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Chapter 7

HOW TO DEFINE
THE GRANTING OF CREDIT
(method of josavere)

 

by josavere

Accepting that to grant credit is a difficult decision, we take care to do it the most objective possible way in order to facility practice a preventive audit.

The granting of credit is very risky, because the management becomes aware from which this one has been badly granted when the problem is already created. Hardly, in the first stage (while the credit has not been overcome), one knows that a portfolio director is wrongly selected to the clients granting credits in a deficient form.

The great advantage of the system of points to grant credits consists in the possibility that offers to objectivity the decision. Who guarantees that a portfolio director does not grant credits in bad faith and for personal benefits? That does it simply applies to bad criterion?

If the company fixes parameters for granting credit is easy to request justification for one decision. The method, becomes a support and it guarantees a of pattern uniforms of measurement and consistent even though change the employees.

With the object of making comparisons, the quantitative methods are very practice and first of all, allow us to obtain defined results clearly.

The establishment of a manual of credits by points constitutes a measurement pattern that helps us to compare a natural or legal person with another one and to decide how much credit  can grant objectivity.

The technique consists on designing a manual with which a number of points that are assigned, base on a scale previously established that quantifies the different factors.

 

1. VARIABLES TO CONSIDER

Selected characteristics that are quaintly by degrees; these must be common to all the potential clients and must facility the establishment differences among them.

Each company or business will design its own manual considering the specific characteristics of its clients, the conditions of the competition and their general direction towards the assumption of risk.

In the case of natural people the following variables will be used among others:

 

2. NATURAL PERSON

A.Unemployment: generally, a person who has a category tries to take care of her/his image. In addition, the job guarantees periodic income.

B. PERIODIC INCOME: the greater the wage level and income of diverse kind, the greater the capacity to meet the payments.

C. IT CALLS TO ACCOUNT: who ever have real state has ties to a city, and in general principle, he tends to remain in it.

D. TELEPHONE, FAX OR ELECTRONIC MAIL (E-MAIL): it facility enormously speeds up the communication for all the related effects.

E. YEARS IN THE LAST USE: it is a symptom of stability in the job. It is especially useful when one of them is consumption credit.

F. AGE: a certain relationship between the age of a person and its life expectancy, its interest in maintaining good reputation and its attitude towards the fulfillment of commitments.

G. CIVIL STATE: normally the unmarried ones have fewer commitments than the married ones; but they also tend to be more disordered in their expenditures.

H. PATRIMONIAL ENDORSEMENT: assets of the applicant that in breach of contract circumstances they could enter endorsing the debt.

I. INDEBTEDNESS LEVEL: the knowledge of the effective debts helps to have one more and more reasonable base about its credit behavior and to define its potential for indebtedness.

 

3. COMPANIES

A. TYPE OF SOCIETY: independent of other considerations, the joint-stock companies offer fewer risks than limited and these also less than the collective ones. This factor can be joined up with the years of operation of the society.

B. GRANTED GUARANTEE: the guarantee that has less risk is the letter of credit in addition to being very liquid being indispensable to its victory in immediate form. In contrary the bills of exchange do not offer almost any guarantee.

C. FINANCIAL SITUATION: a careful study of the financial statements of a company, specially the cash flow, allows predicting, with a certain degree of certainty its capacity of payment among others, it is possible to be analyzed: the liquidity, indebtedness, operative cycle and proportion of fixed assets on the total assets cover and yield. In this aspect it is important to remember that the result cannot be taken literally from an index it, is necessary that the analysis be made altogether; considering the limitations of the financial analysis and the alternatives to improve it.

D. TIME OF COMMERCIAL ENTAILMENT: the historical record on the commercial relationships allows predicting the behavior of the clients, taking advantage of the experience.

E. GEOGRAPHIC LOCATION: in the big urban centers collection is speed up because they visit several clients taking advantage of the time. In addition, the airlines and telephone and other services offer great advantages. An errand in New York is very different from another one in Denver.

 

F. IMAGE: this one is detected through the looks of the business, the
acceptance of credit cards, its location in the sector of the city, trajectory of the company, time of activity and its acceptance in society.

 

G. ECONOMIC SECTOR: because it eases the analysis in the measurement in which it allows comparisons according to the general conditions of the economy and the sector individually.

 

4. ASSIGN A WEIGHT TO THE FACTORS

Once selected the factors to be considered,continue to its apprising. For it, the constitution of a committee of heterogeneous nature is recommended and in which must take part, persons from an independent criterion; each one will emit its own judgment about the relative weight of each one of the factors, for example, two members of a committee will be able to distribute the score in the following form:

Factors
A (%)
B (%)
1. Type of society
15
12
2. Granted guarantee
20
20
3. Financial situation
25
20
4. Time of commercial relationships
10
8
5. Geographic location
10
20
6. Image
10
10
7. Economic sector
10
10

Following a confrontation of the emitted judgments and by means of application of the statistic it will arrive at an appraisal that will be used for make the manual. When differences are very ample appear, continuing with a process of discussion and analysis that allows to join the members or, to obtain greater objectivity. Example:

Factors
Examining
Weighed 
qualification
Statistical 
measurement
A
B
C
D
E
1. Type of society
25
20
30
25
25
25
Mode
2. Granted guarantee
20
30
30
25
20
25
Mean
3. Financial situation
15
20
15
15
15
15
Mode
4. Time of commercial relationships
5
5
10
5
5
10
Mode
5. Geographic location
5
5
5
10
5
15
Mean
6. Image
10
15
5
10
15
10
Mean
7. Economic sector
30
20
25
30
10
15
Mean

Once it is obtained the appraisal of factors we continued to the corresponding subdivision. With a base of 100 adapted to maximum credit, we deduce the variation rank which each factor will have. For example, the largest score that can be granted to a company according to the type of society will be 25 points.

Continued subdividing each of the factors in the different variables that can be presented in it and we assigned the corresponding score according to the hierarchical structuring that it becomes. For example:

Hierarchical structuring

Grade
Explanation
Points
1 Joint-stock company
Up to 10
2 Limited Society
Up to 9
3 Limited partnership by shares
Up to 8
4 Simple limited partnership
Up to 7
5 Collective Society
Up to 6
6 Impersonal Company
Up to 6
7 Official Company Even
Up to 2

Once the manual is drafted, we continued with the processing of the of fees chart. For it, we entered to study the statistics of the company as far as the quota of credit of the clients who are effective. Thus we calculated fitted maximum that the company has granted.

This is equivalent to the Maximum purchase that hopes in the event that the clients continue themselves tolerating in the same form.

Complemented this information with the criterion of the executives of sales, that among other considerations, will try to avoid the concentration in one client(s) and, anticipating the possible increase of prices in the period for which one is going away to apply the manual, it is defined fitted maximum that the company decides to grant to each one of them.

A potential buyer that accumulates 100 points by means of the sum of invoices, assigned in agreement with its specific location in each one they, will obtain fitted maximum, which is practically theoretical, because hardly will be somebody that describes very optimally in all the factors.

Once fitted maximum with the scale of points, we obtain the rate by each one. Example:

It fitted maximum: 10 million dollars

Maximum points: 100

r = 10'000.000 / 100 = $100.000 by each point

No. Points
It fitted of Credit ($)
1
100.000
2
200.000
"
"
"
"
"
"
10
10.000.000

 

5. GENERAL CONSIDERATIONS

a. The manual must be considered as a guide. In cases of doubt, is necessary the good criterion of the executives. Like general rule, the cups will leave by means of the routine application the manual; special cases require considerations of qualitative type.

b. The quotas of credit due to be reviewing periodically in agreement with the change that each client presents and that appear in the policies of the company as the experience is accumulated. In addition, general adjustment will become when they vary prices.

c. The introduction of the technique, like almost all the innovations, will present initial difficulties in its application. In the measurement that allows to the handling of situations and its respective feedback it, the pertinent adjustments will become until obtaining a high degree of reliability.

b. It is a serious error, to copy a manual. Each company must study its particular case and design its own model.

e. It is advisable that audits the application of the manual and applied the experience in the improvement.

f. It is understood that requirements are due to fix minimum to reunite by all the clients to be able to be object of the study. These requirements do not give points.

g. For have good consultant's office before signing any document is important, be because legally, all the financial organizations are authorized to receive sanctions by slow payments. Of not being briefed in the document any collection cannot take place.

h. Among others we can enumerate:

  • Transaction of form to ask for credit.
  • Sales contract acceptance and fulfillment on credit, in case that it exists.
  • Presentation of financial statements.
  • Good references, provided preferably by specialized organizations.

Example of a Manual

I. Pond ration of the Committee

Factors
Examining
Weighed
qualification
Statistical
measurement
A
B
C
D
E
1. Type of society
10
3
5
5
10
7
Mean
2. Granted guarantee
24
24
24
30
24
24
Mode
3. Financial situation
30
33
28
25
30
30
Mean
4. Time of commercial relationships
5
5
5
5
5
5
Mode
5. Geographic location
5
4
5
5
5
5
Mode
6. Image
10
11
7
5
5
8
Mean
7. References
10
6
5
5
5
5
Mode
8. Economic sector
5
14
8
20
16
16
Mean

II. Pond ration of Factors

A. TYPE OF SOCIETY: maximum score 7

1. Joint-stock company
7
2. Society in C. x actions
6
3. Society in simple C.
6
4. Limited society
5
5. Impersonal Society
4
6. Without profit spirit
4
7. Society in fact
3
8. Natural Person
1

B. GUARANTEE: maximum score 24

1. Fiduciary guarantee
24
2. Letter of credit
18
3. Check
15
4. Promissory note
10
5. Letter of change
5

C. FINANCIAL SITUATION: maximum score 30

1. Liquidity
12
2. Indebtedness
8
3. Activity
5
4. Yield
5

Note: The score is assigned with base in the corresponding indicators (to see financial analysis).

D. TIME OF COMMERCIAL ENTAILMENT: maximum score 5

1. More than 3 years
5
2. Between 2 and 3 years
2
3. Between 1 year and less than 2 years
3
4. Less of a year
0

E. GEOGRAPHIC LOCATION: maximum score 5

1. Metropolitan
5
2. Zone A
4
3. Zone B
3
4. Others
1

F. IMAGE: maximum score 8

1. Presentation
3
2. Publicity
2
3. Credit cards
1
4. Systematized Information
1
5. License of Operation
1

G. REFERENCES: maximum score 5

1. Well referenced
2
2. Without given back checks
2
3. Active clients
1

H. ECONOMIC SECTOR: Maximum score 16

1. Mining
16
2. Services
14
3. Telecommunications
12
4. Farming
11
5. Commercial
9
6. Foods
8
7. Plastics
6
8. Metal mechanic
6
9. Automotive
5
10. Footwear
5
11. Textile
2
12. Construction
2

6. PROCESSING OF THE QUOTAS TABLE

For our case it was possible maximum to grant is of dollars 10,000,000, the amount of dollars, which is equivalent to 10,000 dollars by point.

r = $ 10.000.000 / 10 = $ 100.000

TABLE OF VALUES BY POINTS

Punts
Valor
Punts
Valor
Punts
Valor
Punts
Valor
100
10.000.000
71
7.100.000
42
4.200.000
13
1.300.000
99
9.900.000
70
7.000.000
41
4.100.000
12
1.200.000
98
9.800.000
69
6.900.000
40
4.000.000
11
1.100.000
97
9.700.000
68
6.800.000
39
3.900.000
10
1.000.000
96
9.600.000
67
6.700.000
38
3.800.000
9
900.000
95
9.500.000
66
6.600.000
37
3.700.000
8
800.000
94
9.400.000
65
6.500.000
36
3.600.000
7
700.000
93
9.300.000
64
6.400.000
35
3.500.000
6
600.000
92
9.200.000
63
6.300.000
34
3.400.000
5
500.000
91
9.100.000
62
6.200.000
33
3.300.000
4
400.000
90
9.000.000
61
6.100.000
32
3.200.000
3
300.000
89
8.900.000
60
6.000.000
31
3.100.000
2
200.000
88
8.800.000
59
5.900.000
30
3.000.000
1
100.000
87
8.700.000
58
5.800.000
29
2.900.000
86
8.600.000
57
5.700.000
28
2.800.000
85
8.500.000
56
5.600.000
27
2.700.000
84
8.400.000
55
5.500.000
26
2.600.000
83
8.300.000
54
5.400.000
25
2.500.000
82
8.200.000
53
5.300.000
24
2.400.000
81
8.100.000
52
5.200.000
23
2.300.000
80
8.000.000
51
5.100.000
22
2.200.000
79
7.900.000
50
5.000.000
21
2.100.000
78
7.800.000
49
4.900.000
20
2.000.000
77
7.700.000
48
4.800.000
19
1.900.000
76
7.600.000
47
4.700.000
18
1.800.000
75
7.500.000
46
4.600.000
17
1.700.000
74
7.400.000
45
4.500.000
16
1.600.000
73
7.300.000
44
4.400.000
15
1.500.000
72
7.200.000
43
4.300.000
14
1.400.000


 

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