Joshua V.

Aguirre BSBA-FM I
Credit & Collection
Credit Instruments
The Nature of Credit Instruments - a credit instrument
becomes the evidence that there exists a credit transaction. Credit
instruments are in written form.

Two Specific Characteristics

1. Presence of risk due to the fact that payment is
postponed to a future date.
2. Stress on the debtor-creditor relationship

Importance and Advantages

1. Written form
2. Parties can stipulate the details of the transaction clearly and
definitively.
3. Rate of interest charged is cited in contract
4. Creditor can monetize the credit because credit instruments
can be transferred to third parties
5. Incontestable proof thus given a legal leg to stand on

What is Credit Instruments?

1. Written agreement or contracting evidence
2. Gives legal claim to the creditor
3. Evidences the existence of debt
4. Tangible proof presented in court

Classification of Credit Instruments

(Acceptability, Form, Functions, Negotiable Character)
1. Acceptability either unlimited(money) or limited
acceptance.
2. Form either orders to pay or promise to pay. Both are
payable either on demand or at a future determinable time.
Orders to pay may be in a form of checks, drafts, acceptances
or postal money order.
3. Functions classified as credit money, commercial credit
instruments, or investment credit instruments. Used as a
medium of exchange. Facilitates use of credit in short-term
commercial pursuits.
4. Negotiable Characters essentials of negotiability:
a. Must be in writing
b. Must be an unconditional promise or an unconditional
order
c. Must have a determinable future time of payment
d. Must have definite sum of money
e. Instrument must be signed by the drawer (in the case of
on order to pay) or maker (in the case of a promise to
pay)
f. Must be made payable to order to bearer
 Functions Forms Instruments
Credit 1.Government credit money
Promises to pay
Money 2.Bank credit money
1. Open books account
2. Promissory Notes
Promises to pay 3. Collateral Note
4. Commercial letter of
credit
5. Travelers letter of note
a. Personal
b. Cashiers/
Checks Managers/
Treasurers
Commercial
c. Certified
Credit
d. Travelers
a. Money order
Orders to pay b. Bank
c. Trade or
Drafts commercial
d. Sight or
demand
e. Time
Acceptan a. Trade
ce b. Bankers
Promises to pay a. Bonds
b. Long-term notes
Investment
Evidences of
Credit a. Stock Certificates
ownership in a
b. Stock right (pre-emptive)
Corporations