9.

Term extension
Merchandise return on swap
Condonation of penalties or swap
Restructuring: simple, document substitution
Deposit of durables, movables
Debtor substitution
Decion en pago
Addition of guarantor or surety
Securitization

Condition:

debtor is willing to pay

Term extension
- Extra time to tap his resources and make
settlements of obligation
2. Merchandise return swap
- For unsold merchandise, the wholesalercreditor could take back the merchandise
[change it with new ones]
- Seller protects his business relationship with
the buyer
1.

3. Condonation of properties and surcharges

- non-collection of penalties and surcharges or
interest in exchange of the full payment of the
account
4. Restructuring
Simple restructuring - terms are extended and
monthly payments reduced to affordable levels
Document substitution change from accounts
receivable to notes receivable by signing a
promissory note
adv. A. strengthens the financial condition of the
creditor [more reliable]

b. PN could be used by the creditor to pay its

own debts or as collateral
5. Novation or change in the credit agreement
Merchandise credit creditor takes back
ownership of the goods. Change contract to
trusteeship under PD115
6. Deposit of durables and movables at the
branch office
- Buyer deposits goods purchased in installment
payments at the branch store and suspends
the surcharges and penalties

7. Debtor substitution
- Debtor is replaced by another debtor who is
reputable
- Requires new documentation which will
extinguish the old obligation and create a new
one
8. Dacion en pago
- If there is a collateral to the loan, debtor sells the
property to the seller based on near market
value

8. Addition of guarantor or surety

- Creditor believes that the debtor has financial
difficulties, another guarantor or surety is
recommended
- Objective is protection of the creditors
asset/principal
9. Securitization
- Applies to unsecured credit obligations
- Creditor requests for a real estate or personal
property as security

Adv.
a. Protection of asset or safety of the principal
b. There is a specific collection time frame and
may readjust his own resources
Drastic Recovery Efforts
Type of credit

Type of credit

options

Cash loan, unsecured

Court order, levy,

garnishment, replevin

Merchandise credit,
unsecured
Consumer durables, I

Do
Sum of money, cancellation of
sale, repossession, replevin

Movables, CM

Foreclosure, replevin

Trust receipt

Criminal prosecution

Real estate sale on I

Cancellation of the sale

Loan secured by real estate

foreclosure

Credit obtained thru deceit

Criminal prosecution