MARCUS EDITION

MARCUS EDITION

CREDIT MANAGEMENT
Credit management is a term used to identify accounting functions usually conducted under the umbrella of Accounts Receivables. Essentially, this collection of processes involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on a customer invoice. When functioning efficiently, credit management serves as an excellent way for the business to remain financially stable. Credit management is the process for controlling and collecting payments from your customers. A good credit management system will help you reduce the amount of capital tied up with debtors (people who owe you money) and minimise your exposure to bad debts. The process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is particularly important if the company chooses to extend some type of credit line (A credit line, or line of credit, is the amount of credit extended to a borrower. The amount of credit extended is most often based on the borrower's credit rating. A credit rating, or credit score, is an assessment of a borrower's credit history coupled with their assets and/or liabilities)or revolving credit to certain customers. Proper credit management calls for setting specific criteria that a customer must meet before receiving this type of credit arrangement. As part of the evaluation process, credit management also calls for

determining the total credit line that will be extended to a given customer. Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit (Sometimes referred to as business credit or commercial lending, commercial credit has to do with the ability of a business to obtain goods and services from a supplier. Business credit is extended with the understanding that the business promises to pay the supplier according to the terms and conditions that the buyer agreed to at the time of acquisition). This includes gathering data on the potential customers current financial condition, including the current credit score. The current ratio between income and outstanding financial obligations will also be taken into consideration. Competent credit management seeks to not only protect the vendor from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner. Good credit management is vital to your cash flow. It is possible to be profitable on paper and but lack the cash to continue operating your business.

Credit management tips

It is best to minimise the likelihood of bad debts through good credit management practices. The following suggestions will

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MARCUS EDITION

assist you in preparing your own policies and procedures for credit management: Terms and conditions Clearly state in writing your terms and conditions of trade and your credit policy. Draft terms and conditions that suit your business. It is strongly advised you seek legal advice before finalising the document to ensure it has internal consistency and covers all the key issues. It's also important to ensure the document does not contain any illegal terms and can be relied on in the event that court action is necessary to recover a debt. Include your terms on all quotes, estimates, contracts, agreements, purchase orders, and related documentation. Clearly specify what will be supplied, when the work will be done, and when and how payment is to be made. Obtain a written acceptance of the agreement along with written approval of any variations to the original agreement. Some terms and conditions to consider include, but are not limited to: y y y y y penalties for late payment you must specify the exact fees and rate of interest; retention of title' clause where the seller retains title to the goods until payment is made; your policy on returns and refunds; your policy on refund of deposits; incentives for early payment; and

whether a fee is charged for payment by credit card. The amount in dollars or the percentage to be charged must be disclosed.

Invoice promptly Include accurate details on your invoice for the goods or services supplied, the amount due along with the date and preferred payment method. Always try to resolve invoice queries or disputes quickly. Monitor your debtors Maintain your debtors' records to identify any due or overdue debts. Develop a good records management system and keep records up to date so you can quickly identify who owes you money and how much is owed.

Take a proactive approach to credit management by contacting clients a few days before the due date to remind them a payment is due and ask if they foresee any problems with meeting their payment. Implement your debt collection practices the minute a debt becomes overdue and ensure clients do not exceed their credit limits.

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MARCUS EDITION

Credit Application Process

It is sometimes possible to increase sales by granting credit to selected clients who may choose to do business with you because of the convenience offered by a credit account. If you choose to provide this option be sure to develop a sound credit application process which includes a thorough check of client credit ratings before granting approval. Allowing some clients to purchase on credit is like offering them an interest free loan, and you are not obliged to provide credit to risky clients. Allowing clients to defer payments increases the risk of bad debts occurring and draining your cash flow, so it's vital that you identify good customers and screen businesses with a poor credit history to minimise bad debts and avoid cash flow problems. Develop a credit application form and have the draft checked by your lawyer. The credit application and approval process could include, but is not limited to the following steps: y the completion of a credit application form which requests full business and personal contact details, trading name, credit guarantors, referees, Australian Business Number ( ABN ) and the number of years in business; asking for details of suppliers who can be contacted as referees and then checking the client's payment habits with the referees; requesting bank references;

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asking the client to sign a directors' guarantee which makes the directors of a company personally liable for any debts incurred with your business; checking the client's business registration on the Australian Business Register; obtaining a credit report to determine whether the client is credit worthy. A range of credit reports can be obtained from commercial information brokers listed with the Australian Securities and Investments Commission (ASIC). discuss the reports available and the costs involved with individual broker firms; and periodically evaluating the credit rating of your existing credit clients.

Alternatives to providing credit

You may find it necessary to reject credit applications in some cases. Rather than risk losing the client entirely, you might suggest alternative payment methods while your client establishes a trading history with you. Review the client's situation after a specified volume of trade, number of orders, or period of time. The alternative methods may include:  requesting cash on delivery ( COD ) for new clients until a trading history is established;

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MARCUS EDITION

 collecting a deposit before making a supply to cover costs of materials and overheads, and as an indication of their ability and intention to pay;  collecting progress payments that are linked to achieving major milestones. Progress payments are common in the construction and building industry; and lay-by.

Contractual Obligations
Commercial contracts are the basis of doing business. Whether they are purchase orders, supply contracts, exclusive agency agreements, partnership agreements, franchise agreements, or leases, small businesses enter into contracts with others on a daily basis.

Debt recovery
You may still incur bad debts even with sound credit management policies and procedures. There are a several methods with escalating degrees of severity that you can use to recover these bad debts. It is advisable to use a measured approach and select the most appropriate method to recover the debt while maintaining the relationship with your client. Essentially, an unpaid invoice is a breach of contract. Disputes arise when parties to a contract don't do what they agreed - in this case - paying for products or services supplied. You can learn more about the options available to resolve your contract dispute. Generally, your debt collection options include: 1. personal communication and consultation with your client 2. a written request to settle the debt (letter of demand) 3. a debt collection agency 4. legal action.

Disputes arise when parties to a contract don't do what they agreed. It is preferable to resolve the dispute without court action wherever possible. First, read the contract and other associated documents to clarify the rights and obligations of each party about the issue in question. In many cases, a well-written contract will set out what both parties have agreed and the action required will often be obvious. Also, check your contract for a clause that outlines a process for dealing with disputes between the parties. If the contract or other associated documents do not clarify the issue, obtain professional advice There are three options available to resolve your contract dispute: 1. Informal negotiation: The cheapest and easiest thing to do is attempting to resolve the dispute through discussion. Try to resolve the problem through talking and informal negotiation

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MARCUS EDITION

with the other party. Often the parties to the contract can negotiate a resolution that is satisfactory to both without the need for formal mediation. Remember to confirm any verbal agreements in writing. 2. Mediation and arbitration: mediation or arbitration is another option to resolve the dispute if informal negotiation fails. It is a way of reaching an agreement that is usually cheaper and quicker than using the courts. An independent mediator will assist to negotiate an outcome which meets the interests of both parties. Mediation is not a binding legal process but the agreement can be enforced if necessary. Arbitration is a more involved process similar to court proceedings but much less formal. An arbitrator is an independent third party that will decide the dispute between the parties. The arbitrator considers the evidence of the case presented by both parties and then makes a decision that can be legally enforced. 3. The Courts: you may find it necessary to take the dispute further if other forms of resolution have not been successful. Before you seek a resolution in the courts, carefully consider whether the issue is worth the damage it may cause to the relationship with the other party. Further, this option can be expensive and time consuming. However, if you have a good case and the dispute cannot otherwise be resolved this could be your best option.

Business Contracts
Every time you or your business agrees to take some action, make a payment in exchange for anything of value, or provide products or services for payment, you have created a contract. Contracts are also known as agreements, terms and conditions, purchase orders, bills of sale, leases, or employment agreements. Contracts can be verbal or written providing they contain the four essential elements of a contract. However, a verbal contract is much more difficult to prove. Some types of contract such as those for buying or selling real estate and credit, must be in writing. A written agreement is recommended because it becomes your proof of what was agreed upon, prevents ambiguity or misunderstanding, and prevents either party forgetting or changing the terms later. A written contract also makes the parties focus on the essential issues and come to a definite agreement. Unless you're a lawyer nobody expects you to write your own contracts. However, as a business owner, you're expected to be able to read a contract and understand what it means. This section provides a brief introduction to the basics of contracts. Keep in mind that you should always obtain legal advice before signing a significant contract.

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MARCUS EDITION

What is a contract?
A contract is a legally binding agreement between two or more parties that creates an obligation to do, or not do, particular things. This means that the obligations of each party set out in the contract are enforceable. The process for creating a contract generally includes information exchange, discussion, negotiation, and making and accepting offers. The question is, when does all the discussion and negotiation become a legally binding agreement? A contract is formed when the four essential elements are present:     offer; acceptance; the intention to create legal relations; and consideration.  The contract involves misleading or deceptive conduct, mistake, duress, undue influence, unconscionable conduct or other categories that at law can cause the contract to be avoided.

Principles for the Management of Credit Risk

Introduction 1. While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. This experience is common in both G-10 and non-G-10 countries.

A contract is formed at the moment when the parties assume contractual obligations and the risk of liability if the terms of the contract are breached. Even if the four essential elements are present a contract could be invalid if:  It is an illegal contract. Examples of illegal contracts are an agreement to commit a crime and an agreement that breaches legislation, such as unconscionable conduct under the Competition and Consumer Act 2010.  The person or entity lacks the capacity to enter into the contract. Examples of persons where lack of capacity could be an issue are minors and bankrupts.

2. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management

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MARCUS EDITION

of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation.

3. For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.

5. The sound practices set out in this document specifically address the following areas: (i) establishing an appropriate credit risk environment; (ii) operating under a sound creditgranting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk. Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to the assessment of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk, all of which have been addressed in other recent Basel Committee documents.

4. Since exposure to credit risk continues to be the leading source of problems in banks world-wide, banks and their supervisors should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify, measure, monitor and control credit risk as well as to determine that they hold adequate capital against these risks and that they are adequately compensated for risks incurred. The Basel Committee is issuing this document in order to encourage banking supervisors globally to promote sound practices for managing credit risk. Although the principles contained in this paper are most clearly applicable to the business of lending, they should be applied to all activities where credit risk is present.

6. While the exact approach chosen by individual supervisors will depend on a host of factors, including their on-site and offsite supervisory techniques and the degree to which external auditors are also used in the supervisory function, all members of the Basel Committee agree that the principles set out in this paper should be used in evaluating a bank's credit risk management system. Supervisory expectations for the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank's activities. For smaller or less sophisticated banks, supervisors need to determine that the credit risk management approach

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MARCUS EDITION

used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes.

BANKRUPTCY FACTS
Here are two bankruptcy facts that might surprise you: y Credit After Bankruptcy Fact #1: If you follow the right steps and learn how to fix credit, you can build your credit score to 720 within a couple of years of a bankruptcy. Credit After Bankruptcy Facts #2: You might be tempted to wash your hands clean of credit after bankruptcy, but this is the wrong move. Learn all about credit repair after bankruptcy!

7. The Committee stipulates in Sections II through VI of the paper, principles for banking supervisory authorities to apply in assessing bank's credit risk management systems. In addition, the appendix provides an overview of credit problems commonly seen by supervisors.

8. A further particular instance of credit risk relates to the process of settling financial transactions. If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the principal amount of the transaction. Even if one party is simply late in settling, then the other party may incur a loss relating to missed investment opportunities. Settlement risk (i.e. the risk that the completion or settlement of a financial transaction will fail to take place as expected) thus includes elements of liquidity, market, operational and reputational risk as well as credit risk. The level of risk is determined by the particular arrangements for settlement. Factors in such arrangements that have a bearing on credit risk include: the timing of the exchange of value; payment/settlement finality; and the role of intermediaries and clearing houses.

For many people, bankruptcy is just part of a cycle of bad credit that includes high interest rates and tight finances. But it doesnt have to be that way. If you need to know all about credit repair after bankruptcy, you have come to the right place. This website is dedicated to helping people fix bad credit, and this includes the steps to repair credit after bankruptcy. You will learn:  To quickly rebuild your credit score, achieving a 720 scores within just a few years of declaring bankruptcy.  How to qualify for credit cards and loans immediately after a bankruptcy, and why using credit is the best way to achieve credit repair after bankruptcy.  Ways to qualify for loans even in the wake of a bankruptcy.

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MARCUS EDITION

CREDIT REPAIR AFTER BANKRUPTCY

Philip Tirone: Contrary to popular belief, credit repair after bankruptcy is not impossible. In fact, if you ever again plan on buying a home, renting a car, applying for a job that runs a credit check, or even going on vacation and securing a rental car, you are going to need credit. If you have declared bankruptcy and want to know how to build credit after your bankruptcy, follow a two-fold plan. First, you will need to open new lines of credit. Second, you will need to pay your bills on time and in full to best achieve credit repair after bankruptcy.

credit, you can easily raise your score well before the bankruptcy is removed from your credit report in ten years. As part of your plan for credit repair after bankruptcy, you should: Open three new credit cards, which you keep active by using in lieu of cash, but pay off in full after each use. If you are at lunch with a friend and have cash to pay, charge the lunch to your credit card. As soon as you return home, make an electronic payment in the amount (assuming you are not charged for electronic payments). My point is this: keep the cards active, but keep the balance as low as possible monthround. If you are buying a new appliance, household furniture, or a computer, ask the sales associate whether you can buy it on installment loan. Again, pay the loan off quickly and with cash. Two things to keep in mind when opening new accounts: Because you likely have low credit, you might not qualify for loans and credit cards with low interest rates. This is yet another reason to pay your bills immediately and in full. That said, you might be willing to find lenders willing to compete a little for your business. Trying to negotiate a lower interest rate is always wise. To best achieve credit repair after bankruptcy, try to open all your new accounts as soon as possible after the bankruptcy discharge. This might cause your score to drop immediately as

Opening New Lines of Credit

Do not be fooled by companies that say they can wipe a bankruptcy off your record. You cannot legally erase the bankruptcy from your credit record. The good news is, however, that credit bureaus will pay more attention to your recent activities than to things that happened in the past, so if you immediately start using credit responsibly, you will be well on your way to a clean credit record. We talk more about this in the articles about credit repair and credit score scale. Obtaining new lines of credit after bankruptcy tells the credit bureaus that while you might have hit hard times, you are on your way up! If you follow this advice and obtain new lines of

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MARCUS EDITION

lenders might think you are preparing to go on a spending spree. In the long run, though, your credit will benefit from this strategy as credit-scoring bureaus will award more points to those who have the longest relationships with lenders. If you stagger the accounts by opening a new one every six months, you will keep lowering the average age of your accounts.

HOW TO FIX CREDIT

Learning how to fix credit can mean the difference between qualifying for a loan with great interest rates and not qualifying for the loan at all. It can mean the difference between being approved for a rental and struggling to find a place to live! And with 60 percent of employers running credit checks, not knowing how to fix credit could cost you a job! You can learn how to fix credit by following seven simple steps: Step One: Keep the proper credit card balance. Did you know that your credit card balance affects your credit score? Having the wrong balance, even for a day, can cause your score to drop. Step Two: Have the right number of credit cards. Credit bureaus give higher scores to people with the right number of revolving credit cards (i.e., MasterCard, Visa, Discover, or American Express). Step Three: Make sure the credit bureaus are reporting your proper credit limit. Credit card companies often report the wrong credit limit to the credit bureaus, which interferes with the balance-to-limit ratio (See Step One). Learn how to correct this error.

Paying Your Bills on Time and in Full To achieve credit repair after bankruptcy, you must never make a late payment. You cannot pay one minute past the deadline. This is the number-one rule of bankruptcy facts. The creditscoring models consider you an extremely risky borrower, so any indication that you are slipping into old patterns will not bode well for your credit score. You must pay on time and in full each month. If you cannot pay your credit cards in full, you must never exceed a balance that is more than 30 percent of your limit. Your balance-to-limit ratio is a big part of the credit score scale. This means that you must make a budget and stick to it. You cannot splurge on a latte just this once. You cannot make the minimum payment as your credit card balances creep up. Not even once. If you suspect that your financial problems occurred because you are a compulsive spender, visit the Debtors Anonymous website so you can continue to work on credit repair after bankruptcy.

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MARCUS EDITION

Step Four: Learn the difference between helpful and harmful installment loans. A helpful installment loan is one of the fastest ways to boost your credit score, but finance account installment loans will cause your score to plummet. Step Five: Remove high priority credit report errors. Approximately 80 percent of all credit reports have at least one error, and those that occurred within the past two years can cause serious credit woes. By removing erroneous information from your report, you could see your score jump. But beware of spending too much time on this step. When learning how to fix credit, make sure you know the difference between high priority and low priority errors. Step Six: Address credit collections head-on. Instead of waiting for a collection account to drop from your credit report, begin the process of negotiating to have it removed! And be sure you know the facts. For instance, did you know that each time you make a payment on a bill in collections, your credit score could be damaged? Step Seven: Create a credit monitoring plan. Once you have learned how to fix credit, be sure you maintain your high credit score. Create a budget, leverage advances in technology, pull your report regularly, and protect your marriage by learning when to have joint accounts and when to have separate accounts. ?

DEBT MANAGEMENT
A Debt Management Plan (DMP) is a method used in various countries for paying personal unsecured debts. Typically, such debts are out of control payments are late and/or take too large a portion of income, or even exceed it. A DMP usually involves a third party organization that looks at all or some of the debts, assessing income and budget, and re-negotiating interest rates and payments with the lenders. The negotiated rates and payment plan is based upon the probability of a higher likelihood of collection by the lenders in light of the debtor's more realistic monthly repayment. Some debts have priority over others and not all are amenable to participating in a DMP. Money left over after dealing with these debts and priority expenses may be suitable for a DMP. DMPs are typically a managed arrangement with creditors through a third party. The debtor may use a free creditorsponsored DMP organisation or a fee-charging DMP company. Accepting any terms of a DMP proposal put forward on behalf of the debtor is always at the discretion of the creditors. A good debt advice service recognises this and will only suggest a debtor pays what they can realistically afford after their priority expenses are met. Priority expenses usually include mortgage or rent, food and utilities. Creditors usually request a review of the debtor's situation annually to ensure they are paying as much as they can reasonably afford.

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MARCUS EDITION

Fee-charging DMP companies will often charge up-front fees as an 'admin' charge, and then will charge an on-going management fee. This fee may be proportional to the monthly contribution, or proportional to the number of debts they are managing. OFT guidelines in the UK state that the debtor shall be made aware of all possible solutions to their circumstances. These solutions could include Re-mortgage, additional loan, Debt Management Plan, IVA (Consumer proposal in Canada), Protected Trust Deed (In Scotland), Full and Final Settlement, Bankruptcy and Debt Relief Order (In the UK). Each of these solutions has benefits and disadvantages. Some may incurr more costs to the debtor, some may cause more harm to the Debtors credit rating. While the stigma of Bankruptcy appears to be reduced these days, many Debtors still regard Bankruptcy as an unacceptable alternative. An Income Payment Order may also be imposed by the Trustee in Bankruptcy of up to 66% of the Debtor's monthly disposable income. Fee Charging companies employ staff to "Advise" on the best possible solution for the client and their current circumstances. As Fee Charging Debt Management in the UK is largely unregulated, there is a wide variance in the quality of advice available. Some companies may give advice that is not in the client's best interests but is more profitable for the company. The fees charged by DMP companies could theoretically be going to clear the debt itself if no fees were charged to the debtor, however fee-charging companies may offer enhanced

support and administration services to the debtor throughout the program. It is also common for fee-charging companies to employ dedicated "creditor liaison" departments who can negotiate with creditors directly in terms of stopping interest and other charges being added to the debts in question which may result in an overall saving for the Debtor.

Free or low-cost services

Non-fee or low-fee DMP organisations are typically charities or government agencies that offer a consumer credit counselling service. Their function is typically the same as a fee-paying DMP but without a fee charged directly to the Debtor. The funding for these services varies in its source: The government funds some advice agencies who advise and prepare a debt plan but do not manage the payments and correspondence. Some organisations claim charitable status and accept donations from Creditors to administer debt plans on their behalf. In the USA and Canada, the majority of Debt management companies are allowed to keep a "fair share" of the distributions by the creditors if they can prove they are a "not-for-profit" organisation. In the UK, there are relatively few companies who operate in this way and most charge fees to the Debtor. People that use a DMP to eliminate their debt will typically only have unsecured debts (In finance, Aunsecured debt refers to any type of debt or general obligation that is not

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MARCUS EDITION

collateralised by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. In the event of the bankruptcy of the borrower, the unsecured creditors will have a general claim on the assets of the borrower after the specific pledged assets have been assigned to the secured creditors, although the unsecured creditors will usually realize a smaller proportion of their claims than the secured creditors. In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are able (and in some jurisdictions, required) to set-off the debts, which actually puts the unsecured creditor with a matured liability to the debtor in a pre-preferential position) such as personal loans, credit cards, bank overdrafts and store cards included in their plan. Secured debts or priority costs, like mortgages, car HP repayments, rent and utilities, are not subject to monthly payment reductions. When someone participates in a DMP, some creditors may choose to register a Default Notice with credit reference agencies. This would affect the Debtor's chance of being accepted for further credit. If defaults have already been registered against the debtor, entering into a DMP may not significantly affect their credit rating. The DMP itself is not recorded on the credit file, but the inability of the debtor to meet their contractual payments will be recorded. Some creditors may choose to enforce the payment of a minimum amount by seeking a County Court Judgement against the Debtor. Any such court action taken by the creditor is also recorded on credit files

REFERNCES: wiseGEEK.com (clear answers for common questions) Basel Committee on Banking International Settlements) Supervision (Bank for

http://www.smallbusiness.wa.gov.au/credit-management-tips/