CBA Exam Review Part 2 James A. McIntyre, CCE NACM 2011 Essential Components of a Credit Policy Establishing the Credit Standard: This describes the profile for an acceptable credit customer, including appropriate details and examples. Determining Credit Availability: This describes how the maximum of available credit is computed and managed, including decision criteria for reducing or increasing a customer s availability of credit. Setting Credit Terms: This stipulates the exact terms of sale for each class of customer. Defining Collection Policy: This provides criteria for regular collection procedures for past due amounts. Essential Components of a Credit Policy Benchmarking: Internal External Centralized and Decentralized Credit Management: Strict credit policy Liberal credit policy 1
Breakdown of Selling Terms Selling terms are the conditions of a transaction. They may include the following points: A statement of the time allowed for payment of the invoice. Inducement for the purchases to pay ahead of maturity. Allowances to the purchaser because of his line of business, and for quantity purchases. Additional charges for payment beyond the normal maturity. Types of Selling Terms Prepayment Secured Unsecured Terms of Sale Prepayment Conditions Cash with order Cash before delivery Cash on delivery Sight draft bill of lading Unsecured Conditions Cash terms 10-day terms Individual order terms 2
Terms of Sale Unsecured Conditions Single payment of lumped terms End of month terms Middle of month terms Proximo terms Progress payments Dating Terms Regular dating Seasonal dating Terms of Sale Secured Conditions Uniform Commercial Code Consignment terms Standby letter of credit Guarantees Corporate purchasing cards Discounts Regular discount terms Anticipation discounts A Brief Guide to the UCC Article 1 General Presents purposes and policies, definitions Article 2 Sales Contracts for Purchase/Sale of goods Article 2A Leases Transfer of the right to possession and use of goods for a term in return for consideration Article 3 Commercial Paper Negotiable instruments, Promissory notes, checks, Certificates of Deposit, Money Orders, Drafts Article 4 Bank Deposits and Collections Deposit/Collection of Checks Article 4A Wire Transfers Electronic transfers of funds (CHIPS/Fedwire) 3
A Brief Guide to the UCC Article 5 Letters of Credit Domestic and Foreign commercial letters of credit Article 6 Bulk Transfers Special protection for creditors of seller in bulk inventory sales Article 7 Article 8 Article 9 Warehouse Receipts and Documents of Title Special rules for documents that evidence ownership or right to possession of goods Investment Securities Stock Certificates Secured Transactions Security interests, collateral, priority among secured creditors Uniform Commercial Code Definitions Security Agreement Establishes obligations and contractual rights between the debtor and creditor. Security Interest Secured Party Debtor Collateral The interest or ownership in the goods that provide the security for payment of the debt. Seller, lender, lessor, or person who holds the security interest. Party or entity that has responsibility of payment for the secured debt. The property covered by the security interest. Uniform Commercial Code Definitions Goods Perfection UCC has subdivided collateral goods into four categories: Inventory, Equipment, Consumer Goods, Farm Products To perfect a purchase money security interest and to establish a true priority claim in the goods or collateral, public notice must be given to all prior secured parties who hold a similar security interest in the same inventory or customer. This action takes place after the filing of a UCC-1 form and subsequent search of the public records for all prior secured parties. 4
Uniform Commercial Code Uniform Commercial Code Key Aspects and Background State law Filings with the Secretary of States 5-Year Filing UCC Benefits Protection under the UCC Code Legal Protection Psychological Protection Practical Protection Uniform Commercial Code The Blanket Security Agreement Covers Personal Property assets of debtor entity Covers per-existing debt The priority of interest is chronological Does not require notification to prior secured creditors Is perfected at the time of filing The Purchase Money Security Agreement Secured party has senior interest in their goods Only covers inventory received after perfection Must be filed within 10 days for non-inventory goods Does not affect a third party s prior secured position until they are notified Financing Methods Ordinary Accounts Receivable Financing Factors Letters of Credit 5
Legal Composition of Business Organizations Sole Proprietorship Partnership General Limited Silent Corporation C-Corporation S-Corporation Limited Liability Companies Credit Limits Five Cs of Credit Character: Those moral qualities and actions of a credit applicant which impel the applicant to pay. Morality Reputation Capacity: The ability to pay when a debt is due. Cash flow Income Capital: The financial strength of a risk measured by the equity or net worth of the applicant. Asset Strength Credit Limits Five Cs of Credit Conditions: The current and expected general economic situations as they might affect the applicant. Economic Political Collateral: Possessions or equities from which payment might be expected should character or capacity fail. Protection 6
Direct and Indirect Investigation Credit Reporting Agencies NACM Specialized Agencies Voluntary Trade Groups 7