The Fundamentals of Credit

The Fundamentals of CreditUnit 9 Chapter 29Introduction to Business

1Polonius cautioned,Neither a borrower nor a lender be, but today providing credit has become a way of life in our country and around the world.80% of gasoline, 100% online purchases, $2 million dollar loans to business expansion, State of Louisiana sold bonds to raise money (another form of credit).

2What is credit?Credit is the privilege of using someone elses money for a period of time. That privilege is based on the belief that the person receiving credit will honor a promise to repay the amount owed at a future date.

3Bernie MadoffHedge fund expert claims to always buy low and sell high. Impossible!Supposedly purchased well known stocks in companies like Johnson & Johnson, Intel, Pepsi. Never did!Ponzi Scheme take money from others making them believe in something that is not true and pockets the money. 65 billionTrust? Yes Criminal activity? Yes

4DebtorAnyone who buys on credit or receives a loan.

5CreditorThe person or company that sells on credit or lends money.

6TrustMeans that the creditor believes that the debtor will honor the promise to repay.

7Quick Review of what weve learned so far.Credit

Debtor

Creditor

Trust

Privilege to use someones money

Buys on credit or receives a loan

Sells on credit or makes a loan

Believes the debtor will repay as promised

8Types of CreditLoan creditSales creditTrade credit

9Loan creditBorrow to purchase something special. Usually requires a written contract.Installment loan or consumer loanExamples: car, home, jewelry, or furniture. More expensive or long term.

10Sales CreditUsing a charge card or credit card to make the purchase.Less expensive or convenient purchase.Some businesses (few) have accounts receivables this sale to a customer would also be a sales credit transaction.

11Trade CreditUsed by businesses when a wholesaler delivers goods and pays for them later.Trade terms 2/10, n/30 means they will get a 2% discount if paid in 10 days and the balance net is due in 30 days.

12Granting of creditMust be able to prove that you are a good credit risk.Not everyone desiring credit will receive it.Credit references are businesses or individuals from whom you have received credit from in the past who can verify your credit record.Pay on time |DMV records |court judgments | collection agency reports

13The Three Cs of CreditCharacter

Capacity

CapitalYour honesty and willingness to repay when it is due.Your ability to repay. Large enough income to repay the debtValue of your possessions, including money you have. This gives lenders assurance that you will meet your obligations.

14BenefitsConvenienceImmediate possessionSavings (get it on sale)Credit ratingEmergency readyManage budget

15PrecautionsOverbuying buying something more expensive than you can affordCareless buying may not check for sales, or do not compare pricesOveruse of credit over using your credit card can result in too much being owed. Buy it now and Pay it later sounds good, but if you can not pay it later there is a problem

16So.. What did we learn today?CreditDebtorCreditorTrustTypes of CreditLoan CreditSales CreditTrade CreditTerms 2/10, n/30Granting of creditProve or establish good credit risk behaviorThree Cs of CreditCharacterCapacityCapitalBenefitsPrecautions

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