Aging balance
Assignment of receivables to liabilities
Issued by the customer accounts department, this document determines the sums due for each customer and each due date. It is a basic and needed tools to manage receivable and define priorities in collection strategy.
Procedure followed by the creditor when transmitting the amount of receivables due to him to a court judge in view of receiving compensation.
Bank guarantee
Technique whereby a bank undertakes to pay, by the order and for the account of the seller, an agreed amount in case of default of the seller. The bank guarantee can be setup 'on demand' or based on fulfilment of one or several conditions.
Bankruptcy / De jure insolvency
The inability of a private customer to fulfil his commitments, ascertained through : suspension of payments, liquidation, winding up arrangement, bankruptcy, etc...
Bill of exchange / Draft
Commitment undertaken by a debtor to pay a given amount at a given date to a beneficiary
The bill of exchange must conform with highly specific drafting requirements and be issued by the creditor (drawer) who then has it accepted by the debtor (drawee).
Buyer
Private buyer :
Any commercial entity that can be taken to court by a creditor under common law procedures and, if necessary, be wound up for insolvency
Public buyer :
Any commercial entity for whom the state of the country of residence accepts liability. The buyer may be the State itself, an emanation of the State or any public establishment which cannot be wound up by court order. By extension, this buyer may be any entity whose obligations are covered by the State.
Buyer credit
Any commercial entity that can be taken to court by a creditor under common law procedures and, if necessary, be wound up for insolvency
Public buyer :
Any commercial entity for whom the state of the country of residence accepts liability. The buyer may be the State itself, an emanation of the State or any public establishment which cannot be wound up by court order. By extension, this buyer may be any entity whose obligations are covered by the State.
Credit granted by a given bank to a foreign buyer. Funds are paid directly to the exporter through a lending bank
Cancellation of an option
Contractual Risk
Covenant
Credit limit / Credit line
Credit management
Credit scoring
Decision which puts an end to an option previously agreed by the credit insurer. The cancellation followed:
Cash against documents
- a serious incident
- a bankruptcy
- the degradation in the economic and politic situation of the country of the Buyer. Then, in this case, the cancellation decision is applied to the agreements as a whole issued in this country
- a decision based on credit insurer onw constraints like a cancellation of a line on a country or a sector
Sales are defined as cash against documents when payment conditions are subject to the remittance of documents or documentary credit at sight
Catastrophic risk
A catastrophic risk arises from natural disasters such as hurricanes, floods, earthquakes, volcanic eruptions, tidal wave, etc...impeding the fulfilment of the contract
Cause of loss
Situation or event liable to give rise to cover, the details of which are stipulated in each credit insurance contract
Commercial paper
The commercial paper or bill of exchange is a written document used by a creditor to order a debtor to pay a given sum at a given date, either to himself or to a third party beneficiary.
There are two types of commercial papers :
Commercial risk
- the bill of exchange issued by the supplier
- the promissory note issued by the customer
Risk specific to the private buyer, resulting from his de jure or de facto insolvency
Commercial risk
Risk specific to the private buyer, resulting from his de jure or de facto insolvency
Commitments
Customer receivables including tax + bills in hand not due yet - advance paid by customers + orders in portfolio
Consultation threshold
For several credit insurances policies, enables the policyholder to fix the amount of guarantee to be granted; this is based on the opinion given by the insurer within the framework of thresholds fixed by the policy
Contract notification
Document used by the policyholder to inform the insurer that the contract has come into effect, i.e. :
- when a deposit is made on placement of the order : when the contract is signed on receipt of down payment
- no down payment : on signing of the contract
- with documentary credit : on signing of the contract and opening and acceptance of the seller of the documentary credit
Possibility that the contract conditions do not respect the balance of the two parts obligations. The supplier has to ensure that contract is well balanced between his obligations and those of his buyer.
Covenants are special clauses accompanying the bank loan. There are positive covenants, negative covenants, pari passu covenants, and cross-default covenants.
Positive Covenants : Positive covenants are a borrower's commitments to comply with certain capital structure or earnings ratios, to adopt a given legal structure or even to restructure. Positive covenants are also called affirmative covenants.
Negative Covenants : Negative covenants can limit the dividend payout, prevent the company from pledging certain assets to third parties (negative pledges) or from taking out new loans or engaging in certain equity transactions, such as share buybacks.
Pari Passu Covenants : Pari passu covenants are clauses whereby the borrower agrees that the lender will benefit from any additional guarantees the borrower may give on future loans it raises.
Cross-Default Covenants : Cross default covenants specify that if the company defaults on another loan, the loan which has a cross default clause will become payable even if there is no breach of covenant or default of payment on this loan.
Cover on outstanding order
Positive Covenants : Positive covenants are a borrower's commitments to comply with certain capital structure or earnings ratios, to adopt a given legal structure or even to restructure. Positive covenants are also called affirmative covenants.
Negative Covenants : Negative covenants can limit the dividend payout, prevent the company from pledging certain assets to third parties (negative pledges) or from taking out new loans or engaging in certain equity transactions, such as share buybacks.
Pari Passu Covenants : Pari passu covenants are clauses whereby the borrower agrees that the lender will benefit from any additional guarantees the borrower may give on future loans it raises.
Cross-Default Covenants : Cross default covenants specify that if the company defaults on another loan, the loan which has a cross default clause will become payable even if there is no breach of covenant or default of payment on this loan.
In case of cancellation of reduction of the guarantee granted by the insurer, the insured part can ask to the insurer to cover the orders in portfolio, according to the policy contract. This clause of the policy has to be negotiated with the credit insurer and / or with the broker when the policy is implemented
Cover rate
Measures the effective guarantee on outstanding customer credit. It is calculated as following : sum of guarantees given by the credit insurer / sum of guarantees requested to the credit insurer
Cover request
Formula request made to the credit insurer by the insured party which may or may not translate into a guarantee commitment
Credit insurance
Contract providing protection against the risk of customer non-payment. It is issued by a specialized company named credit insurer in favor of the insured company who pays a premium to be covered. There are several types of credit insurance contract:
- Classical
- Excess of loss
- Multibuyer
- Single buyer
- ...
This is the maximum credit risk that the supplier agrees to take for a given customer.
It depends on the business value, the payment conditions and the creditworthyness of the buyer.
There are several ways of fixing the credit limit : through credit insurance or factor guarantee, limit fixed by the financial analysis in equity, which is the percentage of customer's equity in relation to his fixed assets...etc.
Activity aimed at reducing the customer credit granted to customers and at minimising the risk of non-payment.
Credit Management puropose is to facilitate the business while improving cash and mitigating credit risk.
Credit need
Credit Management puropose is to facilitate the business while improving cash and mitigating credit risk.
Refer to theoretical outstanding and the potential receivable exposure based on business forecast and payment term.
It is calculated as following: sales value of the period x payment term (in days) / period (in days).
Credit risk
It is calculated as following: sales value of the period x payment term (in days) / period (in days).
The risk that a Buyer may not be able to repay all or part of the amount of credit owed due to a cause of loss. Credit risk can be assessed in value (amount at risk) or in quality (credit scoring of the buyer).
Method of assessing a buyer according to specific criteria.Mainly used to determine a credit limit.
The credit notation is a scoring tool dedicated to credit management purpose.
Customer credit
The credit notation is a scoring tool dedicated to credit management purpose.
Customer receivables including tax + instruments in circulation (bill of exchange...) - advance paid by customers.
Days of Sales Outstanding (DSO)
De facto insolvency / Payment default
Declaration of Potential Loss (DPL)
Due receivables
This is the amount of customer receivables in days of turnover, including tax. It breaks down as follows:
- contractual DSO (measuring the credit granted to the customer)
- late or resulting DSO (measuring the customer's payment time in relation to due date)
Customer payment default after delivery of supplies. Credit insurance policies includes a delay before indemnification in this case as there is no legal proceeding of the buyer (usually 6 months).
De jure insolvency / Bankruptcy
The inability of a private customer to fulfil his commitments, ascertained through : suspension of payment, liquidation, winding up arrangement, bankruptcy...
Debts are generally frozen and suppliers have to declare their loss to the administrator, waiting for a schedule of payment of their receivable.
Document given to the insurer and aiming to notify him of an important customer risk or of overdue.
The DPL has to be sent to the credit insurer according the policy contract where a deadline is specified.
Default status
Situation of a buyer who has not paid off his debt within the 30 day repayment period.
Default of payment is set at a number of days, that is a little after the maximum length of credit allowed be the credit insurance contract.
Discounting
Default of payment is set at a number of days, that is a little after the maximum length of credit allowed be the credit insurance contract.
Financial discount granted to a customer when his invoices are paid before the due date. It is usually calculated with an interest rate, the number of days of advance payment and the amount early paid.
Dispute warrant
Clause in the insurance contract empowering the insurer, in the event of potential loss, to exercise all rights and actions of the policyholder, specified in the guaranteed contract, on behalf of and in place of the policyholder
Documentary credit
Technique used by a bank when undertaking to pay for goods, on behalf of a buyer, against presentation of certain documents (invoices, transport documents...
To be eligible for payment, the seller must present the required documents to the bank within the credit validity period.
Know more about documentary credit
Receivables to be paid when invoiced and due date passed
Economic Risk
Exclusion
Possibility of a modification of the country economic environment which can affect the manufacture of equipments during a business case (example: inflation, raw materials costs, devaluation).
This risk has to be taken into account on medium - long term business
Escrow Account
This risk has to be taken into account on medium - long term business
An escrow account is a special bank account for the deposit of funds, to which the beneficiary's access is a subject of the fulfillment of one or several conditions, generally the completion of a contract. An escrow agreement setting out these conditions is usually drawn up between the bank, the supplier and the buyer.
The credit insurer is entitled to cancel his guarantee at any time by an exclusion notification.
Some countries are excluded from all guarantees, due to their insolvency and political risk situation, and it is thus impossible to guarantee such countries' buyers with an insurance policy.
Some countries are excluded from all guarantees, due to their insolvency and political risk situation, and it is thus impossible to guarantee such countries' buyers with an insurance policy.
Factor / Member
The seller agrees to the factoring contract submitted to him by the factor, which is why the term "member" is usually used for the factor.
Factoring
Short-term financing method involving the transfer of customer receivables to a specialised company (the Factor). As well as financing, the factoring company can also take on the management of customer accounts, legal disputes and full credit insurance, if the customer so requires.
More information about factoring here.
Financial Risk
More information about factoring here.
Uncertainties related to the financial conditions of a contract and which have an impact on the results of this contract (example: risk of margin deterioration).
Forfaiting
Service based on agreed discounting of commercial paper without recourse and at a previously agreed rate
Forfaiting house
Financial house which carries out forfaiting operation
Fronting
Issue of an insurance policy by a local insurer operating as a partner of our own insurer, in a given country.
Guarantee commitment
Document issued by the credit insurer specifying the conditions under which the guarantee is granted : contract amount, terms of payment, particular provisions when applicable
Guarantee on loss overrun
Insurance covering the policyholder above a given annual loss amount, the cost of which is covered by the policyholder
Guaranteed credits outstanding
Outstanding credit granted by the insurer to a given buyer
Guarantor undertaking risk
Unfair commercial and/or political calling cover relating to trading "sureties" (bid bonds, deposit repayment, performance bonds, holdback).
Guarantees on performance and holdback should be taken out within the framework of the credit risk guarantee. A guarantee on deposit repayment should be taken out within the framework of the manufacturing/pre-shipment risk guarantee
Guarantees on performance and holdback should be taken out within the framework of the credit risk guarantee. A guarantee on deposit repayment should be taken out within the framework of the manufacturing/pre-shipment risk guarantee
Injunction to pay
Legal proceedings leading to the instant payment of an undisputed debt
Inquiry costs
They correspond to the costs invoiced by the Insurer for each option request.
To ask once again for a guarantee concerning a customer you previously made cancelled doesn't generate enquiry costs if this demand is ask during the year following cancellation
Insolvency
To ask once again for a guarantee concerning a customer you previously made cancelled doesn't generate enquiry costs if this demand is ask during the year following cancellation
The inability of a customer to fulfil his commitments.
There are two types of insolvency:
Intermediate Balance
- de jure insolvency
- de facto insolvency or default
Breakdown of the net results used in financial analysis to assess profitability
International Chamber of Commerce (ICC)
The International Chamber of Commerce publishes uniform customs related to international trade issues such as :
- Collateral Security - Publication 525
- Guarantees on Demand - publication 458
- Bonds - Publication 524
- Documentary Credits - Publication 500
- Standbys - Publication 590
Letter of comfort
Loss
Loss account
A letter issued to a lending institution by a parent company acknowledging the approval of a subsidiary company's attempt for financing.
The 'letter of comfort' in no way guarantees the loans approval for the subsidiary company. It merely gives reassurance to the lending institution that the parent company is aware and approves of the situation.
Liquidity ratio
The 'letter of comfort' in no way guarantees the loans approval for the subsidiary company. It merely gives reassurance to the lending institution that the parent company is aware and approves of the situation.
General liquidity ratio = (current assets / short-term debts) x 100
The ratio evaluates the short-term leasing cover per current asset
Reduced liquidity ratio = (current assets inventories / short-term debts) x 100
If the ratio is < 100, the company has to sell its inventories in order to pay its short-term debts
Immediate liquidity ratio = (invested movables + cash available) / short-term debts x 100
This ratio determines whether or not simple cash will suffice to pay short-term debts
Situation in which a risk becomes real, giving the policyholder the right to claim compensation to the credit insurer
In credit insurance, compensation following loss is determined using a loss account which includes :
Loss ratio
- in the debit column: the expenditure incurred by the policyholder in the event of manufacturing loss; or, in the event of credit loss, the receivables guaranteed by the contract
- in the credit column : money collected by the policyholder through this contract
Measures the profitability of a credit insurance policy by comparing the amount of paid premiums with the amount of claims received.
A policy's profitability must not be restricted to the loss ratio, since it is also necessary to take into account the risks avoided through prevention measures. The following calculation is thus preferable :
A policy's profitability must not be restricted to the loss ratio, since it is also necessary to take into account the risks avoided through prevention measures. The following calculation is thus preferable :
- Received claims - paid premiums +- variation of bad debts
- This calculation gives an estimation of the actual cost of managing risks with a credit insurance
Material Adverse Change (MAC)
Mortgage
Material adverse change clause, a part of every merger or acquisition transaction, is intended to protect buyers from a dramatic short-term deterioration in the target company's business. Gives a buyer the right to terminate the agreement before its completion or at least to renegotiate its terms, if events occur that are detrimental to the business/assets of the target company.
A loan secured by the collateral of some specified real estate property that the borrower is obliged to pay back with predetermined set of payments.
Non-Indemnifiable Losses (NIL)
Within the Excess insurance, threshold below which unit losses are not indemnifiable and are not taken into account in the calculation of the annual first loss
Non-transfer risk
Risk arising from an event taking place outside the policyholder's country or from a decision by foreign authorities to prevent or delay the transfer of funds paid by a debtor into a local bank
OFP
Order Fulfilment Process, covering all operations, from submission of the offer to collection of payment
Option
Maximum amount of fixed outstanding credit that the insurer accepts to guarantee for a given buyer
Overall credit insurance policy
An insurance policy is said to be a "wrap up" policy when the insurable material is the policyholder's total turnover. This type of insurance has to be distinguished from "individual" and "floating" policies which are specific to certain types of contracts.
Payment on collection basis
Document given to the bank by our customer, ordering it to hand over the documents against payment or counter acceptance of a bill
Percentage of cover
Percentage at which compensation is granted within the limit of the guaranteed credits outstanding. It is generally between 85% and 95%
Pledged Asset
An asset that is transferred to a lender for the purpose of securing debt. The lender of the debt maintains possession of the pledged asset, but does not have ownership unless default occurs.
Pledged Asset
An asset that is transferred to a lender for the purpose of securing debt. The lender of the debt maintains possession of the pledged asset, but does not have ownership unless default occurs.
Political risk
Risk arising from a so-called political event (war, revolution, riot, government act or decision) and impeding fulfilment of the contract
Premium minimum
Premium minimum :
The premium minimum is calculated by the insurer on the basis of 70% of the estimated turnover. If the premium which has been actually paid turns out to be lower than this amount, the insurer is entitled to claim the difference. Joint premium minimum :
So that calling cover risks linked to the premium minimum are mutually insured, the Group has negotiated a premium minimum with the insurer which is common to several policies
Promissory note
The premium minimum is calculated by the insurer on the basis of 70% of the estimated turnover. If the premium which has been actually paid turns out to be lower than this amount, the insurer is entitled to claim the difference. Joint premium minimum :
So that calling cover risks linked to the premium minimum are mutually insured, the Group has negotiated a premium minimum with the insurer which is common to several policies
The promissory note involves the same commitment as that of a bill of exchange, but is written directly by the debtor
Qualified debts
Receivables falling due when a contractual event takes place, for instance provisional or final acceptance
Questioning threshold
Within the Excess insurance, the amount of credit outstanding that can be granted to a customer without consulting the insurer.
Beyond this threshold, any risk on a customer must be discussed with the insurer.
Beyond this threshold, any risk on a customer must be discussed with the insurer.
Request for intervention
Document sent to the insurer by the policyholder requesting the insurer to act on a defaulter.
The compensation procedure begins once the insurer has received this request. The request itself must be sent before the deadline (in number of days after the invoice date) included in the insurance contract.
The compensation procedure begins once the insurer has received this request. The request itself must be sent before the deadline (in number of days after the invoice date) included in the insurance contract.
Satisfaction rate
Standby
Measures the guarantee granted by the insurer in relation to the policyholder's need
Standard conditions of payment
These are the payment means and periods granted to the customer depending on his status (company's sector or legal form) and the risk he represents. The standard conditions of payment have to be defined in the credit management policy
Not a means of payment as such, but a payment guarantee.
Issued as a documentary credit, the seller will only use it if the buyer does not pay.
Enables the seller to accept a simple payment such as transfer while enjoying the back-up of documentary credit
Swift bank transfer
Issued as a documentary credit, the seller will only use it if the buyer does not pay.
Enables the seller to accept a simple payment such as transfer while enjoying the back-up of documentary credit
Interbank electronic messaging that speeds up transfer times
Theoretical outstanding
Amount of credit resulting from sales to customers:
Turnover ratio
- Provisional theoretical credits outstanding = budgeted turnover / SCP
- Actual credits outstanding = maximum level of credits outstanding on the customer's account
Inventory turnover ratio = (sales O.G. taxes included / inventories) x 365.
This ratio calculates the speed at which inventories circulate in days
Turnover ratio of outstanding customer credit = (customer debt + undue discounted bills) / (sales O.G. taxes included) x 365
This ratio expresses in days the average duration of credit taken out by customers = DSO
Turnover ratio of outstanding supplier credit = (supplier accounts + payable bills) / (purchases taxes included) x 365
This ratio expresses in days the average duration of credit granted to suppliers
Unnamed buyer's clause
Clause enabling private buyers to benefit from the guarantee without having to make a request for an option
Working capital
Excess of fixed assets on net invested capital.
Working capital acts as a safety margin for the company since it absorbs any loss and provides resources for covering part of the requirements in working capital
Working capital requirements
Working capital acts as a safety margin for the company since it absorbs any loss and provides resources for covering part of the requirements in working capital
Common financing need generated by short-term jobs and resources, including and excluding operation, net of liabilities.
It is calculated from the net working capital requirement Net WCR
It is calculated from the net working capital requirement Net WCR
- + various short-term debtors
- - fiscal and social debts
- - other short-term creditors
- - short-term liabilities / various debtors