1. Understand business credit and risk management.
Essential Standard 5.00
Understand business credit and risk management.

2. Understand credit management
Objective 5.01
Understand credit management

3. Topics Main types of credit
Common advantages and disadvantages of businesses using credit
Cost of credit
Main factors examined for granting credit
Credit documents
Credit regulations
Credit assistance

4. How Credit Cards Are Made
The Credit Card Song by Old Man Pie
Simpson’s Advertisement

5. Tips for Using Your Credit Card
YouTube Video
Tips for Using Your Credit Card
What is credit? Loans, Mortgages and Overdrafts

6. Obtaining Credit

7. Who uses credit: Credit used by people for personal reasons.
Consumer Credit
Commercial Credit
Credit used by people for personal reasons.
Credit used by businesses.

8. Main Types of Credit What is credit?
Credit is an agreement to obtain money, goods or services now in exchange for a promise to pay in the future.
Main types of credit
Charge Accounts
Credit Cards
Installment Credit
Consumer Loans
What is credit?

9. Main Types of Credit continued
Charge account is a contract between creditors and debtors. Charge accounts allow debtors (customers) to receive goods or services from suppliers (creditor) and pay for them at a later date.
Deadbeats: People or businesses who pay off the balance of their credit card bill every month with no interest expense.
You want to be a deadbeat!!!!!

10. Credit Cont.
Charge Accounts – most common type of short- term or medium-term credit.
Regular Charge Accounts
Require that you pay for purchases in full within a certain period of time. Example: A charge account with an electrician who re-wired a house
Revolving Charge Accounts
Allows you to borrow or charge up to a certain amount of money (credit limit) and pay back a part or the entire balance each month. Example: A charge account with Duke Power utility company
Budget Charge Accounts
Allows you to pay for costly items in equal payments spread out over a period of time (6 months same as cash). Example: Home equity credit line

11. Main Types of Credit continued
Credit cards allow debtors (customers) to receive goods and services from suppliers (creditor) and pay for them later.
Types and examples:
Bank
MasterCard and VISA
Travel and entertainment
American Express and Diner’s Club
Oil company
BP Oil and Exxon
Retail store
Belk and American Eagle

12. Credit Examples cont. Single-Purpose Multipurpose
Can only be used to buy goods or services at the business that issued the card.
Examples: JC Penney, Sears
Multipurpose
Similar to a revolving charge account.
May be used at several locations.
Examples: Visa and Master Card
Travel and Entertainment
Similar to regular charge accounts.
Must be paid in full each month.
Example: American Express

13. Main Types of Credit continued
Installment sales credit is a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly.
Example
Rooms To Go Furniture Store
Consumer loans require debtors to make monthly payments of a specified amount for a period of time.
Borrowing $1,000 from a bank and agreeing to make $100 payments for ten months

14. Credit Types: Secured vs. Unsecured Closed vs. Open Ended Cosigner
Student, mortgage, automobile, etc.
Secured vs. Unsecured
Secured loans are backed by collateral (help guarantee the repayment of a loan).
Closed vs. Open Ended
Closed-end credit is used for a specific purpose and involves a definite amount of money.
Open-end credit gives you a certain limit on the amount of money you can borrow.
Cosigner
Person responsible for the repayment of a loan if the original party does not pay.

15. Business/Gov. forms of Credit
Bonds – written promise to repay a loan with interest on a specific date. The buyer of the bond is considered the creditor.
Corporate Bonds
Usually used to finance buildings and equipment.
Municipal Bonds
State and local governments use these to finance projects.
Savings Bonds
Sold by federal government.

16. Other Sources of Credit for Businesses
Small Business Administration
Offers a number of financial, technical, and management programs to help businesses.
Credit Bureau
An agency that collects information on how promptly people and businesses pay their bills.
Information retrieved from banks, finance companies, stores, credit card companies, and other lenders.

17. Definitions
Trade credit: a company receives goods from a supplier and pays for them later
Loan credit: borrowing money for a specific purpose
Sales credit: Charge a purchase at the time you buy a good or service
Finance charge: Total $$ cost of credit including interest and all charges
Down payment: payment of part of the purchase price usually made at the time of purchase

18. Definitions
Installment loan: borrower agrees to make monthly payments in specific amounts over a period of time
Promissory note: a written promise to repay based on a debtor’s excellent credit history
Collateral: aka security; property that is used as security for a loan; the lender has the right to sell the property to get back the amount of the loan if you default or don’t repay it
Cosigner: person responsible for payment of the note if the signer doesn’t pay as promised

19. Who Uses Credit?

20. Terms Review what is Credit : Creditor Debtor
Privilege of using someone else’s money for a period of time.
Creditor
One who sells on credit or makes a loan.
Debtor
Anyone who buys on credit or receives a loan.
Obligated to pay back the loan.
Usury Laws :Restricts the amount of interest that can be charged.

21. Why Use Credit?
Convenience
Immediate Possession
Emergencies

22. Common advantages and disadvantages of businesses using credit
Establishing favorable credit rating
Keeping business separate from personal expenses
Minimizing record-keeping and receipts
Keeping track of what employees are spending
Earning rewards
Growth of the Economy
Buying goods will help the economy expand.
Experiencing theft of customer records/databases
Overbuying by employees
Overusing credit
Credit Fees
Interest paid on balance

23. Results of Overuse
Repossession = Loss of property because of failure to repay loan.
Bankruptcy = Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets.

24. Cost of Credit continued
Using someone else’s money has a cost.
Interest is the cost of using someone else’s money.
Factors for computing interest include:
Principal, P = Amount of the loan
Interest Rate, R = Percent of interest charged or earned.
Time, T = Length of time for which interest will be charged, usually expressed in years or parts of a year.
Formula for computing simple interest:
I = P x R x T
= 500 x 7% x 3 months

25. Cost of Credit continued
How is time determined for a loan for each of the following lengths?
Years =multiply by the number of years
Months=multiply by the portion of the year. Such as 2 months =2/12
Days=portion of the year such as 30/360
How is the maturity date calculated? Months-the maturity date is the same day of the month that the loan was made.
Days-Determine the day the loan was made, and then count the exact number of days of maturity.
How is time determined for a loan for each of the following lengths?
How is the maturity date calculated?
How is a decreasing loan payment calculated?
What is disclosed in APR?

26. Business Credit Cont. How is a decreasing loan payment calculated?
Interest is calculated on the amount of the loan that is unpaid.
What is disclosed in Annual Percentage Rate (APR)?
Percentage cost of credit
Service fees

27. MATH Calculate Maturity Date Activity
Converting Time and Percents Activity
Simple Interest Activity
Installment Interest Activity

28. Main factors examined for granting credit
Creditors examine several factors about potential debtors when deciding whether to grant them credit, such as…….

29. Main Factors Examined for Granting Credit
The Four C’s of Credit
Character
Capital
Capacity
Collateral

30. The 4 C’s of Credit Character is
Honesty to pay a debt when it is due.
How past debt obligations were handled.
Capacity refers to how much debt can comfortably be handled.
Capital is current available assets that could be used to repay debt if income was to become unavailable.
Collateral is security to help guarantee that the creditor will be repaid.

31. Credit Worthiness Terms
Credit History
Indicates the amount of debt you have and your payment history.
Capital
How much you have beyond what you owe.
Credit Limit
Maximum amount you can borrow.
Cosigner
Person responsible for a loan if you, the original debtor, do not pay.

32. Process of Obtaining Credit
Credit Application
Documentation
Processing
Underwriting
Closing
Funding

33. Main Factors Examined for Granting Credit continued
Credit Application:
A form used by lenders to obtain information from applicants in order to make a decision about granting credit.
Should be filled out completely, accurately and honestly.
Requires signature of applicant, which indicates provided information is true.

34. Main Factors Examined for Granting Credit continued
Credit data make up the information that applicants provide on credit applications.
Documentation of credit data may be verified by:
Employers (former and current)
Type of data: Employment dates and salary
Financial institutions
Type of data: Saving or checking account information
Personal references
Type of data: Manner how personal business is conducted

35. Main Factors Examined for Granting Credit continued
Information provided by Credit Bureaus
Credit bureaus sell lenders credit information about credit users such as debt records, payment history, and if any action has been taken to collect overdue bills.

36. Credit documents:
Checking loan features and credit activities for errors minimize potential credit problems. Two commonly used credit documents that assist with minimizing credit problems are:
Credit Contract
Statement of Account

37. Credit Documents Credit contract
Credit contracts are legal binding documents that allow debtors to use credit to obtain goods and services.
Debtors should know the content of the credit contract before signing such as:
Amount of finance charges
Repairs covered
Add-on features
Reduction of finance charge if contract paid in full prior to ending date
Receive the copy of the contract
Repossession conditions

38. Credit Documents continued
Statement of account
Comes once credit is granted and purchases are made on credit.
Comes monthly and includes summary of transactions completed during the billing period.
What kind of information may be found on the statement of account?
Balance due
Amounts charged or credited during the billing period
Current balance
Minimum amount of next payment
What kind of information may be found on the statement of account?

39. Underwriting Examples: Equifax, Experian, and TransUnion.
Reviewing loan for soundness.
Consumer Reporting Agencies
Company that compiles and keeps records on consumer payment habits.
Used to evaluate creditworthiness.
Examples: Equifax, Experian, and TransUnion.

40. Closing a loan and funding
REAL ESTATE
Meeting with lending financial institution and attorney to sign all documents
Attorney files documents indicating a lien on the property
3 Days after closing, funds are released
AUTO or PERSONAL
Car dealership or lending financial institution will process all documents indicating a lien on the property
Financial institution processes all documents

41. Credit regulations and assistance options
Credit Regulations: exist to protect rights of credit applicants and rights of credit users from fraudulent and unfair practices.

42. Credit Regulations
Truth in Lending Law requires lenders to reveal the cost of credit (APR and finance charge) and terms before signing an application or contract.
Equal Credit Opportunity Act allows credit applications be judged on financial responsibility of credit applicants. The three areas of responsibilities are low income, large debts, and a poor payment record.

43. Credit Regulations continued
Fair Credit Billing Act requires creditors to correct billing mistakes promptly.
Fair Credit Reporting Act allows individuals to scrutinize any information shared by credit reporting agencies with potential creditors and employers. Individuals also may correct any incorrect credit information.

44. Credit Regulations continued
Consumer Credit Reporting Reform Act requires that the credit reporting agency must be able to prove that credit information they provide is accurate.
Fair Debt Collections Act prohibits deceptive, harassing, and unfair practices for collecting debt from debtors.

45. Credit Regulations continued
Credit Card Accountability, Responsibility, and Disclosure Act is an amendment to the Truth in Lending Act. The act institutes fair and transparent practices of providing credit. FTC: Federal Trade Commission enforces laws on credit

46. Cost of Credit Terms Interest Rates Principal Time Factor
Percentage that is applied to debt.
Principal
Amount of money borrowed.
Time Factor
Length of time for which interest will be charged.
Maturity Date
Date on which a loan must be repaid.

47. Terms Cont. Finance Charge or Fees Annual Percentage Rate (APR)
Cost of credit stated in a dollar figure
Annual Percentage Rate (APR)
Indicates how much credit costs on a yearly basis.
Grace Period
Time period during which no finance charges will be added to an account.
Cash Advance
Borrow money on a credit card.

48. Credit Regulations continued
Some practices instituted by the CARD Act are:
Inform customers of increase of cost of credit not less than 45 days prior to effective date.
Provides information about how long it would take to pay off a loan if minimum payments are paid.
Protects potential credit consumers under the age of 21, who must have a cosigner with a means to repay debt of the consumer.

49. Process of Obtaining Credit
Credit Application
Documentation
Processing
Underwriting
Closing
Funding

50. Credit assistance
is available to minimize or eliminate credit problems of credit users.
Credit assistance available includes:
Debt repayment plan
Credit counseling
Bankruptcy

51. Credit Assistance continued
Debt repayment plan
An agreement between a creditor and debtor that allows the debtor to pay off a debt with more manageable payment plan.
Credit counseling
Provides information on actions to take in order to manage debt.
Bankruptcy
May be used by debtors to reduce debt or amount owed to creditors. Legal process in which some or all of the assets of a debtor are distributed among the creditors because the debtor is unable to pay his or her debts.

52. Types of Bankruptcy Chapter 7 (Liquidation)
Draw up a petition listing assets and liabilities.
Most of the debtor’s assets are sold to pay off creditors.
Cannot release debt on alimony, child support, taxes, fines, educational loans, and court fees.
Chapter 11 – (Reorganization) Businesses Only
Chapter 11 bankruptcy reorganization: what is it and how does it work
Chapter 13
Propose a plan for using future earnings and assets to eliminate debts over a period of time.

53. Effects of Bankruptcy Kept on file with credit bureau for 10 years.
Affects credit rating, future extensions of credit, loss of jobs, etc.
YouTube - Credit Card reform too late for one Small Business Owner