Topic 2: Practices and Procedures (Credit Application and Credit Investigation)

The first activity in the Credit Department as it starts the actual operation of its function
is the credit application. A credit department must have a credit application form for use by its
prospective customer/client. In fact, as a matter of policy, no credit extension, however large or
small, should be approved and released, unless the customer/client has at least filled up a credit
application form. This is essential because the duly filled up credit application provides the
credit department.
1. With initial credit information on which to base its credit decision , if credit decision has
to be made, for some reason or another, without further credit investigation;
2. Information on which to further interview the applicant (the process of credit interview
will be discussed more thoroughly in succeeding chapters); and,
3. With some “leads” on which to start his credit investigation process

Documentation Required for Processing a Loan Application

1. Individual/Single Proprietorship
a. A certified photocopy of its trade name or style registered with the Bureau of
Domestic Trade
b. Mayor`s Permit
c. License to engage in business issued by the City or Municipality
d. Income Tax Returns for the preceding year and official receipt of payment; and
e. Latest audited/unaudited financial statements
2. Partnership
a. A certified photocopy of its trade name or style registered with the Bureau of
Domestic Trade
b. Copy of articles of partnership, duly registered with the Securities & Exchange
Commission
c. Latest audited/unaudited financial statements of the partnership
d. Income tax returns for the preceding year of each member of the partnership
e. License to engage in business issued by the City or Municipality
f. Resolution of the partnership authorizing the negotiation of the loan and authorizing
the partner to sign for and in behalf of the partnership
g. Curriculum Vitae or personal information.
3. Corporation
a. a certified photocopy of its trade or style registered with the Bureau of Domestic
Trade and the SEC
b. copy of Articles of Incorporation and By-laws, duly registered with the SEC
c. Latest audited financial statements
d. Certified list of stockholders of the company as of date of application, to include the
following:
 Name of its stockholders
 Nationality
 Number of shares subscribed
 Amount subscribed
 Amount paid on subscription
e. Certified list of incumbent officers
f. Curriculum vitae or personal information sheet of the officers
g. Board Resolution (with Corporate Secretary`s Certification) authorizing the filing of
the application and authorizing the person to undertake the application
h. License to engage in business issued by the City or Municipality
 i. Alien Registration Certificate of alien officers of the company; if any.

In addition to the foregoing, and depending on the kind of special loan being applied for,
the following shall also be submitted:
a. Picture of applicant
b. Photo of business establishment with owner (inside portion and outside showing
façade, one copy each post-card size)
c. SEC registration, if registered
d. Photocopy of certificate of registration of the business with the concerned
government agencies
e. Certification that inventories offered as collateral have been duly graded, classified
and standardized by appropriate government agency in accordance with its rules and
regulations – if offered collateral is merchandise
f. Quotations from suppliers, if purpose of loan is to purchase machineries and
equipment
g. Co-maker`s statement duly accomplished by two solvent co-makers, if offered
collateral is merchandise inventory, or machineries/equipment, or marketable stocks
or bonds, or untitled real estate
h. List of officers and members and their address

CREDIT INTERVIEW
Preparing in Advance – What you do before you ever start talking with a candidate can be as
important as the interview itself. Inadequate preparation can be a serious handicap to successful
data collection and client assessment. Know what you are looking for before you start searching.
Know the Account – before you take any action with the client himself, be sure you know the
account.
Planning and Scheduling – plan in good administrative fashion as you would for any other
business undertaking. Make sure you have the materials you need.
Eliminate Interferences – Courtesy is, again, the keynote _____. Devote your full time and your
full attention to the man in front of you. Eliminate anything that will interfere with his chance to
communicate fully.
Differences –There are no rigid rules about conducting an interview. But there are certain sound
principles that will be valuable for any interviewer to follow. It is with these that we are
concerned. Remember that different people may achieve success in different ways. Another
interviewer may not conduct himself in precisely the manner in which you prefer to approach the
task, but it may for him. There are always variations. Strive for the maturity that permits you to
accept procedures that are initially alien to you. They may round out your interviewing skills.
Your personality – it is essential to good interviewing that you recognize that your own
personality will strongly influence what you look for in a candidate, and how you react to what
you see and hear. It is obviously helpful – more than helpful – invaluable, for you to recognize
what you are before you evaluate others.
Time – Remember that there is a time factor in success. This fact underscores the needs, the
must, of knowing the account and its requirements before interviewing a requesting client. Know
what you are interviewing for. Do not settle for the shopworn, glib, over d, inadequate concept of
interviewing to find out if the account is good. Unless you are critical and resourceful enough to
determine “good for what” you will never be a good interviewer.
  Plan ahead
 Observe the rules of courtesy
 Do not permit distractions
 Appreciate differences
 Know yourself
 Know what you are looking for

CREDIT QUALITIES TO INVESTIGATE

1. INCOME – Since most consumer debts are to be paid from income, investigation of the
income of an individual is essential. The amount of it should be ascertained, its regularity
of receipt established, and the probability of its continuance estimated. Since income
must be evaluated relative to the demands placed upon it, information should be sought
about the demands upon the income brought about by family needs and existing
obligations. This seems to be a formidable body of information about the income quality.
Actually, the discussion has illustrated the nature of the information and the analysis
which will be made of it. In the course of the investigation, the specific facts sought
should be simply the amount and source of the income.
2. EMPLOYMENT – Employment is probably the principal source of income, so it should
be investigated along with income. Information about employment should seek as a
minimum the name of the employer, the type of business, and the position occupied by
the subject of inquiry. Additionally, an effort should be sought to determine how
employment has been for a comparatively short period of time, less than five years being
considered short, it may be advisable to investigate previous employment and to continue
the investigation of previous employment, until the record has been established for at
least 5 year period. In the case of credit prospects who are self-employed, the
investigation should be especially extensive sine the employment information also must
necessarily be the source of information relative to income.
3. PAYMENT RECORD – Many creditors regard the payment record as the most important
factor revealed by the investigation. It not only shows the manner of payment, and thus is
important as a predictor of behaviour, but it shows the past payment habits as well. Often
creditors feel that the best basis of a forecast of credit experience is the past payment
record . While there is no question that such information is important, it should be
recognized that in certain instances, payment record may not have the prime importance
sometimes attributed to it. In connection with the information sought relative to payment
record, the investigation should seek facts as to the types of account involved the amount
currently owed, the amount past dye, the highest recent [Link] the manner of payment
should be stated specifically – pays 30 to 60 days, pays 90 days, and so forth. The
adjectives “prompt”, “good” “slow”, can have a variety of meanings to 60 to 90 days may
be considered promptly by one firm, slow by another, depending, of course, on the type
of accounting involved
4. RESIDENCE – Checking of residence through the investigation is first of all a routine
verification of identity. In addition, the information about the residence should show the
length of time at that location and, if less than five years in duration; should reveal the
previous residence. The facts can be used as the basis for more intensive investigation,
the locality should be necessary. They also may reveal certain information about the other
credit qualities of the credit applicant himself. In addition, the investigation of residence
should determine the status of the credit applicant as owner or tenant of the property. If
ownership is involved, the investigation should be extended to reveal the amount of the
 mortgage, if any, and the payments made thereon. The amount of the rent and the manner
of payment should be determined, if the property in question is being rented.
5. MARITAL STATUS – the marital status of the individual is a significant quality in most
consumer credit transactions, and as a result, should be included as a fact sought through
the investigation. In most cases the information is simply married or single. In some
information may be sought as to whether the person is a widow, widower, or divorced, as
this status often affects the income and obligations against that income as well as
person`s attiude toward credit obligations.
6. AGE – With the youthful, the investigation should establish that legal capacity to contract
is present. With most investigations, age is not an important credit quality. However, with
the extremes of youth or old age, it can be of crucial importance, and in these instances
this quality becomes the proper subject for intensive investigation.
7. REFERENCE AND REPUTATION – The investigation seek to develop information
about the reputation of the credit application and to secure information adequate for
evaluating the credit data reported by references. In effect, references and reputation plus
payments record are investigation of character.
8. RESERVE ASSETS – In only a few instances are reserve assets to be relied upon for
payment of a consumer credit obligation. In most cases they are additional surety which
both debtor and creditor hope there will not be a need to use. In some cases, especially
with aged customers who are living upon a pension or income from investments, the
investigation of serve assets may be essential in order to establish capacity to handle the
credit obligation.
9. EQUITY IN OPURCHASE – An additional credit quality, equity the purchase, is of
major concern especially under the instalment method of consumer purchasing. This is
not an attribute of the individual himself, but it is an attribute to the market value of the
property. The presence of this market value, as it is available to the creditor through the
terms of the lien contract, may raise an otherwise unacceptable credit well above the level
of acceptability.
10. COLLATERAL – While this element of capital in the form of collateral usually is
lacking in most retail and service transactions, it does often appear in those in those
instances in which cash loans are made to the customers. Thus, collateral in the form of
some tangible asset owned by the individual and offered as additional security to the
loaning institutions in another credit quality to take into consideration.

SOURCES OF CREDIT INFORMATION

1. SALEMAN`S REPORT – The company`s first contact with a new customer is the
salesman. If all goes well, the salesman will have the most frequent contacts with
established customer. It is therefore, necessary that salesmen should be trained to submit
credit applications on all prospective and/or new customers, and when necessary to
obtain current financial statements. Most firms and individuals are conditioned to the
necessity of furnishing credit information to support credit transaction.
2. CUSTOMER SUPPLIED INFORMATION – in the final analysis, the principals of the
company being investigated have many answers not obtainable in any other quarter.
Indeed, there is no better source of information about the operation and financial
condition of a business than the business itself. Therefore, it is reasonable to expect that
direct contact with a customer can provide the credit man with available financial details,
banks, and trade references, and other information of importance of the credit exposure,
and the degree of the cooperation which can be obtained from the customer.
3. BANK INFORMATION – Banks are usually quite knowledge about marginal
companies. The larger banks in the metropolitan areas have files which contain a wealth
 of information. The best means of obtaining complete information from a bank, as from
any other sources, is by personal contact. The credit manager should make a special point
of becoming well-acquired with members of the credit department in his bank.
4. CREDIT INTERCHANGE – Direct interchange of credit information is also one of the
most valuable sources of information. The credit analyst should not overlook the
possibility of directly exchanging ledger and other pertinent information with credit
representatives of other concerns known to be supplying the customer under review. He
should keep in mind, however that this is probably the most costly method of obtaining
the information desired.
5. CREDIT REPORTING AGENCIES – The service of one or more agencies or bureaus
may be availed of by the credit department of the company. This, of course depends upon
the number of accounts the company has. When properly analysed, information which
can be secure d from this source may be sufficient to eliminate the need for further
investigation. In some instances, information from this source may serve to point the
areas which should be further explored, thus enabling the credit analyst to determine what
specific information must be secured from other sources.

OTHER SOURCES OF INFORMATION

1. INTERCHANGE BUREAUS – the ledger interchange bureau of the Credit Management
Association of the Philippines (CMAP) is a source of information regarding the manner
in which a customer meets his trade obligations. The association provides the most
economical means of obtaining the ledger experience of other suppliers and often
eliminates the need for other more expensive methods of investigating the customer`s
trade payment habits.
2. COURT AND SECURITIES AND EXCHANGE COMMISSION LISTINGS – The
CMAP sends out to its member court and SEC listings. There, you will find customers
with cases in court and corporations newly organized those with increased capitalization
and those which are dissolved. This is so in partnership.
3. SECURITIES AND EXCHANGE COMMISSION – Copies of the Articles of
Incorporation and By-laws could be secured from this government agency. Articles of
Partnership and financial statements of corporations are also filed with this government
office. By checking these sources carefully, the credit representative can confirm
information about which there may be doubt and can obtain useful information regarding
his customers.
4. MISCELLANEOUS SOURCES – Daily newspapers are also important sources of
information. Even the obituary columns should not be bypassed since immediate
knowledge of the demise of the guiding principal of a business can be of great value to a
creditor. Announcement of promotion, branch openings and the like are matters of
important interest to us. Accountants and attorneys are also important sources of
information.

CREDIT INVESTIGATION PROCEDURE AND REPORTS

The following are some useful reminders to the credit investigator during the process of
investigation and in the making of the report
1. Make it a habit before going out to the field of investigation, to check internal records
thoroughly for any information on the subject of the investigation. Check credit files,
court cases records, current accounts records, signature control records, central liability
files, etc
 2. During the process of investigation, asking for references from banks, commercial firms
and from individuals who happened to have come across the name/s of the subject of
investigation would be a good source for possible leads to pertinent information and
needed facts about the subjects of investigation.
3. If any derogatory information is received, follow it through immediately and thoroughly.
Get information or denial of the reports as much as possible.
4. In the process of investigation, your analytical mind should not only be focused on
fundamental matters about the subject, endeavour to be more concerned about it, in
establishing factual results through a rigid scrutiny of events as the information are
gathered.
5. Reporting bank or company`s experience in credit dealings with the subject of the
inquiry, do not be content with the standard statement. “Experience satisfactory”. As
much as possible, endeavor to obtain a more meaningful insight into the credit worthiness
of the subject of the inquiry. This can be done by asking pertinent questions on the credit
relationship.
6. When conducting credit checking on insurance companies, check the credit standing and
financial stability of the insurance company with the office of the Insurance
Commissioner and check also with three or four local insurance companies with whom
the said insurance company maintains reinsurance treaty agreement relationship.
7. In getting financial statements of individual or commercial firms other than insurance
companies from other sources, the following should be obtained. Total Current assets,
total Liabilities, Net Worth, Gross income or Gross Income on sales and Net profit.
8. Checkings conducted in reply to a capable inquiry. Obtain a statement from the current
banker/s or credit companies, whether a credit relationship may be recommended by
them and under what terms, such as credit limit, terms, security, etc.
9. In case of re-checks, the investigation requires greater attention to details. Obtain
explanation on Reduction of Line, cancellation of Line, Increase in Line, Increase in
Collateral Value, Decrease in Collateral Value and Added Guarantors.
10. Any change in previous terms of relationship should be satisfactorily explained. The
investigator`s inquiring mind and respect for details will be evident by his handling of
these matters. For this reason, only more skilled investigators are assigned.

PREPARATION OF REPORTS
1. In preparing the Credit Investigation Report and other investigation reports, indicate the
name of or quote the person from whom the information was obtained. Use quotation
marks in narrating the information gathered.
2. Information gathered from banks and in trade should be arranged in the following order:
a. Banks who reported current dealings should be reported ahead of those banks who
reported past dealings, followed by those banks who reported no dealings.
b. Commercial firms in trade who reported current dealings should be reported ahead of
those who reported past dealings, followed by those who reported no dealings.
3. In conducting credit checking on a business firm together with the name/s of the firm`s
principal/s, prepare a combined credit investigation report on the firm and principal/s. the
credit investigation report should be prepared in a manner that information about the firm
should be reported ahead of these information about the principal/s in the order indicated
in No. 2
4. Every report should indicate, by way of a footnote, all relationship, if any, the subject of
inquiry has with this bank, the origin and the basis of investigation conducted, and, in the
case of other reports with a different nature of investigation, such reports shouldindicate
likewise, footnote disclosing pertinent data.
 5. In reporting, use credit language for proper tone. Avoid high sounding English, it has no
place in Credit Report. Be brief but complete
6. Bear in mind always: Your credit report is an important basis of a credit decision, either
here or abroad.

Credit as Sales Tool in Business

When a customer abuses credit, you may be tempted to tighten up your policies so that
customers must have perfect paying habits to qualify for any credit extension. However, the
more you restrict credit, the more your sales volume drops off. Don’t lose track of the
importance of credit as a sales tool, moderate your temptations, and be prepared to take
some risk.
As with anything else in sales, sometimes creativity and flexibility land the sale. You
probably haven’t given it much thought, but you can be very creative when extending credit to
your customers. The following factors play into the use of credit as sales tool:
Though price may seem wholly different from credit, in sales they can work in harmony.
Reducing prices is always attractive to customers and serves as bait to gain more business.
Similarly, certain credit policies, such as offering discounted or extending credit terms,
potentially reduce customer costs. Even small concessions can be very enticing particularly in a
very competitive climate.
Adding some extras can make your company stand hand and shoulders above your
competitors. Examples include material storage, concern, recommendations, attitude, loyalty,
etc. even if your customer considers your products to be a commodity, one of your never
ending lists of value added features may make your product more appealing than others.
Although come extras have a measurable peso value, others generate customer loyalty and
feelings of goodwill.
How much competition are you facing? Check to see how much competition really exists in your
market. If you have very little competition, you’re in excellent position. You can dictate terms
and can refuse credit extension. But most businesses aren’t monopolies. Not even close. If
you’re in the opposite situation, you have to consider extending reasonable terms.
Even if your customers can easily turn to your competitors, you may be in a privileged position
because of high customer demand for your specific goods and services. factors that may give an
edge include presentation, quality, prompt service, reputation among others.
Establishing a sound credit policy
Prepare your work outside; get everything ready for yourself in the field, and after that build
your house.
There must always be plans to guide the conduct of business in all operating units of a
company. In reality, however, the majority of business have not deliberately developed credit
and collection policies and procedures. If there is such a system, the policies and procedures
used only evolved and developed after years of operation. This inordinate reliance on
experience and not on fundamentals aggravated by inexperience, is risky and costly.

Contributory factors
 Attractive price and credit terms
 Value-added extras
 Competition
 Giving customers what they’re looking for
 Presentation – complaint reduction
 Quality – access to people
 Prompt service – experience – industry
  Reputation

Factors dictating for liberal credit policy  Competitive market

 Declining market for your g/s
 High overhead costs
 Heavy, abnormal, obsolete inventory
 High advertising and promotion
 Selling season is ending and not financially
expenses
strong to carry inventory next year
 Demand for product is temporary
 When opening new accounts
 Developing a market for new product

Factors dictating restrictive credit policy

 Having extended or leveraged financial condition

 More demand than you produce
 Inventory is low
 General economic condition is slumping badly
 Producing product according to customers specs.

Objectives of establishing credit policies:

1. To maximize sales
2. To minimize costs and bad debt losses
3. To attain profit or income objectives
4. For control and evaluation

Factors to consider in formulating credit and collection policies

Up to what extent can Up to what extent or Does your product or The class of customers
capital of a company period of payment does service lead or lag in its will, to a large extend
service or support the the competition give to market? Does it give influence the collection
receivables? the market? you sufficient policies you will adopt
leverage?

General policies of credit and collection

Depending on the factors affecting your product or service, you can either have:
1. Liberal credit policy complemented by strict collection policy
2. Strict credit policy complemented by liberal collection policy
3. Liberal credit policy with a liberal collection policy
4. Strict credit policy complemented with strict collection policy
A liberal credit and collection policy means loose or lax policies while a strict credit and
collection policy is tight policy.
Implementing your written credit policy
When you implement your written credit policy, remember the two keys to success:
1. Adopt or formulate a written plan that you and your employees use as a guide
2. Keep the policy up to date. Make changes, both as needed and when needed, based upon
unique situations.
Make all the changes in writing. Notate the change, the date it was made and what the change
was.
Customizing your credit policy to meet your needs
Extending credit involves more than just giving your debtor some time to pay the debt.
You can customize credit to meet the needs of your company or of your customers.
Providing a discount
Discounting credit rewards prompt payment, and you can offer it as an alternative or in
addition to any price reductions the customer may earn. The two forms of discount serve
different purposes: the price reduction tells your customer you appreciate him, and the credit
discount rewards him for paying quickly. Although most customers prefer a price reduction to a
credit discount, both are useful for building relationships with good customers.
Credit discounts are written in a simple code. Example is “2/10, n/30” gives your customers a
2% discounts off the price on the invoice if he pays the bill in 10 days. Otherwise, the customer
must pay at full invoice price within 30 days. Customers with a good cash flow will pay on the
10th day and enjoy the 2% reduction on the invoice. The number may vary but the concept
remains the same.

Customers with a mediocre cash flow often try to take the discount even when they pay the
invoice after the discount period and expires. If you decide to let the customer get away with
the discount by failing to reinvoice it, you’re setting a precedent: You’re telling the customer
taking the discount by beyond terms on this or any future invoices is just fine. You may regret
doing that, particularly if this customer takes advantage of it and all future invoices.
Adjusting credit extension to your industry
The unique circumstance of your industry, the nature of your goods or services, and the
frequency of your deliveries or bills all tie into your credit decisions.
Consider for example, perishable goods. Deliveries of food items are usually handled on
a very short leash, with very short credit terms. Time to object to product quality (spoiled milk)
is intentionally kept very short. When a product should be inspected immediately upon receipt,
don’t give the customer a long opportunity to object to its condition. In contrast, some
industries work on (and expect) very long credit terms.
Adjusting credit terms to the quality of the customer’s paying habits
Better customers earn better credit terms. No surprise there. Extending favourable credit
terms when you have minimal risk is a good business strategy. Customers appreciate the vote
of confidence, and you generate loyalty. A win-win situation.

the opposite applies to poor payers. Don’t take on significant risk with a customer who pays
slowly. Slow payers can turn into no-payers. Consider keeping poor payers on COD terms.
Adjusting the level of your accounts receivable
Textbook receivable turnover (collection time) may be 30 days or so, but many factors
affect your collection rate. When your receivables reach a level of being uncomfortably high or
aging is uncomfortably long, tighten credit terms at least to marginal accounts. When
receivables reach critical levels, adjust terms for all customers.
Setting credit extensions based upon ability of customers to pay
Although two customers may be paying according to terms (promptly), the customer
with the strongest financial strength or longest time in business may be entitled to more leeway
on credit extension. Certainly, within reason, reward a good customer who always pays her bills
on time despite a spotty balance sheet. But a promptly paying customer with a strong financial
condition or longevity should be rewarded by receiving your best practice and credit terms.
Setting credit terms based upon interests and late fees
 As an alternative to adjusting credit terms, some lenders prefer to provide equal credit
terms to most who apply. As problem arise with a particular customer, they may add
contractually imposed late fees and interests or cut off credit altogether.
Avoiding discriminatory practices
There are certain laws that impose strict guidelines that you must follow in the extension
of credit. For example, a spouse of a credit applicant can’t be required to sign a personal
guaranty if the applicant would have otherwise qualified for the extension of credit.