Credit and Collection

Topics: Debt, Interest, Bank Pages: 9 (2921 words) Published: July 4, 2013
TABLE OF CONTENTS

I. Title Page
II. Introduction
III. Abstract
IV. Discussion
V. Conclusion and Recommendation
VI. Reference

ABSTRACT
When assessing lending proposals banks apply certain general principles of good lending, often referred to as the canons of lending. Although not all of the principles can be applied by corporate credit managers to requests for trade credit, most are generally applicable. They provide an excellent framework for assessing all credit proposals. Because the purpose of lending is to earn interest and make a profit, it follows that principles of good lending should be concerned with ensuring, so far as possible, that the borrower will be able to make the scheduled repayments with interest, in full and within the required time period. Otherwise, the profit from any interest earned is reduced or even wiped out by the bad debt when the customer eventually defaults. Everybody needs to borrow money. Whether it is to buy a home or a car or to enjoy the convenience of a credit card, borrowing is as much as part of our daily lives as brushing our teeth or going to work or school. The problem is that borrowing money costs money. You have to pay interest on borrowed money to make loans worth a lender’s while. And if you are not paying attention you could end up paying more in interest than you did for something you originally bought on credit. It’s important to understand the nature of borrowing and the effective ways of collecting credits that will not affect the individual’s behaviour.

DISCUSSION
I. Lending Proposition
Lending basically is to provide anything material or money specifically temporarily on condition that the amount borrowed is returned, usually with an interest fee. (startupbizhub.com)
The initial lending or borrowing proposition must come from the customer. The customer must ask to borrow a certain amount of money for a certain period of time and for a particular purpose, making it clear how the bank can expect to be repaid. It is then the task of the banker to decide whether the proposition is acceptable in its current form, whether it would be acceptable if it were amended, or whether it is not acceptable in any form.

If a bank agrees to lend, it will want to structure the loan or facility to match the purpose for which it is being given.
Many lending decisions are based on experience and on the banker’s instinct that the customer will repay the loan and in full. However, a structured objective approach should be used. One such approach is to consider each important factor in turn and assess whether the lending proposition satisfies certain criteria. (Coyle, 2000)

II. Lending Company
Lending company shall refer to a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen persons. It excludes banking institutions, investment houses, savings and loan associations, financing companies, pawnshops, insurance companies, cooperatives and other credit institutions already regulated by law. Lending companies are also synonymous with lending investors. (startupbizhub.com)

III. Good Debt and Bad Debt
When people think debt, they probably think of it negatively. Debt is the amount owed to a person or organization for funds borrowed. But not all debt is bad debt. In fact some kinds of debt allow you to grow your net worth and increase wealth in a way you never could without borrowing.

Good debt is borrowing for an item that appreciates in value or that helps you increase your income or net worth over the long term. Good debt involves using credit to pay for items that will still be around when you’re done paying for them. Good debt is usually worth every penny of interest you’ll pay to borrow money. Take a mortgage, for example. A mortgage is good debt because your home is likely to appreciate in value and...
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