Lesson Three

Question 1

s the process of deciding which customers to extend credit to and evaluating those
customers’ creditworthiness over time.

Answer 1

Credit Management

Question 2

The 5 steps in the credit management process

Answer 2

1. You establish your credit policy
2. Customers fill out a credit application
3. You conduct research
   Your credit management staff
4. You approve or deny the request for credit
5. You continuously monitor customers’ credit

Question 3

An organization that advances credit and lends to others must consistently ensure that new business aligns
with its credit risk tolerance.

Answer 3

Credit Policy?

Question 4

assesses the effectiveness of a company’s policy and balances various interests (for
example, sales goals and customer demand) to achieve its goals.

Answer 4

Credit risk analysis

Question 5

Types of Credit Policy

Answer 5

1. Loose credit
2. Flexible credit
3. Tight credit
4. No credit

Question 6

Represents a greater willingness to extend credit to grow the business; a strategy to take on higher credit risk
and reap the rewards.

Answer 6

Loose credit

Question 7

Represents a willingness to extend credit depending on circumstances. It’s generally a neutral strategy
that does not aggressively grow or restrict access to credit for clients.

Answer 7

2. Flexible credit

Question 8

Generally means less willingness to extend credit to support revenue growth. This is a strategy of restraint
often implemented to limit credit losses and/or replenish capital.

Answer 8

Tight credit

Question 9

This is an unwillingness to extend credit, as a company is highly risk-averse or has no business case to
support the cost/benefit of extending credit.

Answer 9

4. No credit

Question 10

Rigorously applying the Cs of credit along with tight administration practices throughout the____ and ___what usually forms the components of a sound credit policy.

Answer 10

sales and
collection cycle

Question 11

Components of a Credit Policy

Answer 11

1. Credit application process
2. Credit types, limits, and term
3. Collection
4. Monitoring and control
5. Risk management

Question 12

Describes the evaluation and approval of credit.

Answer 12

Credit application process

Question 13

Cover the types of credit, the amount available, and their repayment terms.

Answer 13

Credit types, limits, and terms

Question 14

Administers credit post-advance. The collection process may involve an internal team and systems, or it may
require external means (such as collection agencies and other legal remedies).

Answer 14

Collection

Question 15

Assess the effectiveness of the credit policy and cover the entire gamut of credit decisions and performance
of the credit portfolio.

Answer 15

Monitoring and control

Question 16

Includes tools and processes to support crafting the credit policy and mitigating portfolio risk.
Portfolio-wide risk mitigation techniques include an internal risk rating system, customer concentration
limits, and industry diversification.

Answer 16

Risk management