Ten Commandments of Credit

The month of July is often the most challenging month for any Credit and Collection manager. For one, July is the start of the second semester for the fiscal year and this is the time when management or owner wants to know about their six month sales particularly the Accounts Receivables.

In terms of Account Receivables, this is where management would like to have a heads up report of the overall picture of the current, delinquent and defaulted accounts. Usually, management will come up with all sorts of statistics and analysis towards the breakdown of these accounts. If the Accounts Receivables is healthy, meaning the defaults are still within the company projection, the Sales and Credit and Collection group will be commended. However, if the Accounts Receivables are already out of control, it is obvious that something is wrong. If the defaults are becoming a clear problem, the good news is that there is more time to collect, but the most basic thing to do is at least going back to basic in granting credit to mitigate future exposure.

The following, are the “Ten C’s or Commandments of Credit” which are a basic guideline for all Credit and Collection executives.

First. Make sure that the company or person you are extending credit is of upstanding CHARACTER. Going back to the basics of credit, one of the 3 C’s of credit is Character. As a matter of fact, it is not a coincidence that the first C of credit is character, it is really in that order: character, capacity, condition, capital and if more is needed, collateral.  The credit and collection officer can do character verification by checking given references such as but not limited to neighbors, credit card companies, court case listings, watch list among others.

Second.  Make sure that the company/ person you are extending credit has the CAPACITY to pay. Always check bank references, trade suppliers, and most of all, history of paying habits in relation to amount of credit lines and amount of credit being applied for.

Third. Always understand and put into factor that all business, and individual as well, that natural and economic CONDITIONS can and will change. An example here is natural calamities, loss (such as loss of income), death, physical incapacity, adverse legal judgment, among others.  The credit officer must understand this and to be one or two step ahead of any foreseeable situation and provide for any shift in present condition or incident that may and can happen. Political condition is likewise another factor to be greatly considered.

Fourth. Make sure that the company or prospective debtor is adequately CAPITALIZED. Check capitalization by accessing records from the Securities and Exchange Commission (SEC) and Department of Trade and Industry (DTI) Mayor’ s Office (Mayor’s Permit) among other agencies. If not enough, determine if stock inventories are assets, or just on consignment basis and so on.

Fifth. Make sure that the COLLATERAL is not the sole consideration in arriving at the decisions to grant credit. In granting credit, although collateral is one of the best securities, this however cannot and should not be the sole basis in approving credit, other factors should be also considered such as availability, real ownership and most importantly authenticity. (to be continued).

For comments, rejoinders and questions related to credit & collection, please email to [email protected].