Chapter 7

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

 

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

The granting of credit is very risky because the management becomes aware from 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.

Now with the Digital Revolution, using Artificial Intelligence (AI) that is designed to identify contexts and scenarios, work with some predictive models and make autonomous decisions and Big Data with the capacity to process huge volumes of information, the design of models is greatly facilitated to define credit quotas objectively following the guidelines presented in this chapter.

The great advantage of the system of points to grant credits consists of the possibility that offers objectivity to 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 supported and it guarantees a pattern uniform 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 of designing a manual with which a number of points are assigned, based 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 facilitate 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 kinds, the greater the capacity to meet the payments.
c. IT CALLS TO ACCOUNT: whoever has a 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): its 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 a 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 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 are 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. On the contrary, the bills of exchange do not offer almost any guarantee.
c. FINANCIAL SITUATION: a careful study of the financial statements of a company, especially the cash flow, allows predicting, with a certain degree of certainty its capacity of payment among others, it's 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 center's collection is sped 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, the 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 to make the manual. When differences are very ample appear, continuing with a process of discussion and analysis allows them to join the members or, to obtain greater objectivity. Example:

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:

Once the manual is drafted, we continued with the processing of the 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 the 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, it is necessary for the good criterion of the executives. Like a general rule, the cups will leave by means of the routine application of the manual; special cases require considerations of qualitative type.

b. The quotas of credit are due to being reviewed periodically in agreement with the change that each client presents and that appears in the policies of the company as the experience is accumulated. In addition, the 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 the handling of situations and their respective feedback, 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 audit the application of the manual and applies 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 the object of the study. These requirements do not give points.

g. For have good consultant's offices before signing any document is important, be because legally, all 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 inc. x shares	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 on 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	3
4. Less of a year	0

E. GEOGRAPHIC LOCATION: maximum score 5

1metropolit	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 backchecks	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 dollars 10,000,000, the number 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