A complete guide to the financial terms
associated with the activity of Debt Recovery
Acid test ratio: This term describes the formula used to calculate the short to medium term prospects of a company in meeting its financial obligations. In short work in progress and stock is deducted from current assets. The figure is then divided by the company’s current liabilities. The ratio is used in debt recovery cases to work out affordable repayment plans.
Agent: An expressly authorised person acting on behalf of another person, company or business, referred to as the principal, who shall as a result of the implication or agreement delegated, be legally bound by the actions of the agent.
Annual return: Limited companies are required by law by to submit a summary of the company’s financial activity during the previous 12 months to Companies House. The summary must include details of the company’s shares and capital along with any shareholder or director changes. This is often one of the first documents to be studied by a collector prior to commencing debt collection action.
Associated companies: If two or more companies operate in same industry from the same premises or are operated by one or more of the same directors, they are considered to be associated. A company is not liable for the debts or debt recovery of an associated company.
Administrative receiver: A creditor appointed insolvency practitioner instructed by the power related to a floating or fixed charge. The duty of an administrative receiver relates strictly to the recovery of the value of the asset in question. While the company may continue in its everyday business activities a winding up petition will not be set aside if issued in a County Court.
Authorised Capital: Relates directly to the funds a publically quoted company lists as share capital. If the company is limited this figure is usually referred to as Nominal capital.
Auditors report: This report is prepared not by the company’s accountant, but by an external auditor following an examination of the business or company accounts, the aim is to ensure the firm presents a fair and true position of its financial status.
Bad debt ratio: A simple calculation based on the percentage of unrecoverable debt compared to total sales figures.
Bad debt: Money owed and not received or likely to be received, and usually after e debt collection agency has failed, is referred to as bad debt and written off against taxable profits in business accounts.
Balance sheet: Drawn up at a specific date to show the assets and liabilities of a company or business and included in annual accounts.
Bankruptcy: Either at their own request or that of a creditor, a Court can declare a person bankrupt. Any assets would then be realised by a receiver in an attempt to repay creditors.
Bank reference: A written request to the company’s bank by a supplier to gather information when considering a request for credit in return for goods or services.
Behaviour scoring: A points based system used by financial institutions to assess the risk of non-payment of a loan account. Interestingly this system is now often used just as much for marketing purposes as a tool to avoid debt recovery and collection.
Bill of Exchange: An order that is in writing and unconditional, addressed to the drawee, and guaranteed by the drawer to provide immediate payment from the drawee of a fixed sum.
Borrowing ratio: The extent to which the company relies on external finance presented as the percentage of debt compared to shareholders funds.
Business debt collection: A business or company instructing a debt recovery practitioner to recover a debt from another business or company.
Cash: Available funds held in cash, cash in hand or cash on bank deposit.
Capital fully employed: Indicates a shortage of cash and a term often used by financial institutions in reply to reference requests.
Cash flow: Income received on a regular basis and used to pay outgoings.
CCJ: County Court Judgment abbreviation.
CCA: Consumer Credit Association.
Charging order: One of the options available to enforce a Court Judgment usually attached to property or funds that belong to the debtor. Similar in many ways to a mortgage with payment by instalments and possible the sale of property if the order is defaulted.
CCA: Consumer Credit Act.
Certificate of incorporation: The certificate issued to a new Limited company on completion of registration at Companies House to certify said company’s legal status.
Cash on delivery: A promise to pays for services or goods in cash at the moment of delivery.
Contractual interest: Late payment interest as defined in Terms & Conditions of Business. The seller will decide the payment period and interest before seeking the buyer’s agreement. The credit period or the interest may be challenged in Court if either are deemed to be unreasonable.
Collateral security: Security by way of acceptable property deeds or share certificates deposited as a guarantee that the borrower will repay a loan.
Conditions of sale: A contract of sale detailing the terms and conditions applied to the sale of services or goods.
Commercial debt recovery: The recovery of a debt using commercial late payment legislation.
Company Registration Number: The number issued to a Limited company at the point of registration at Companies House, which must by law be displayed on company documents.
Controlling interest: If a company owns more than 50% of the shares of another company it will have a controlling interest.
County Court: Separate tracks for money claims were introduced in 1999 and are as follows:
Small claims track – suitable for straightforward claims up to a value of £5,000
Fast track – suitable for claims over £5,000 and up to £15,000
Multi-track – suitable for complex cases and claims of more than £15,000
Credit: Derived from “Credo” meaning “I believe” in Latin. Credit is the promise to at a later date pay for services or goods already received.
Credit insurance: Bad debt insurance designed to reimburse a creditor should a debtor fail to make payment.
Credit reference: Credit agency report containing information on CCJ’s, loans and liabilities used to credit score loan applications.
Credit scoring: A calculation based on the ability to make repayments.
County Court Judgment: The result of a successful debt recovery claim in the County Court. Usually payable forthwith and enforceable if not paid within 14 days.
Court appointed receiver: An officer of the Court appointed to execute a Judgment.
CSA: The debt collection and debt recovery industry body.
Current ratio: Business liquidity calculation based on dividing current liabilities against current assets. The smaller the ratio, the higher the risk involved in extending credit.
Current assets: Cash or easily convertible assets such debts, shares and short term investments.
Current liabilities: Payments due within the next 12 months can include taxation, loans, overdrafts and creditors.
Cut-off score: Determined by a credit provider based on a credit report to reject or accept an application for funds.
Decree: Judgment issued in debt recovery claims in a Scottish Court.
Debenture: Promissory document recording a debt and the re-payment process agreed by the debtor and the creditor.
Debt collection agency: A third party employed by a creditor to collect an unpaid account from a debtor.
Debt Recovery Agency: Specialists in complex and disputed debt recovery cases.
Document of title: Enables the person in possession of the document to control a property.
Discretionary limit: The maximum of a single transaction covered by credit insurance.
Days sales outstanding: A calculation of the average number of days to receive payment for sales of services or goods.
Dormant company: Limited company that has either ceased trading or has not started to trade. Also known as a shell company, the purpose is to remain on the active companies index, so that trading can be quickly started at some point in the future.
Earnings statement: Similar to a profit and loss report, listing transactions, income and expenses over a 12 month period.
Enforcement: Following a successful debt recovery claim, Judgment enforcement may be required if the Judgment is not satisfied. Forms of enforcement include the use of a bailiff, an attachment of earnings instruction, a charging order and a third party order of debt.
Firm: In legal terms, a business operated by two or more partners, but often and incorrectly used to describe limited companies and non-limited businesses.
Fixed charge: Charge on a specific type of asset or an asset itself, for example property, book debt or machinery.
Fixtures value: The current resale value of fittings and fixtures less depreciation.
Fixed assets: Intangible and tangible assets other than short term assets used to produce or supply services and goods and not expected to be resold.
Floating charge: A temporary charge covering all of a company’s assets. Usually created by a lender to enforce a Judgment following debt recovery action.
Gross profit: Net sales after deducting costs.
Gearing: The ration of unencumbered capital compared to borrowings. Highly geared companies working capital will be mostly borrowed.
Guarantee: A promise in writing to fulfil contractual commitments.
Holding company: A usually non-trading company formed to control a group of trading companies. Also referred to as a Parent company. A holding company cannot be pursued by a debt collection agency to recover debts owed by a group company.
Insolvency: The inability to pay outstanding debts, or when liabilities exceed assets. Governed by the Insolvency Act, the law states you can be declared insolvent if you are unable to pay debts over £750.
Income statement: A financial statement listing turnover, net income and expenses over a given period. Also referred to as an earnings statement or an operating statement.
Indemnity: A guarantee against default, loss or expense incurred or a form of wrongdoing.
Intangible assets: Cannot necessarily be easily or quickly sold and include goodwill, trademarks and patents. Intangible assets will often be discounted in debt recovery investigations when calculating realisable assets.
Intermediate assets: Found under fixed assets in a balance sheet and include trade investments, subsidiaries, investment properties and shares in related companies. These types of assets will be included in debt collection calculations.
Joint venture: Two or more companies combining specific areas of their businesses to form a partnership, with the aim of increasing their pricing competiveness and output capability to complete a specific project. Joint ventures are notoriously difficult to successfully litigate against in debt recovery cases.
Joint and several: A declaration by two or more individuals or companies to hold themselves liable both jointly and severally to a joint or separate action in the case of default. Any individual could be liable for the unpaid debts of another individual under this type of agreement.
Judgment: Often used as a short description of a County Court Judgment. A Judgment is awarded to the creditor and can include the principal debt plus late payment charges, Court fees and solicitor’s fees. The debtor is normally ordered by the Court to pay the Judgement forthwith.
Liquidation: The inability of a company to service its debts may result in the winding up of the company if it is declared insolvent by a creditor, leading to liquidation. Many debt collection agencies will seek to wind up a company should Court action not result in the recovery of a debt.
Late Payment of Commercial Debts (Interest) Act 1998: Allows creditors to claim compensation, interest and third party recovery costs in relation to unpaid commercial invoices. This legislation effectively allows debt recovery companies to offer free to the creditor debt collection services.
Limited company: A company where the directors liability is limited, including liability for the company’s debts. Many lenders and creditors will insist on personal guarantees from directors before agreeing loans or extending credit, especially in the case of newly formed limited companies.
Limited liability partnership: Essentially a limited company operated by two or more directors, or partners with limited liability to the LLP’s debts, and additionally where a director is not liable for another director’s professional malpractice or debt recovery claims.
Liquidator: An insolvency practitioner appointed with the power to wind up the company and distribute any balance of funds to the creditors.
Long-term debt: Amounts not due to be paid for at least 12 months, long term liabilities. Not usually taken in to account in small business debt collection.
London Gazette: The British Government’s official financial publication. In addition to listing Government announcements, it also lists bankruptcy proceedings, notices of the Companies’ Act, dissolution of partnerships, winding up petitions and voluntary liquidations.
Net worth: Shows a company’s financial position including capital reserves, issued capital, share premiums, general reserves, grants and profits and losses. Net worth is a good indication of the funds that might be available should the company be wound up during debt recovery action.
Official Receiver: An Insolvency Service officer appointed by the Court and Civil Service to manage compulsory company liquidations and bankruptcies.
Partnership: A non-limited business structure operated by at least two individuals. The partners will not benefit from the limited liability to business debts afforded to directors of corporations and can be pursued by debt collection agencies.
Private Company: A registered company whose shares are not available to the public for purchase. There are fewer legal requirements for private companies, with no minimum capital share requirement and often no requirement for full accounts to be filed.
Public Limited Company: A PLC is registered under the 1980 Companies Act as a public company. Authorised share capital of £50,000 is required and a minimum of £12,500 is required to be paid up. Strict rules apply to PLC’s although they may offer securities and shares for sale to the public.
Proprietor: A sole trader who individually owns and operates a business with full liability. In debt recovery actions against a proprietor a claim can be pursued against private assets in addition to any business assets. Many sole traders will incorporate their business at a later date once the viability of the business has been established.
Profit (loss): The income remaining after deduction of expenses. In the case of loss, the remaining expenses once income has been exhausted.
Profit and loss statement: An organisations financial statement listing net income, revenue and expenses over a specific period.
Profit Margin: A gauge of operating success – the measurement of profit as a calculation to net sales and capital.
Quick assets: Usually held as cash or in a form that can be quickly cashed or sold. Examples include trade debts, current accounts and instant access investments. Measured against current liabilities the ratio can be used to predict the business or company’s risk of insolvency or liquidation and the chances of successful commercial debt collection.
Receivership: Currently there are 3 forms of receivership:
A property of law Act official receiver can be appointed in accordance with the Act;
The Court appoints an official receiver;
A debenture holder appoints an administrative receiver under a floating or fixed charge.
An administrative receiver is not to be confused with an official receiver. The former will take instruction from debenture holders, while the latter is instructed by the Insolvency Service.
Retained earnings: A form of profit and loss representing net income accumulated that has not been posted as reserves or carried forward. Retained earnings are included in the net worth of a company.
Registered company: A company registered in accordance with the Companies Act at the Registrar of Companies. The form of registration can be either, private, public, limited, unlimited or public limited.
Registered office: The company address used for the service of official, debt recovery and Court documents, in order for said documents service to be deemed effective. The registered address must be used on company headed paper and is recorded for every company at Companies House.
Revaluation reserve: The surplus created by the rise in a property’s value, essentially the difference between the latest book value and the former book value. Considered realisable assets in business debt recovery cases.as
Retention of title clause: This clause prevents the ownership of goods transferring until such time as the goods have been paid for in full. It also places a duty on the buyer to care for and not resell the goods prior to transfer of ownership.
Secured charges: Security is used by a business or company to loan money, creating a secured charge which is registered at Companies House. This is designed to inform unsecured ordinary creditors of a preferential claim on the company assets in the event that the company is dissolved.
Security: A promise to pay given by a debtor in the form of collateral. Examples include property rights and share transfers which can be triggered if the debtor defaults.
Shell company: A non-trading company set up to at some point in the future take over from an existing company. Used in company failures, takeovers and for tax reasons.
Set-off: A defence entered by a debtor in debt recovery claims acknowledging the creditor’s debt, but counterclaiming with a demand to reduce the claim in part or in full.
Shares: The capital of a limited company is represented by shares, which can be either, ordinary or preference.
Sole trader: Effectively a one man band operating a business without employees. The least complicated business structure to set up and commence trading. Sole traders are liable for all their own business affairs and debt recovery actions.
Secured creditor: A debtor may give title to an asset to a creditor making them a secured creditor. The asset can be realised given the creditor additional security in the event of company failure. Secured creditors rarely require the services of a debt collection agency.
Small business debt collector: A debt collection agency specialising in recover low value debts from customers of small businesses.
Statutory interest: Applied to the late payment of services and goods in business to business transactions, and can be added the total amount to be recovered from debtors in commercial debt collection claims.
Subsidiary: A company with at least 50% of its shares owned by another company becomes a subsidiary.
Third party debt order: A legal document used to recover a debt from incurred by a third party.
Total assets: A company’s total fixed assets and current assets, does not include intangible assets.
Technically insolvent: Despite having long term loans and positive working capital, a company is technically insolvent if the shareholders’ funds are in defecit.
Terms of Trade: A written contract detailing the terms under which services are supplied and goods are sold. Terms will often include how to deal with late payment and debt recovery.
Trade creditors & accruals: Amounts owed for services and goods received yet to be invoiced.
Trading address: The business address of the company if trading is not carried out at the registered address and the address where assets will be based.
Unlimited liability: The liability to all of the business debts incurred by a trading organisation. Particularly applies to proprietors and sole traders whose liability is not limited to the capital or assets in their business. Personal funds and assets may be pursued by creditors to recover debts.
Waiver: A creditor may waive late payment charges in order to arrange settlement of the principal amount in commercial debt collection claims.
Warranty: A covenant or promise offered by a vendor to the purchaser guaranteeing the goods or services are as described and offering a remedy in the case of default.
Working capital: The funds available to carry out day to day business activities, calculated as current assets less current liabilities.
Winding up order: A court order forcing a company to cease trading followed by the appointment of a liquidator to wind up the company’s affairs. An unsatisfied Court Judgment in debt recovery cases can often lead to a winding up order.
Winding up petition: The petition presented to Court by a company or person requesting a company be compulsory liquidated. The procedure is often used where earlier debt collection activity has failed to recover a debt.
Z-scoring: The failure of a company can be forecast by using this technique which is based on a series of financial ratios.