Credit management is a process in which a company or financial institution sells product/service or lends money to customer on Credit basis, the terms it’s granted on and recovering this credit when it’s due. The company or financial institution collects or retrieves payments from customer or borrower at a later time, after the sale of product/service.
There are many definitions that have been proposed to describe the institution of credit. Among these we find:
• Credit is the ability of an individual or business enterprise to obtain economic value on faith, in return for an expected payment of economic value in the future. (Christie and Bracuti, 1986)
• Credit is a medium of exchange with limited acceptance. After a period of time, the value initially received by the buyer is returned to the seller in the form of payments. (Cole and Mishler, 1995).
• Credit is a privilege granted by a creditor to a customer to defer the payment of a debt, to incur debt and defer its payment, or to purchase goods and services and defer payment. (ICA, 2003).
Role of Credit in the Economy
Today, our economy thrives on the existence of credit. Cole and Mishler in 1995 writes: “The use of credit has become an important part of any economy. It is the oil that lubricates economic machinery.” Jurinski adds: “The availability of credit is the lifeblood of any nation economy….(And) it is hard to imagine an economy without the availability of credit. Credit grows the economy, cash retards. However, misuse, abuse or mismanagement of credit seriously debilitates the economy. Therefore, the one to whom credit is to be extended should have the ability, character, and willingness to comply with the terms of the credit.
According to Summers and Wilson: “Credit is pervasive in all the economies of the world affecting financial transactions at all levels from individual consumer to multinational company.
- What We Analyse in Credit Analysis
What is Credit Analysis in the first instance?
It’s the method by which one calculates the creditworthiness of a business organization or individual. In other words, it is the evaluation of the ability of a company or individual to honour financial obligations.
To achieve this definition, searchlights are beamed on:
1. Analyzing audited account of a company: The objective is to determine how prudent or otherwise the company spends, saves or invests the money it made during the immediate past three years. The mindset for this is to know whether or not the company is capable of honoring its payment obligations in the event of any creditline extended to it.
2. Analyzing the board of directors of a company: You analyze the make up of the board with a view to determining their individual stake and commitment to the company, discovering their individual advantage or disadvantage in terms of contacts that he or she have in the industry, market or government places that the director is most likely going to bring to the company, if need be, as well as the overall reputation of each board member for the purpose of safeguarding the future of the company, or if a board member has a history of being critical of government (federal, state, local) policies and the likelihood that such posture may attract attack on the company directly or indirectly, among others.
3. Analyzing the management of a company: This is to determine their fitness to manage the company for profit, their ability to manage the company with all sense of ethicality and professionalism, their previous track records of a successful management of an enterprise, their individual qualifications and experiences. The analysis shows either the management of the company is good enough to deliver to the expectation of owners of the company, so that it can honour its obligations to its suppliers or those with whom it does business.
4. Analyzing political environment of the country: This is to determine how susceptible or vulnerable the company’s business might be, to determine if the line of business of the company may expose the company to certain political attack, or the company is located in a place or certain community where the possibility of political attack is high against the company, or in the sudden event of government’s shift in policies, among others.
5. Analyzing the industry and market: This is where the company does its business with a view to determining the leading and weak competitors, strong and weak products in the market and the top five in the industry, as well as how others are doing, among others.
6. Analyzing the banking transaction: Records of the company’s banking transactions have to be analyzed to see if the company have a case or unfulfilled credit obligations with any bank or its name has been reported to credit bureau in relation to credit abuse or credit default.