DEVELOPMENT (REVIEW) OF CAPACITY or security offered.

Its the collection of the

BIAS CREDIT AND COLLECTION POLICIES credit granted arising from being a going
concern, which develops positive capacity
No amount of sales can ever compensate for bad
rather than the acquisition of the collateral or
debts, uncollected. It cannot be eliminated either; but
security:
can be avoided and minimized by adopting a
11. Set a workable system for monitoring,
financial (liquidity), capacity bias rather than mere
evaluating and expeditious action on
character bias credit policies with a no-nonsense rank
perceived and/or actual credit danger signals
and file to implement the same and collect.
shown by debtors;
CREDIT AND COLLECTION PRINCIPLES 12. The credit and collection and sales operations
AND PRACTICES TO ADHERE TO AND must be in positive synergy to attain overall
ABIDE BY FOR BUSINESS objectives;
13. Decisiveness and expeditiousness in
1. Credit is earned; and a privilege, not a right; collection efforts on all fronts of collection
2. The financial security, sustainability of the venues be effectively undertaken within and
creditor is the principal consideration rather without the creditor's organization to prevent,
than the attainment of sales or credit avoid and minimize bad debts.
objectives; 14. A bad compromise is better and pragmatic
3. Credit must be granted only to person than a long contentious, expensive litigation.
possessing the positive traits and attributes of A peso in collection is better than zero;
trustworthiness, integrity, capability and 15. Don't cry over spilled milk. Take your loss,
capacity to earn, save and repay one's write-off the bad account and learn from your
financial obligations; negligence.
4. The credibility, collectibility and protection
of the credit granted must take precedence There must always be plans to guide the conduct of
over expansion or growth; and, must be given business in marketing, manufacturing, accounting,
expeditious positive attention, action; treasury, credit and collection functions and other
5. Financial soundness, operational vital management operating units of a company.
effectiveness, efficiency and security of the
In reality however, the majority of businesses have
creditor must be balanced against risks,
not deliberately developed credit and collection
diversification, expansion and profitability:
policies and procedures. If there is such a system.
6. Debtors must not be given credit much more
The policies and procedures used only evolved and
than what they can reasonably, effectively,
developed after years of operation. This inordinate
efficiently repay:
reliance on experience and not on fundamentals of
7. To balance risks of credit granting for growth
credit and collection discipline is risky, costly.
and expansion, realistic credit limits and
terms be set for the target market within the Developing and implementing no-nonsense credit
geographical areas of operation; and collection policies and procedures must be based
8. Credit must not be extended to one who is a on the sound basic principles, science and art of the
habitual delinquent; discipline on credit and collection management,
9. Each credit applicant must properly be credit marketing/sales, law, economics and finance.
investigated and evaluated. Properly
THE QUESTIONS A COMPANY SHOULD ASK
documented, recorded, expeditiously
ITSELF AND WHICH IT MUST ANSWER - IN
registered with the proper government
DEVELOPING ITS CREDIT AND
agency in applicable cases. Effectively and
COLLECTION SYSTEM OR POLICIES ARE:
efficiently collected;
10. Credit grant must not be motivated and 1. Who shall initiate the system? The owners or
granted principally by reason of the collateral the stockholders, directors or officers?
 2. Is the credit function a finance/treasury high "maharlika", middle aliping
function or a marketing/sales function? namamahay" or low "aliping saguiguilid"
3. What is the policy's philosophy or rationale? income group will, to a large extent influence
4. Should credit policies and procedures be the collection policies you will adopt and
liberal or conservative? enforce.
5. Is the system suited to the industry to which
C. CREDIT AND COLLECTION POLICY
you belong?
EQUATION
6. What products and services do you sell and,
how should you sell these on credit? Depending on the factors affecting your product or
7. What market share do you want to attain? service, you can either have:
8. What is the perspective/status of the
industry/business to which you belong? 1. Liberal credit policy complemented by strict
9. Are the political, social and economic collection policy.
environments conducive to the business you 2. Strict credit policy complemented by liberal
are in? collection policy.
10. What kind of competitions do you have? 3. Liberal credit policy with a liberal collection
11. Do you have the competent, experienced policy.
personnel to develop, implement and enforce 4. Strict credit policy complemented with strict
the policies and procedures? collection policy.
12. What are your benchmarks for effectiveness, D. FACTORS DICTATING FOR LIBERAL
efficiency in assessing the performance of the CREDIT POLICY
credit and collection operation in your
organization. 1. High overhead cost necessitates high volume
to prevent losses;
A. OBJECTIVES OF ESTABLISHING CREDIT 2. High advertising and promotion expenses;
POLICIES 3. Demand for products service is temporary
1. To maximize sales; due to the fad/nature of your product(s)/
2. To minimize costs and bad debt losses; service(s):
3. To attain profit or income objectives. 4. When opening new accounts;
4. For control/incentive; 5. Developing a market for new
5. For sustainability and growth. product/service;
6. If your are in a very competitive market;
B. FACTORS TO CONSIDER IN 7. A sunset market for your product/ service;
FORMULATING CREDIT AND COLLECTION 8. Heavy, abnormal, obsolete inventory;
POLICIES 9. The selling season of your product/ service is
ending and not financially strong to carry
1. Capital - Up to what extent can the capital of
your inventory to the next year.
a company service or support the
receivables? E. FACTORS DICTATING RESTRICTIVE
2. Competition - Up to what extent or period CREDIT POLICY
does the players in the market give to the
customers? 1. Having extended or leveraged financial
3. Product or Service - Does your product or condition;
service lead or lag in its market? Does your 2. There is more demand for your product
product or service give you sufficient market /service than your ability to produce or
leverage against your competitions? serve;
4. Kinds of customer or target market - The 3. The inventory is low and not in a position to
class of customers or the market for your build up inventory expeditiously to meet the
product or service; whether belonging to the demand;
 4. The general economic condition is that, credit limits are restrictive by nature. It opens
unfavorable; the opportunity for repeated customers business as
5. Business condition among your customers they proved themselves capable and worthy of more
are slumping badly; credit extensions.
6. Manufacturing product according to
ADVANTAGES OF SETTING CREDIT LIMITS
customer's specification which you cannot
sell to others; 1. It is the overall tool for the control of credit
extension, promotion of sound credit
The credit policies you devised must be flexible.
practices; and, the effective collection of the
Conditions can change quickly in your company and
accounts.
in your market; and, the credit policies that are just
2. Prevents misunderstanding and confusion
right at the present may be too liberal or too
within the sales operation and with the
restrictive tomorrow.
customers. Minimize wasted sales efforts,
Your sales, credit and collection records showing provide some degree of discretion for
relationships between total sales and credit sales may automatic control over the accounts
be the starting point to amend your credit policies to receivable.
adjust to the prevailing condition. 3. It aids in reducing the cost of credit and
collection operation; and, contributes to
The possible two pronged solutions are; first, to be
efficiency.
liberal in credit extension; then, active promotion of
4. Credit limits work as a check against
credit sales.
imprudent, reckless buying of customers and
SETTING OF CREDIT LINES/LIMITS: their abate extravagance imprudence in using
credit.
Represent an estimated ceiling that represent in the
judgment of the creditor as to the amount of credit OBJECTIONS TO CREDIT LIMITS
which may be extended safely to a credit applicant or
There are reasons advanced why setting credit limits
debtor.
are objectionable.
It is the amount produced by the analysis of the
1. Difficult to set up and keep current;
elements and basis of credit to be in relative
2. Unless keep current, credit limit is of little
proportion to the credit applicant's needs, capability
value;
and capacity to pay within the credit term extended.
3. Facts and figures are difficult to gather from
It is arrived at from the point of view of the creditor
different sources;
and debtor. It serves to improve the granting or
4. Necessitate readjustment every time an order
establishment of credit in particular transaction for
causes an excess in the limits set:
credit promotion and collection.
5. May precipitate losing rapport with the
Sharing the credit limit information with the sales customers due to frequent discussion of their
operation will result to a more effective sales- credit limits;
marketing positive synergy; thus avoiding wasted
The foregoing apparent objections are far from
sales efforts and expense in getting orders in excess
reality because credit limits are not permanent
of the customer's limits which in the end, will be
amounts but estimates only of one's capacity to repay
rejected.
for credit obtained.
Contribute to a cost effective synergy between credit
Its not necessary to adjust the limit often at short
and sales operations within the business
intervals nor necessary to reject an order due to a
organization.
slight increase in the credit limit set.
Credit limit works also as a guide in the promotion
Credit limits do not exactly reflect the actual capacity
of sound credit operation, not withstanding the fact
of the debtor to repay his credit. They are generally
set as guideposts, warnings as to debtor's or Finally, the creditor/seller's must give due attention
customer's relative capacity to pay. to the customer's debtor's requirement and keep all
credit extensions within those limits; otherwise,
WHY SET CREDIT LIMITS
credit so obtained maybe diverted or used for other
Whether or not to grant credit is based on three credit obligations of the customer-debtor; or, for
intertwined decisions namely: some other business needs unrelated with the
business the creditor seller have extended credit to.
1. To extend credit;
2. On what terms and conditions shall credit be CREDIT LIMIT ALLOCATION
granted;
Prudence dictates that credit lines must be allocated
3. Setting or determining a limit to the amount
judiciously and equitably to the different target
of credit to be extended under the specified
markets.
terms and payment conditions.
The factors to observe in credit allocation are:
Credit limits are essential, because credit is a
motivation to an active and profitable sales activity. 1. Keeping tap of creditor's allocation of credit
It is inherent in the institution of credit as leverage in to its different market, business and
its administration and control. industries;
2. Rational extension of credit terms to different
FACTORS NECESSARY TO ARRIVE AT A
debtors;
CREDIT LINE/LINE
3. Judicious, timely monitoring of credit danger
Generally, its the same factors in arriving at a signals on credit availors;
decision to grant credit. Bias must be given to 4. Effective, timely payment collection
customer's past and present good paying performance monitoring.
performance; and, the prevailing business, economic
WAYS TO SET CREDIT LIMITS
condition in conjunction with a study of the
customer's particular line of business and the type of It can not be said for certain that these two
the business organization which must be correlated approaches shall be used distinctly separate from
with credit and collection policies of the creditor- each other.
seller.
It is best to use these two methods in computing for
It must be remembered that, it is not the ultimate the credit limits for the customers-debtors because
payment of the account that is of importance, but the the needs and requirements of a customer-debtor
willingness and capability to pay the credit within the may not be supported by their debt paying capability.
credit term extended that is more important.
METHODS TO DETERMINE CREDIT LIMITS
Necessarily, the past, the present andl future
willingness and capability of the debtor-customer 1. Credit limit granted arbitrarily:
vis-à-vis potential conditions are more significant a. Following the credit limit granted to
than those which actually exist. credit applicant by other creditors or
sellers and competitors within one's
A. The customer's or debtor's positive debt
industry;
paying capacity and ability to pay. In short,
b. The trial and error (oido) method;
whether or not the credit can be paid on time
c. Based on the average amount of the
within the credit term and what amount, is the
highest credit granted by others in the
financial approach of setting credit limit.
same line of business;
B. The positive needs and requirements of the
2. Credit Limit based on the debt paying
customers-debtors of the merchandise/
capacity of the debtor/ customer.
service of the seller-creditor, is the sales
approach to setting credit limit. Computed on the tangible networth or the net
working capital of the credit applicant. The limit is
computed by dividing tangible networth by the c. Credit set on temporal basis without
number of principal creditors or suppliers which may specification as to amount; such as a
be obtained from the creditor's own experience with week or month credit which may with
similar types of business. It is assumed that the experience be changed to some other
networth fairly measures the debtor's debt paying period of time. This is mostly used in
capability, particularly when the assets consist sale on credit for perishable goods;
mostly of fixed assets and little current assets. It must d. Determination of the customer's/
be noted that fixed assets in the net worth are not debtor's total requirements for the
readily available for payment of current indebtedness year which is estimated from the cost
in a going concem operation. Such limit is not related of goods sold to be sold during the
to any period for which credit is to be extended. period. Dividing this figure into the
normal rate of turnover will result to
3. Another way of setting credit limit is
the average requirements when
assigning a limit either as fixed amount on
divided by the number of principal
certain credit rating bracket as ascertained in
suppliers a credit limit is obtained.
a credit scorecard; or, as a percentage of the
capital rating done by reputable, credible It's a fairly reliable method as long as sellers have
rating company. When this latter method is similar product or service mix and their credit
used, the procedure adopted is to allow a extensions are generally similar.
credit limit equivalent to a certain percentage
A. SUGGESTED METHOD OF COMPUTING
of the capital rating figure of a credit rating
CREDIT LIMIT BASED ON CUSTOMERS
company.
REQUIREMENTS
This method has similar weakness as in the method
You must not allow the customer-debtor to indirectly
based on tangible net worth.
fix his credit limit. The steps to compute for a
There is too much reliance on ratings, regardless of customer's needs and requirements are as follows:
the fact that ratings changes frequently and are
1. Determine the customer's yearly volume of
estimates based only on the degree of judgment of
business;
the rating company which must jibe with the
2. Determine what percentage of customer's
judgment of the individual credit manager who is on
business is in your company:
the account.
3. 3. Determine what proportion of customer's
4. Other method of computing credit limit is business you can obtain (say for example,
the net working capital method (current that out of P1,200.000 annual business, you
assets minus current liabilities) or net assets. may be able to get 50% or P600,000 of such
Net current assets is divided by the number of business);
customer's principal suppliers/ creditors. The 4. How many days of sale will you grant the
presumption under this method is that the net customer a credit of 45 days credit term. The
current assets measures the debtor's ability to credit limit is computed by dividing 45 days
pay within the credit term or period; and, that into 360 days and dividing the result into
he is granted credit or buys from the creditors amount to be extended during the year thus;
or sellers used as divisors.
(360+45=8; P600,000+8= P75,000 credit limit)
5. Credit Limit Based on Customer's/Debtor's
Requirements 5. Reduce the credit limit thus determined by
a. The debtor's indicated probable need, the average gross margin of profit on which
or requirement of the customer; buyer normally sell your product say, at 30%
b. Asking the customer debtor when margin, and you will get approximately
applying for credit to state how much P52,500 in credit line.
he requires from the seller/creditor;
Annual sales x percentage in seller's line x of goods sold, from which all creditors must
percentage in seller's line, seller expects to obtain x be paid from;
cost of goods sold, as percentage of sale divided by 3. Estimate all the accounts and notes payable
average turnover of seller's accounts receivable. appearing on the customer's financial report
as claims against the funds available for
= Credit Limit substituting the figures in the
paying creditors;
foregoing illustration, the results are as follows;
The money claims for the period are determined by
(P2,000.000 x 60% x 50% x 70 % divided by 8 =
multiplying the total of the accounts and notes
P52,500 margin)
payable to creditors by the rate of turnover of such
Another way to compute a customer's requirement is obligations. The rate maybe computed from financial
to ascertain the cost of goods sold during the year reports of customer's- debtor's paying practices; such
obtain from the latest financial statement, which as those given by credit bureaus, the salesmen and
maybe regarded as the annual merchandise those secured from the SEC.. It is arrived at by
requirements, divided by the customary credit dividing 360 days by the average length of time taken
period; to obtain the amount that would be required by the customer-debtor in paying his debts. The
during such time; then, the amount is divided by the product of the payables and the turnover rate
number of suppliers to arrive at the credit limit to be represents the estimated claims of creditors against
set by each of the suppliers. If the cost of goods sold the customer's-debtor's income for the year.
is P180,000 for the year, and the general credit term
4. The portion of the earnings available to pay
is 60 days, the amount needed for such period is
a new creditor, on the assumption that
P30,000.00 worth of goods or credit. This amount is
customer-debtor did not replace old creditors
divided by say 15 suppliers, will result to a credit
is the difference between the total of cost of
limit of P2,000.00 each, computed to wit.
goods sold (step 2) and the obligations to
present creditors (step 3). The balance
represents the total which a new creditor may
expect to sell to the customer in a year's time.
5. The credit limit for any given period is
dependent upon the length of time that the
creditor maintain the customer-debtor in his
Days in year (360) x no. of suppliers = Credit limit list of customer's.
B. CREDIT LIMIT COMPUTED ON The total annual sales that the creditor may hope to
DEBTOR'S PAYING CAPACITY make to the customer-debtor are divided by the
turnover rate which he expects to make to the
1. Ascertain the estimated revenue of the
particular customer-debtor.
customer-debtor from all sources. From this
amount shall come payments for debtor's For illustration assume that the creditor's regular
debts; credit term is 30 days, but on the average said term
extends to 60 days, one sixth 1/6 (360+60) of a years
The expected sales of customer-debtor for the period
sales to the customer may be allowed to be
inclusive of the goods (service) to be sold on credit,
outstanding (delinquent) at any given time. This
must be estimated. This is however difficult to
represents the customer's credit limit by his ability to
ascertain and the immediate past sales figures maybe
pay.
relied upon.
The entire procedure may be arrived at by the
2. From the sales in # 1 deduct customer's gross
following formula;
margin and operating expenses. The balance
after deduction of the gross margin is the cost
Expected Sales x % of Sales represented by Cost of b. Credit limit computed from credit
Goods Sold, Seller's Turn over of Receivables less bureau's report or from other creditors
AP & NP x Rate of Turnover Credit Limit* of credit applicant. Take the average
amount of the credit applicant's other
credit accounts and initially allow the
highest or medium amount paid
within a certain period- based on the
credit terms allowed by the creditors.
c. Credit limit based on time; i.e. daily,
weekly, semi-monthly or monthly
etc., in some instances allowing for
some grace or extension period.
Therefore, customer-debtor pay his creditors d. A 30 day charge account for an
monthly (360/30) amount computed at a certain
percentage of customer's-debtor's
Thus, the total claims of other creditor's on monthly salary like; P1500 for those
customer's-debtor's annual earnings, exclusive of his with monthly salary of P6000 to
operating expenses of P60,000 x 12 equals P720,000. 7500; P2500 for those with monthly
The amount of P720,000 shall be deducted from the salary of P7500 to P10,000 and P4000
cost of good to be sold gives P960,000 less P720,000 to P5000 credit limit for those with
equals P240,000, the new credit sales the creditor - monthly salary of P10,000 or over.
seller may expect to sell to the customer-debtor. 2. Credit limit for installment or deferred
However, due to the creditor's practice of extending payment. The following factors must be
his average 30 days term to 60 days, the expected taken into the computation of the credit
collection from the customer-debtor is six (6) times, limit and term.
thus a credit limit of P40,000 is assigned for the Credit limit must be set for durable goods buyer to
customer-debtor. prevent the customer from buying imprudently; and,
P1,200.000 x 80-(60,000 x 12) / 6 = P40,000-credit to avoid unreasonable bad debt losses. In this
limit direction the installment buyer's capacity to pay is of
primary importance to determine.
It is therefore of necessity that granting credit based
on customer's-debtor's needs and requirements must To determine the capacity to pay of the credit
always be tied with the paying capacity and applicant all his obligations on installments must be
capability of the customer-debtor. determined and the sum total of such obligations
must not be more than 12%-15% of the customer's
From needs and requirements must come the show monthly income for an installment period of 12-24
and proof of capacity and capability to pay. From months; vis-à-vis the price, durability, reliability of
anticipated debt paying ability stem to some degree the goods bought on installment; and, installment
the requirements for goods/services to sell; and, buyer's earning capacity and security. This may be
provide such debt capability and capacity of improved by deducting 10% -15% of monthly
customer-debtor. income referred to above or 1% for each dependent.
SETTING SMALL CREDIT LIMITS More over the resale value of the good or product
bought as well as the depreciation factor's must be
1. Assigning Credit Limits on Retail Account taken into the computation of the credit limit.
a. Request the credit applicant to
indicate on the credit application, the 3. Credit limit for revolving credit varies
minimum, medium and maximum with the paying capacity of the debtor and
credit limit he wants;
 the length of time over which the credit limitation is imposed to forestall abuse,
revolves. indiscretion, imprudence and taking
advantage of the bank or financing
Generally, creditors computing for such a credit limit
companies' financial resources;
determines the amount which the customer can
3. Some selective dealing of some banks with
normally pay every month for the kind of goods the
certain businesses because of their
customer normally buy for each month. The amount
knowledge, specialization of a given type of
is multiplied by the number of month embraced in
industry (i.e. small and medium enterprises)
the plan. Some creditor grant 30, 60, 90, 120,180 and
is more bias to grant a bigger line of credit to
others for 360 days. Thus, if a customer will pay
borrowers in that business than one who is
P200 a month and the store has a 60 days turnover a
unfamiliar with it and thus overcautious;
credit limit of P200; 400; 600; 800; 1200 and 2400
4. The banks' imposition of a lending condition
for credit terms ranging from 30-360 days
which is to maintain a minimum balance
respectively.
either daily or monthly; and, in paying up or
4. Credit limit from lending institutions for clean up of all loans at least once a year;
borrower is essentially the same except 5. The "pawnshop lending" paradigm of banks
that, in a bank and financing companies and financing companies where, very seldom
their credit investigation, documentation is a borrower possessing positive
process is more rigid and stricter. creditworthiness is granted credit or loan
clean, uncollateralized or risk based lending.
The banks and financing companies are governed by
regulations imposed by the Bangko Sentral ng OTHER GUIDES IN SETTING UP CREDIT
Pilipinas as well as the Securities and Exchange LINES/LIMITS
Commission.
1. NORMAL REQUIREMENT
Among these statutorial and regulatory provisions
Based principally on the customer's financial
that control lending to borrowers are;
responsibility and payment performance in relation
1. The single borrower's limit; where a single with his needs. Under this method, emphasis is on the
borrower may not be granted all the money purchasing patterns, rather than the payment
he/she wants to borrow. It's usually limited to performance, implicitly assuming that payment for
a certain percentage of the bank's paid up, normal purchases will be made within the term
unimpaired capital and surplus accounts. granted.
This regulation is intended to prevent the
The term "normal requirement" must be fully
concentration of risks, so the failure of any
explained, experienced and understood from the
one or group of borrowers within the same
customer's performance; so that, substantial and
family or group of businesses owned by just
financially sound customers can be sold on credit
one individual or group of individuals may
under this term.
not devastate or cripple the bank or financing
company; and, to have wider, greater 2. CREDIT LINE BASED ON SIZE OF
distribution of banks' and financing ORDER
companies' funds throughout the country.
Credit lines are generally established in relation with
They being institutions of wealth
the total balance outstanding or the total amount of
redistribution and economic development.
order placed within a given period. Under some
2. Directors, officers, stockholders and related
circumstances however, a credit line based on the
interest or, (DOSRI) prohibition against bank
amount of the individual order may be desirable,
and financing company owners, officers,
allowing automatic approval of any order less than
relatives and similar relations personally and
the specified amount. Larger orders cannot be
in their inter-locking businesses. This
approved without some further investigation. This
kind of line may be particularly useful in a when?" The credit manager will need to ask several
decentralized credit organization where it is questions: do the customer's debts appear to be in
impractical for order- processing points to keep proportion to his trading assets? Are trade payments
complete records on receivables. The thinking prompt? What is the option of other suppliers on the
behind it is similar to that underlying blanket risks? Are other suppliers placing undisputed claims
approval of small orders that the amount of risk does for collection? Is there any evidence or unreliable
not justify the cost of investigation. performance by the responsible people? If
satisfactory answer to these questions cannot be
3. CREDIT LINE BASED ON
obtained, it is probably a disservice to the customer
OUTSTANDING BALANCE
as well as to the supplier to increase his debt or credit
Lines intended to bring about referral of orders when term. Efforts to work out collateral, security or some
the total outstanding balance exceeds the line, require special arrangement for reduction or elimination of
complete records of unpaid invoices and/or orders credit risks maybe prudent and necessary.
approved but not yet shipped. Such lines are
If the available information indicates ability to pay,
ordinarily used when the customer's position is such
but casts doubt on ability to pay within terms, the
that a normal requirement line cannot be supported.
question is whether the expected delinquency will
To minimize the referral of orders, the peso credit
make the receivable an unprofitable investment.
line should be as close as to the customer's actual
Again, special arrangements may be considered.
needs and as consistent with credit policy and
available credit information. CREDIT LIMITS AS MAXIMUM RISK
4. CREDIT LINE FOR A SPECIFIED TIME Credit lines are sometimes interpreted as the
PERIOD maximum amount of credit the company is willing to
extend, the ceiling above which the risk is too great
A credit line may also be based on the total amount
to accept. Used in this way, the credit line is usually
ordered which can be approved during a given period
called a credit limit.
of time.
In companies which generally use credit lines as
Credit lines stated in this way are particularly useful
guides for order processing, a limit may come to be
in companies which process orders at a number of
used with certain accounts; for example, a customer
locations but maintain more centralized accounts
may be assigned a peso credit line close to customers
receivable. Credit lines for a specific time period
normal purchases. Customer purchases increase,
provide control with a minimum of referral to a
eventually reaching a point beyond which the credit
central office of record keeping at the order-
executive considers the risk too great. A limit has to
processing point. In assigning such credit lines, the
be set on the account. Similarly, the customer's
credit department/manager, should bear in mind that,
financial condition may deteriorate to the point that
since even prompt payment for all invoices billed
the line formerly used as a guide is considered the
during the designated period would not necessarily
maximum amount of credit to be extended.
be received on time during that period, the total credit
exposure will often be larger than the amount of the Sometimes the credit line initially assigned to a
line. Adequate controls must be established to customer is regarded as a credit limit. This may be
prevent extension of further credit to delinquent the case more frequently with marginal customers,
accounts. where the risk is high and very close control is
necessary.
HANDLING ORDERS EXCEEDING THE
CREDIT LIMIT Administration of credit lines of any kind requires
that there be available accurate and efficient record
In arriving at a decision regarding an order which
of unpaid invoices and orders approved for credit
exceeds the customer's limit, the two most important
unshipped. The form and detail of this record vary
considerations are "Will you be paid?" and "If so,
according to the kind of control that is wanted.
Proper enforcement of a credit limit demands a satisfies the needs, wants and desires of the
record that is complete, detailed, accurate and customer-debtor. In purely economic sense,
thoroughly up to date. mercantile or consumption credit are both
productive.
INFORMING CUSTOMERS OF CREDIT LINE
CREDIT PERIOD / TERM
Credit executives differ as to the advisability of
notifying customers of their credit lines. Those who Arrangement between buyer and seller which specify
favor the practice point out that; in notifying a the conditions required in payment for goods or
customer of a line, an opportunity is afforded to services are known as terms of sale. These terms
discuss it with the customer and to offer suggestions indicate if credit is to be part of the sales transaction,
which may help to improve his position. the length of time for which credit is to be extended
Furthermore, if the customer is permitted to assume and other stipulation such as discount available.
that there is no limitation on his purchases, Most business transactions in the Philippines involve
embarrassment and misunderstanding may result a title transfer prior to the requirements of payment
when an order is held. from the purchaser. Such business deals actually
constitute commercial credit transactions.
On the other hand, the customer may interpret the
credit line as a reflection of his financial Factors that determine the length of time to extend
responsibility. This damages goodwill and it may for the repayment of the credit granted by a given line
also lead the customer to confine his purchases to the of business or for a given creditor are dependent on
original line, even when a larger line has become the following considerations.
reasonable. Those who emphasize these
1. Rate of turnover of the goods or service, is
considerations hold that a credit line should be for
the period of time from the purchased of
internal use only.
the goods on credit and its conversion to
CREDIT LINE FOR COMMERCIAL CREDIT receivable or cash is called turnover
period.
Mercantile or commercial credit refers to the credit
extended to the sellers and buyers of goods and The length of the credit period varies inversely or on
services for resale in the same, modified or for use in the opposite with the rate of stocks' turnover on the
the conduct of their business enterprise. Its users are type of the goods involved that the higher the rate of
either generally profit motivated business turnover or conversion, the shorter is the credit
enterprises, non-profit cooperatives or government period; and, the lower the rate of turnover, the longer
offices. Generally, its confined to some whole selling the credit period.
activities and it is in the power of these organizations
2. Location of Customers and
to obtain goods and services in exchange for future
Transportation Facilities.
payments for the goods, services they secured on
credit. The longer the goods are in transit the slower is the
rate of turnover or conversion which necessitate
The primary function of mercantile or commercial
larger quantity of purchases to have more
credit is to finance goods via the channels of trade,
merchandise on hand, therefore a longer credit period
principally as a matter of necessity governed by
is needed.
customs, practices and, by the need of customers for
such medium of financial assistance. 3. Term of Sale Granted by Other Sellers
It is likewise a marketing tool which has to do with The length of credit period as well as the prompt
the movement of goods from production to payment discount offered by other sellers to a
consumption channels. customer are to a large extent determined by the
terms of sale granted such seller's sources of supply.
Mercantile credit is often considered productive in
The same term may thus be extended or modified.
contrast with consumption credit which generally
 4. Competitive Strategy including a quantity discount only to those who pay
within the period granted.
In a very competitive market for a merchandise or
service the generally extended credit term by the 11. Prompt Payment/ Rebate or Cash
sellers within the industry may result to extending Discount
their credit period to the general target market.
Generally granted to motivate, induce a
5. Character of the Merchandise purchaser/debtor to pay within a shorter period of
time than up to the whole length of the credit period
Perishable or standardized for current or immediate
granted. Its a payment for a credit before its due date.
use or brief marketing period and narrow profit
margin are the factors considered in extending short Its advantages are;
or long credit period. Whereas, for new or seasonal
a. Faster recovery of the money induced by the
merchandise and high profit yielding merchandise
prompt payment discount which give the
longer credit period is extended.
reinvestment of the money in the business for
6. Quantity Involved further or increase business for the creditor;
b. Reduces credit and financial risks as well as
Generally, credit period for large shipments is stricter
bad debt losses;
than on smaller ones due to the lesser price for seller.
c. Reduced collection costs;
7. Classes of Customers d. Promotes and maintain goodwill between
creditor-debtor due to lesser causes for
There is a marked length of credit periods for friction.
consumers, manufacturers, middlemen and retailers.
PRE-PAYMENT TERMS
8. Nature of the Credit Risk
Prepayment terms require payment by the customer
When the credit is inferior, the credit period is shorter before or at the time the merchandise is delivered.
than when the risk is of a high order. Although such terms are standard in a few product
9. Sectoral Differences in Income Level lines, in most industries their use implies
unwillingness on the part of a seller to extend credit.
The credit period or term for farmers, overseas Prepayment terms include the following types of
workers, white or blue collar debtors or for those who payment arrangements.
are low income ("aliping saguigilid"); middle income
("aliping namamahay") and high income • Cash with Order (C.W.O.) or Cash in
("maharlikas") vary from each other. Advance (C.I.A.) - This term are the most
severe from buyer's standpoint and result in
10. The Biases/Prejudices of the Credit the seller's assuming little or no risk. In most
Manager industries their use is largely confined to
For as long as people are people and are the ones who customers who have no credit standing.
decide and implement the setting up of credit particularly where goods are non-standard in
lines/limits and periods, there is always a tendency to nature, orders from customers in this group
be subjective in the evaluation and appreciation of are not processed until the advance payment
the real objective functions of credit and collection has been received.
operation. Most often, the subjective credit manager • Cash before Delivery (C.B.D.) - C.B.D.
insist that his main function is the avoidance or terms are only slightly less severe than cash
minimization of bad debts. This narrow concept of with order arrangements. Under this term,
the credit function leads to a shortened credit period, merchandise may be prepared and packed by
co-extensive with the prompt payment rebate or the seller, but shipment is not made until
added discount to improve the cash discount by payment is received.
 • Cash on Delivery (C.O.D.) - Under C.O.D. Seasonal Dating - Where demand for a product is
term, merchandise is shipped but is not seasonal, sellers encourage off season purchases by
released to the customer until the carrier granting terms which postpone payments to coincide
company has received payment for the full with buyers' selling seasons. The customer benefits
invoice amount. Should a C.O.D. shipment from having the goods on hand without any
not be accepted by the buyer, the seller risk immediate investment of his own funds. The seller
the loss of freight charges in both direction, gains the advantages of more constant sales, leveling
preparation and packaging costs and out production and reducing storage problems.
possibly, deterioration of the product. Sellers
Seasonal dating usually is accomplished by the
are often willing to assume these risks in the
seller's dating the invoice as of the beginning of the
interest of sales volume and C.O.D. term is
active season, from which date the regular terms are
used extensively where credit has not been
computed. Summer wear, for instance, is shipped in
established and where the merchandise is
January on terms of 2% 10,net 60, but the invoice is
standard.
dated May 1. The discount period, therefore, extends
According to the carrier classification policies, to May 10 and the net credit period terminates July
payment must be in the form of currency, bank 1. Purchases during the active season are billed under
cashier's check, unless otherwise directed by the terms of 2% 10, net 60 without dating provisions.
seller. Occasionally, sellers do not have a formal dating
program but accomplish the same purpose by
Proximo Term - Proximo term is another type of extending the credit period of their regular terms an
arrangement that specifies payment in the month
additional 10, 60 or 90 days during preseason
following shipment. (Proximo, abbreviated prox., is
months. For example, a customary practice in the
Latin for "next" or "next following"). Net 10th prox.
men's clothing industry is the extension of net 60-
arrangements require payment of all the previous day terms by an additional 60-days, for which the
month's invoices on the 10th of the following month. customer pays interest at the rate of 12 per cent per
It is evident that such an arrangement is identical to annum.
terms of 10 days E.O.M., although under proximo
terms billings anew usually made at the time of Receipt of Goods (R.O.G.) - Terms of this type
shipment rather than once monthly. Like E.O.M. permit the buyer to compute the cash discount period
terms; proximo arrangements may give identical from the date on which the merchandise is received
discount and net credit periods, for example, 2% 10th rather than from the invoice date. Thus, a distant
prox. However, proximo term often contain a buyer desiring a discount is not required to send his
discount period shorter than the net period. Thus, remittance before examining the shipment, as may
terms of 2% permit a discount for payment on the happen when the discount period commences from
10th of the following month, with the full amount the invoice date. The net credit period however, is
due on the 30th or 20 days later. always calculated from the invoice date and not from
the date of arrival. R.O.G. terms are common in the
Anticipation discounts are sometimes allowed under
sugar industry and are also used by firms in other
proximo term, meaning that a deduction may be lines for gas or oil products between islands. A seller
taken from the face of the invoice when the bill is the who employs R.O.G. terms places himself on a more
end of the net credit period; but, after the cash nearly equal basis with competitors located nearer
discount period. Anticipation privileges may be the buyer.
specifically stated in the terms of sale or they may be
practiced as a matter of industry practice. Extra Dating - Extra dating arrangements, found
primarily in the textile industry, extend the discount
SPECIAL DATING PAYMENT TERMS period to coincide with a relatively long credit
Buyer in some industries receive extraordinary long period. Terms of 2%/10, 45 extra extend both the
credit period through various dating arrangements. discount period and the net credit period to 60 days
from the date of the invoice. They might be written segregated from the consignee's regular
2%/45, net 60, but this form is not used in practice. funds, preferably in a separate bank account
Since "extra" term have identical discount and net or in trust;
credit periods, buyers are not induced prior to 3. Insurance coverage must be provided by the
maturity. Deductions of this nature, therefore, are in seller.
reality trade discounts rather than cash discounts. 4. Reports of sales and inventory remaining on
hand, as well as remittance, must be made at
Sometimes "extra" terms are expressed as 3%/10;
specified intervals.
2%/10, 60 extra which indicates that 3% may be
deducted from the price if payment is made within Companies marketing nationwide should also seek
10 days, but only 2% is deductible if payment is the advice of an attorney to determine whether
made by the end of 70 days. The extra 1% is in effect consignment arrangement constitute absolute sale or
an anticipation discount. not.
Consignment - Consignment terms add a The different terms used for special dating payment
warehousing feature to payment provisions. terms have been developed to serve the competitive
Merchandise is shipped to the buyer's premises under needs of business. Generally they perform their
an agreement that title remains with the seller. The function although question at times arises as to
customer is authorized to withdraw goods from stock whether it is desirable or necessary to continue their
as he sells them and remits to the consignor the use. It will be appropriate and prudent for companies
proceeds of sales either at the time of withdrawal or or businesses to evaluate the continued terms,
at a specified time thereafter. Consignees are practices with the end in view of avoiding risks and
generally retailers, distributor or commission houses more effective, efficient collection.
rather than manufacturers. Consignment terms are
CASH DISCOUNT
particularly suited to the introduction of new product
lines, when the customer is reluctant to invest his The offering of cash discounts is motivated by fear
own funds in an inventory of the new items. They are that unstable economic conditions would affect the
also used in the distribution of goods through a buyer seller's ability to collect before the credit term or it
whose credit standing does not justify regular terms may serve as an incentive for debtor to pay in
for the amount involved and who lacks the resources advance.
to purchase under C.O.D. or sight draft (3.D.); or bill
of lading (B.L.) payment arrangements. Credit men are divided in their views concerning the
economic justification of cash discounts under
Extreme care must be exercised by the seller in current conditions. The practice is staunchly
preparing consignment contract. Unless they are defended by some, but regarded by other as an
properly drawn, consignment agreement may be economic anachronism. The very fact that the
regarded by the courts as constituting unrecorded question arises so frequently indicates that there is
conditional sales and the seller may have difficulty reasonable doubt that the pricing system employing
protecting title to the merchandise as against the cash discounts actually accomplished its purposes.
purchaser's other creditors. For this reason, the Nevertheless, the use of cash discount terms is firmly
advice of an attorney should be obtained. established in current business practices within most
industries at the manufacturing and wholesale levels.
Among the legal requirements of consignment
contracts are the following: VIEWPOINT OF THE SELLER
1. Merchandise on consignment must be A cash discount is a premium which the seller is
segregated from other inventory or clearly willing to pay for certain benefits that accompany
labeled as belonging to the seller, prompt collection of his funds. Obviously, this
2. Proceeds from the sale of consigned stocks premium is paid by the seller when the discount is
awaiting remittance to the consignor must be
earned, but by the buyer when he is unable to pay Rebate in payment for customer purchases within a
within the discount period. specified period encourages them to pay earlier than
their usual term to afford them better cash flow.
Relation to Interest Rates. Cash discount rates have
little or no relation to current interest rates; actually Encourage customers to avoid borrowing or
the cost is so high compared with normal interest financing to pay their accounts payable for their
charges that it must be regarded largely as the price purchases within the rebate period. The prompt
the seller pays for obtaining other benefits. The payment rebate will be more motivating to pay if
following table shows the interest rates equivalent to presented as interest to be avoided thus;
cash discount terms as premiums for the use of
A purchase of merchandise with a credit term of
money:
2/10; n-30 will have an effective cost of paying on
day 30 instead of on day 10 as provided by this
formula:

Anticipation of discounts are more nearly equivalent

to interest rate, since they are usually calculated at
the rate of 6 per cent per annum for the number of
days between the payment date and actual due date.
To calculate these equivalent, first compute the Generally, if the effective rate computed using the
number of days between the cash discounts period formula is greater than the buyer's cost of borrowing,
and the net credit period. This represents the then the prompt payment rebate must be taken
additional time the seller gains in the use of funds advantaged of.
when the buyer remits within the discount period.
Then divide 360 days by this period of time convert Late payment costs more than just money. It affects
the rate to an annual basis and multiply the quotient sellers-buyers relationship.
by the rate of discount.- Thus, for terms of 1/2%/10, Stretching credit payment beyond due date creates
net 30, 360-20=18; 18 x 1/2% = 9% strained relationship with the seller who will be less
Reprinted from the Credit Management Handbook: willing to meet customer orders; or, to commit
Second Edition by Richard D. Irwin; 1958 and 1965 continuing supply of goods. Repeated delays in
Credit Research Foundation Inc., Library of paying by customers provokes or motivates sellers to
Congress Catalog no. 65-17682 demand cash before delivery (CBD); cash with order
(COD) in their payment terms thus reducing credit
DISCOUNTS, REBATES, EFFECTIVE TOOLS financing availability.
FOR PROMPT COLLECTIONS OR HOW
MUCH LATE COLLECTION COST? COST OF CREDIT

Joseph M. Jackson, CCE, Director - Corporate The cost of credit term must be given proper
Credit and Collection, Acme metals Inc. consideration. Among these are:

Riverdale, Illinois USA, 1994 Bureau of Business • Administrative cost in running the
Practice, USA. department;
• The cost of financing the accounts
Discounts are generally used to have an edge over
receivable;
competitors, to encourage customers to buy more.
 • The credit losses due to delinquent or bad It's assumed that there is no change in the credit term
accounts; and also in the total sales. Bad debt losses are not
considered. Sales and competition are the motivation
Generally, the costs of offering credit are: for a contemplated change.
• Credit evaluation costs; which consists of A company sells on a term of 2/10; n/30. Under these
credit investigation and data processing terms, it's expected that 25% of the customers who
• Discounts in payment - Early payment obtained credit will pay on or before the 10th day, the
made by customers net of prompt payment rest will pay on the average, 50 days after the sale.
rebates lowers price without a corresponding The total amount of sales will not be affected by an
increase in volume. The discount or rebate increase or decrease in the sales volume.
availed of reduces the sales volume.
• Investment in Receivables - Alternative The present value of a day's sales under present
credit limits and credit terms will lead to policy thus:
varying receivable levels. Reduction in these
levels, may tree up capital.
• Collection Expenses - Includes cost of
following up accounts that do not pay on
time, as well as;
• Bad debt Expense - The timing and amount
of the bad debt write-off aggravates the cost
affecting credit policy.
The present value under the proposed policy is
PRESENT VALUE ANALYSIS OF smaller by P366 a day or P122,640 a year. The
CUSTOMER'S CREDIT present policy must be maintained.
A change in the credit line or term extended to Relation to Cost - Particularly with respect to
customers will affect cash flow. To arrive at a discount, terms are influenced by the same economic
decision, it is important to determine the present factors as prices. Whereas the seller should include
values to have cost-benefit comparison. the cash discount as a cost factor in his price
To begin with the direct and indirect cash flows calculations, buyers are constantly bargaining for
associated with any line and/or term policy both lower prices and higher discounts to reduce their
alternatives which are estimated and scheduled on a net costs. This pressure is clearly evident with regard
time line method. to prices, but is more subtly used by larger buyers to
establish discount terms or to increase the amount of
An opportunity cost is determined for discounting existing discounts in order to gain their objective. To
the difference, in the timing of cash flow. Said cost support their argument, such buyers often take the
should be based on the alternative use of the fund position that they must obtain the same discount
which generally is either short term investment rate terms from their suppliers as they are accustomed to
or the borrowing rate. offer their own customers. However, the buyer
should consider the fact that the discount he allows
The present value is computed for the net cash flow
of each of the alternatives under consideration. customers is based on the selling price, larger than
the discount he earns on purchases, which is based
The alternative with the biggest net present value is on cost price.
the one that may be chosen from a financial
viewpoint. The cash discount is to some extent a subterfuge, in
that it must in some way be recovered in the selling
For example: price. Consequently, prices in industries which use
discount terms are inflated by the amount of the
discount, since in computing prices it is generally
assumed that most customers will take advantage of legal tender qualities of the currency as well
the discount. Therefore, the advantage of lower cost as the acceptable prevailing exchange rate
usually referred to by the buyer is not as real as it between the foreign currency as against the
might seem. In fact, it can be assumed that net terms Philippine peso. The exchange rate to use
would result in lower prices, a system of pricing must always be the prevailing buying rate of
without discount allowances is more favorable to the the banks as of the date of conversion.
buyer because: (1) it permits a quick, accurate cost 2. CHECK - Checks owned by the debtor
calculation and comparison of prices from various and/or the co-debtor; or, for that matter by
suppliers; (2) it does not penalize him if he is unable other person offered in payment for the
to pay within the discount period; (3) it may reduce account of the debtor that does not affect or
his capital requirements, since net terms are likely to prejudice your money claim may be accepted
coincide more closely with his own average in payment for the debt. As much as possible
collection period and (4) it results in clerical and only current dated check for an obligation by
accounting conveniences. Despite these arguments, the debtor must be accepted. However, there
the larger, financially strong buyers are inclined to are instances where post dated checks may be
favor discounts terms, because they gain a accepted. In these cases, be certain to know
competitive advantage over those in their line who whose signature(s) are on the said check for
cannot earn discounts or who would find it difficult future reference in case of any legal action to
to do so. undertake against the drawer and signatories
thereon, if the check is dishonored.
Bank Financing - Bank financing permits a buyer to
3. PAYMENT IN KIND OR SERVICE - In
take advantage of discounts which he may otherwise
collecting payment for delinquent or bad
be unable to earn. Naturally it is to the advantage of
accounts receivable the probability of being
any company to maintain good banking relations, but
offered payment in kind or service is great if
this is particularly important when purchases are on
you consider that these accounts are
discount terms. The establishment of bank credit will
generally illiquid. In cases of payment of this
insure financial assistance when needed, so that
nature it is a business decision based on
income represented by earned discounts is not lost.
pragmatism whether or not to accept such
When transactions are on net terms, the buyer is less kind of payment. The matters to take into
likely to require bank financing a greater portion of consideration are the following:
the marketing period. In this case, the supplier rather a. Is the debtor really so distressed that
than the customer may need bank assistance. cash payment is not really possible?
b. Pricing of the thing or service;
ACCEPTABLE PAYMENTS c. Saleability or need of the thing or
Generally all credit or debts must be paid for within service;
the credit term generally in cash. There are occasions d. Tax consideration;
however that cash is not offered as payment but some e. Possibility of an expeditious turn
other form of settlement or payment is offered or around from the payment to liquid
made. In which case, it is important to be aware and cash.
appreciate some other kind and form of payment 4. PAYMENT FROM SURETY OR
specially for delinquent or bad accounts. Among GUARANTY PAYMENT BOND - Claim
these payments are; for performance or payment from surety or
guaranty payment bond must always be
1. CASH - Philippine currency or foreign preceded by a formal notice of claim against
currencies maybe accepted from the debtor or the surety or bonding company within the
from a third person in favor of the debtor. If period explicitly provided in the bond. Be
it's a foreign currency, it is imperative to certain that there is no reason or alibi that
determine the authenticity, genuineness and may have been done or used by the surety or
 bonding company to delay, if not on totally Jointly and severally literally means that a person
avoid paying on their joint and several who agrees to be bound under such a mode, answers
obligation under the surety or guaranty personally and directly for the obligations created
payment bond. Extension of time to pay, under the contract.
adding additional condition or material
It also means "in solidium" or "one and the same" in
change in the nature of the obligation will
the obligation created.
generally affect collecting against a surety or
guaranty payment bond due to novation. This partakes of requiring a generally acceptable and
5. JOINT AND SEVERAL OBLIGOR creditworthy third party to be bound in joint-solidary
(DEBTOR) - An experienced creditor will status with the principal debtor, who will
always include the joint and several debtor(s) automatically be bound to pay the obligation whether
in all the notices, demand for payment as well or not he benefited from the credit or loan
as in any material alteration of the credit granted/proceeds thereof. A creditor will not want to
obligation to avoid and prevent unwitting have a third party -joint and several obligor from
novation of the main credit obligation. whom they cannot collect.
COLLATERAL POLICY A demand for payment or performance from the
principal obligor - debtor also necessitates a demand
Credit extension must never be motivated by the
against the co-obligor.
collateral offered by the credit applicant. Because, if
that be the rationale then the going concern paradigm 2. REAL ESTATE MORTGAGE
of business operation losses its meaning and purpose.
It must be borne in mind that credit is an instrument This refers to the conveyance of a real property as a
for economic development and the development of security for the payment of money or the
creditworthiness of the credit availor. performance of some other act, condition to become
null and void upon payment or performance of the
The economy to have dynamism must not be obligation created.
burdened by the "pawnshop mentally" that have
plagued the banking industry which now stymies the The property to be conveyed must be owned, and
availability of credit brought about by their acquired have a free disposal of the same by the party
assets or ROPOAs emanating from inordinate mortgaging the same or is duly authorized to do so.
negligence of granting and enforcing credit. THINGS TO CHECK ON REAL ESTATE
WAYS TO FORTIFY OR SECURE CREDIT MORTGAGE

There are many ways to secure or fortify a credit a. Verification of the authenticity and
granted. It is important for the creditor to realize that, genuineness of the torrens certificate of title
historically, the Philippine financial system has in the name of the owner- mortgagor, with the
always been in dire need of loanable funds. It is for Register of Deeds and Land Registration
this reason that our financial market has been Authority. This must include the positive
dubbed, rightly or wrongly, a "pawnshop, verification of liens and encumbrances
banking/financial market." thereon.
b. Appraisal, location and all the ancillary tasks
Any and all agreements to secure or collateralize a to determine the value, use and worthiness of
loan or credit is an accessory contract. the property.
c. Check the real property declaration and tax
Among the popular methods used to secure credit are
liabilities of the land with the local assessor's
the following:
and treasurer's office.
1. "JOINT AND SEVERAL," (SOLIDARY) d. Verify the inherent limitations of the
OBLIGATION alienability of the land, particularly those
granted to private individual from the public
 domain (such as those granted under free, This is a new method of securing large amounts of
sales, lease patents with the DENR, DAR, credit and is resorted to in special cases, particularly
including those granted through the National in housing loan. syndication/consortium for big
Housing Act and similar agencies). infrastructure projects.
e. The contract of real estate mortgage must
The requirements of registration are substantially the
provide an attorney-in-fact provision with
same except in registration with the different
right of substitution in favor of the mortgagee
governmental agencies.
as a practical step in case of extra-judicial
foreclosure. The mortgage contract must 4. CHATTEL MORTGAGE
expeditiously be registered timely with the
Register of Deeds of the place where the A conditional sale of personal property as security for
property is located. the payment of a debt or the performance of some
f. The mortgaged property must be owned by other obligation specified; the condition being that
the person mortgaging. A third party's real the sale shall become null and void upon the
property may, however, be mortgaged by the seller/mortgagor paying to the purchase/mortgagee a
mortgagor, provided that, he has a valid, sum of money or doing some other act named.
genuine and effective special power of Any and all personal or movable property can be the
attorney authorizing him to do so. subject of a chattel mortgage. Due care and prudence
In this regard, due care and prudence must be must be exercised to ascertain and determine the
exercised to determine that the person who owns the legal and lawful ownership of the property
real property in fact gave and executed the special mortgaged because only property factually owned by
power of attorney in favor of the one mortgaging the the mortgagor can be mortgaged; except, when there
same; and that, he knows that it will be mortgaged to is a special power of attorney granted the mortgagor
secure a credit/loan for the benefit of the principal to mortgage a personal property of another. All
obligor/debtor. As much as possible, determine the chattel mortgage contracts must have an affidavit of
genuineness and authenticity of the signatures with good faith and express provision on the address of
the principal maker of the power; or the attorney the chattel mortgaged.
and/or the notary public who notarized the 5. PLEDGE
document. Request the notary to authenticate the
signatures on the power of attorney. Authentication A contract whereby a personal property is delivered
may be made by signing anew on the document to the creditor or a third person as a security for the
notarized beside their signatures. performance of an obligation.

g. After registration of the mortgage contract, it It is an accessory, real and unilateral contract upon
is wise and prudent to officially furnish the the fulfillment or payment of the debt, the property
parties to the contract with a copy of the with its fruits and accessories shall be returned to the
mortgage to inform them of the transaction debtor.
involving the property and to discuss any last Its requisites are:
minute reaction of the property owner.
a. It is constituted to secure the fulfillment of a
3. PARI-PASSU ARRANGEMENT principal obligation.
b. The pledgor must be the absolute owner of
It literally means; by the same priority. This is used the thing pledged.
by creditors who, marshalling assets are entitled to c. That the person or owner of the thing pledged
receive out of the same fund or asset without any has the free disposal of his property and in the
precedence of each other except as to the direct absence thereof, that he be legally authorized
proportion of their financial exposures in the credit to do so.
granted.
 d. The thing pledged must be placed in the Being a real contract of purchase and sale, an
possession of the creditor or of a third person assignment of credit, or right, transfers the ownership
by common agreement. of the same to the assignee from the moment the
document evidencing such credit or right is delivered
The sale of the thing or property pledged for non-
to the assignee. Assignment may either be with or
performance or non-payment of the obligation erases
without recourse.
further liability to the principal debtor and/or pledgor
even if the proceeds of the sale of the pledged 9. ESCROW ARRANGEMENT
property is less than the debt claim. Collection of
An agreement whereby a deed or a contract, which
deficiency is not allowed.
may be coupled with monetary consideration, is
6. SURETY delivered to a mutually acceptable stranger or third
party with an obligation for the latter to deliver unto
A contract or an agreement whereby a party called
the party in whose favor the deed or agreement is
the surety guarantees the performance by another
made, upon the occurrence or performance of certain
party called the principal or obligor of an obligation
condition or obligation.
or undertaking in favor of a third party called the
obligee. It includes official recognizance, It is the performance of the obligation imposed
stipulations, bonds or undertakings issued. therein or the happening of a condition imposed, that
makes the contract valid in favor of the grantee.
The surety undertakes to pay if the principal does not
pay. A surety is the insurer of the debt. He is 10. LETTER OF CREDIT
conclusively deemed an original promissor without a
A written instrument from a bank directed to another
need of exhaustion of collection efforts against the
bank requiring that the latter bank allow the bearer of
principal. Hence, he is equally liable.
the letter of credit (LC) to buy commodities or
7. GUARANTY service or to want money (either to procure the same
or to pass his promise, bill or other engagement for
A contract whereby a person, called the guarantor,
it). The writer of the LC undertakes to give the
binds himself to the creditor to fulfill the obligations
money for the goods or service or to pay the bank to
of the principal debtor in case the latter fails to do so.
which the LC is addressed by exchange or to give
He is only liable if the principal cannot pay. The
such satisfaction as required.
guarantor's liability is secondary. The guarantor
cannot be held liable until and after exhaustion of all A letter of credit (LC) is basically a request directing
efforts to collect from the debtor is undertaken. someone to pay or give credit to, a third party and
promising to repay or guarantee the same. It is an
8. ASSIGNMENT
absolute undertaking to money advanced or the
An assignment of credit or right is fundamentally a amount for which credit is given upon the faith on
contract of sale. It has for its subject matter the credit the instrument.
or a right assigned; for consideration, the price paid
A person has sold goods to the one in whose favor
for the right; and for the consent, the agreement
the letter of credit was drawn taking his note
between the parties regarding the credit or right to be
therefore. The undertaking of the writer of the letter
assigned and the price to be paid thereof. It is
of credit is collateral to the promise of the vendee, as
perfected in the same manner as in a contract of sale.
security and is not liable to any contingencies except
An assignment of credit is, in a real sense, a contract that of gross negligence in securing the debt by
of purchase and sale. In an assignment of credit or a which the loss may be thrown upon the vendor.
right, there is a definite third person who is obliged,
11. TRUST RECEIPT FACILITY
whereas in sales, it is the whole world which is
obliged to respect the title of the buyer. An arrangement by virtue of which a banker or a
creditor advances money to a person for the purchase
of goods; the former taking full title of the goods at distinguished from an administrator who is given the
the very beginning and continuing to do so until he incidental power of disposal.
is paid; or, if the good has been sold, until the
proceeds ne bof the sale are turned over to him by the
buyer or his successors-in-interest.
It may also mean a security transaction to aid
importers, wholesalers and retailers of goods who do
not have sufficient funds or resources to finance the
importation of merchandise and, who may not be
able to acquire credit except through utilization as
collateral of the merchandise or goods imported.
12. HOLD-OUT AGREEMENT
A recent credit development that disallows any
withdrawal from the debtor's deposit with the
creditor, banking or financing institution during the
duration of the credit granted. It allows the creditor a
charge or debit to the account for any unpaid balance
of not the obligation.
13. SURETY BOND
It is substantially the same as a suretyship, except
that bonds are issued by non-life insurance and
bonding companies. It must be borne in mind that not
all insurance and bonding companies are capable of
fulfilling their obligations under the bonds. It is,
therefore, imperative that only those companies who
are duly authorized by the office of the Insurance
Commission and/or gent Supreme Court have
acceptable financial capacity to underwrite and pay
shall be used.
It must be remembered that a bonding company's
liability is co-terminus with the fulfillment or
payment of the obligation by the principal, and if
there be any changes, extension and the like in the
obligation, its consent and conformity be secured
prior to such amendment, changes and the like.
Claims on bonds are generally filed within 15 to 30
days from expiry thereof, otherwise, it cannot be held
liable.
14. TRUSTEESHIP ARRANGEMENT
A trustee is a person to whom confidence is reposed
as regards property for the benefit of another person.
The trustee is given the possession or custody of the
property without power to dispose the property as