The need for understanding Credit Management: Strathmore University Event

Introduction:

We are a non- deposit taking Micro Finance lending institution headquartered in Nairobi with other branches in Ridgeways, Kiambu Road. We are incorporated as a limited company, as per the Kenyan Company’s Act.

Jijenge Credit now loans as low as 50,000 up to Sh10,000,000 across the East African region. With institutions adapting to new technologies, Jijenge Credit has a mobile lending services for its customers. Documents required for loan processing are scanned or sent via email for processing which indeed takes a very short time possible.

Our focus is on growth-oriented SMEs and individuals where we seek to unlock the banking and financing potential that lies within the financial industry/sector.

Jijenge Credit Limited offers a number of products to clients, we have highlighted just a few reach out to learn more.

  • Logbook Loans
  • Asset Financing
  • Bidbonds
  • Loans on Title Deeds

Estimating Bad Debts

The risk of non-payment is always present in a credit transaction. Therefore, a credit grantor should realize this risk by establishing an allowance for doubtful accounts. It is an allocation for reduction on the total amount of either sales or accounts receivable that deemed uncollectable.

The allowance for doubtful accounts is also called bad debt allowance or allowance for bad debt

One of the three methods that are generally used for calculating Bad Debt Allowance is:

 Percentage of Credit Sales Method

If estimates fail to match actual bad debts, the percentage rate calculations

Understanding Credit Ratings

Credit Rating is an evaluation of the credit risk of an individual; a business, a state; a provincial authority; a sovereign government or a country in order to predict their ability to repay a debt, i.e. fulfill their financial commitments. It is a measure of solvency of an entity.

These ratings are based on detailed analysis of the entity’s historical financial-performance of borrowing, lending and operating activities and are published by well-known and established credit rating agencies. Credit ratings are also used by sovereign wealth funds, pension funds, traders and other investors to gauge the credit worthiness or Country Risk of countries around the world

Different credit agencies have their own evaluation methods to assign ratings.

What are the 4 Cs of Credit?

What do they mean? Are there 3, 4, 5 or 6 Cs of Credit?

Credit investigation could get intricate and dense. The information that is being gathered could be getting strewn and scattered all over the place. The 4 Cs of Credit helps in making the evaluation of credit risk systematic.

They provide a framework within which the information could be gathered, segregated analysed, it binds the information collected into 4 broad categories namely Character, Capacity, Capital and Condition.

These Cs have been extended to 5 by adding ‘Collateral’, or extended to 6 by adding ‘Competition’ to it.

No matter how many Cs we come up with, the fundamental question that remains to be answered by the framework analysis is: Will I get paid on time?

So let’s discuss the structure of our credit analysis within the context of the 4 Cs of Credit. The following are the 4Cs

  • Character
  • Capacity
  • Capital
  • Conditions

How to Set Credit Limits

Credit Limits, is also called Line of Credit

Although credit associates make a difference between ‘line of credit and credit limit and there are some legal ramifications for both but for the purpose of this discussion we will leave the difference alone and treat then the same.

Like most elements in credit management, setting ‘credit limits’ is an art and not a science of granting credit. There are seasoned credit professionals that have used and relied merely upon their gut feeling to grant credit limits. However, it is always better to take a calculated risk than base your decision purely on gut feeling!

Credit Limits: Are threshold that a company (creditor) will allow its customers to owe at any one time without having to go back and review their credit file. Credit Limit is the amount that a firm is willing to risk in an account.

Credit Limit helps the creditor in the following ways

  • It frees up valuable time for other credit management tasks
  • It speeds up sales process
  • It reduces risk and improves collection activity and efforts.
  • It’s an account monitoring tool

At Jijenge Credit Limited we will subject your asset to the evaluation process before we set your credit limit as a way of awarding you the loan.

Credit Limits have also known to upset customers. Thus, the decision to communicate credit limits to your customers has its advantages and disadvantages.

They can be flexible and revised often.

Credit Policy -How to Write One

Credit is an indispensable catalyst in financing the movement of commerce. Its roots go fairly deep in time and are definitely as old as the concept of trade itself. As early as 1300 BC the Babylonians were lending on the basis of getting a charge on security or collateral. Credit touches us in various ways. To some it could be a mere caress or a tickle, to others.

To demonstrate the importance of credit policy, according to our industry;

  • This places your business in a moving system hence less time taken on handling customers.
  • Once put in place clients find it easier to deal with  you as a business
  • This will assist the business not to make losses but still give the client value for money.

How to Draft a Credit Application

Request for credit generally begins with the completion of a Credit Application. This information in most cases is procured by the Sales Representative for the Credit department to make decisions in setting the credit terms and conditions. It is a direct source of information and its quality and dependability is directly intended for Credit control.

The application also extends the information gathering process by seeking the applicant’s Bank and other Trade references. The application can also request financial statements. Financial statements can contain inaccuracies or questionable information but it responsibility for sales and finance, who are looking to review their credit control, also helps in corroborating information provided by the applicant on the credit application or through the Sales representative credit application, credit policy and procedure document

Generally, all the accounts should be opened after receiving and evaluating a satisfactory Credit Application. A well-reviewed account will help save valuable time in attempting to either collect or enforce in the event of a default.

A Credit Application serves the following purposes

  • It is an information gathering tool
  • It is an assessment tool to determine amount and duration of credit
  • It is a collection tool
  • It is a legal document that binds the applicant to your terms and conditions
  • It is an enforcement tool
  • It is a monitoring tool. Revisit the credit applications of your important customers
  • A marketing tool markets your business.

Trade Reference

Trade references are normally obtained on your credit application and checked at the time of setting up of a new customer/applicant

It is a good practice to check references even at a time when an established customer starts to show signs of financial stress or changes their buying or payment patterns. A periodic check on trade references is recommended on customers those contribute to the cash flow of your organization. Do not be surprised if you uncover something unexpectedly! Moreover, it also shows that you care about your exposure and that you particularly concerned.

The following is a checklist of things to ask and look for while checking the reference provided by the applicant for credit

Number

It is a normal practice to ask for three (3) trade references on a Credit Application. Over the ages this has taught the average customer looking for credit to walk around with their best three references while applying for credit. What if as creditors we ask for four or more. It is a subtle way of forcing the applicant to look for and supply you with one or two more suppliers with whom they have a healthy business relationship.

Primary Vs. Secondary Supplier.

Find out if the reference provided is a primary or secondary supplier to the applicant. Generally, we tend to give preferential treatment to our Primary suppliers on which our business depends. Thus, we also end up paying them first. Checking whether the reference is a primary or secondary supplier to the applicant might help reduce that particular anomaly.

At least one Trade Reference from the industry

Ask for at least one reference from your industry. It will help you in ascertaining whether they have abandoned one to now join the other, the other perhaps being you

Location of the Trade Reference

Again, local suppliers tend to get paid first. Finding out the location of the trade reference could provide some insight into the payment practices of the applicant

Date Opened

Try and ask for trade references where the applicant has had trade dealings for at least one to two years

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