Jargon Buster – Debt Collection Edition

Every industry has its own jargon. Those terms are designed to make conversations between professionals easier, without always including the customer. But in a customer-facing world, it’s important that everyone is on the same page and has a clear understanding of what’s going on. And we know that some of the words and phrases, might be a bit confusing for those unfamiliar in debt collection. So today, the first in a series of jargon-busting blogs to demystify the jargon. Since this is the first one, we’ll start off simple.

Creditor and Debtor

These are the most common terms you will hear in the debt collection world, but a lot of people tend to get them mixed Up. So, let’s set the record straight:

• Anyone who is owed money by a person or company is called a creditor.
• The person or company that owes money to the creditor is called a debtor.

For example, let’s say you’ve invoiced a customer on credit, rather than taking payment up front or cash on delivery. In that situation, you are the creditor, and your customer is the debtor.

Liabilities

A liability is something that a person or company owes to someone else. or another company. This can be a physical thing, but it can also include debts of money. When you’re looking at your accounts, liabilities are the opposite of assets (which are things that you own or debts that are owed to you.

Interest

Most people have had an overdraft, taken out a loan or applied for a mortgage at some point in their lives, so you should be familiar with the term ‘interest’. It’s the amount charged on top of the loan as a fee for borrowing money. It’s usually calculated as an annual figure, using the Bank of England base rate.

When you raise an invoice on agreed credit terms, you’re effectively giving them an interest-free way to borrow money from you for however long the agreement is. This is usually either 60 or 90 days, but it can be longer. But did you know that you’re legally entitled to charge interest to any commercial clients who don’t pay on time? It’s under the Late Payment of Commercial Debts (Interest) Act – and it gives you the statutory right to claim interest on late payments at 8% above the Bank of England base rate. It’s worth doing!

Credit Score

A credit score is a number that shows how likely it is that a debtor will pay their debt, based on their history of utilizing credit and making repayments. Most people think this is worked out by some kind of black magic, but it’s really just a very clever calculation. For businesses, credit scores are also decided based on your most recently reported financial performance and balance sheet.

Credit scores range from 0 to 100. 0, or numbers close to 0 mean the debtor is a high risk, and, the closer to 100 means they are a low risk. the data to determine your credit score is collected by 3 main agencies (Equifax, Experian and Trans Union), who securely hold all of that financial information on any individual or business in something called a credit report, which is used to create your credit score. Every person or business has one – and you can use a customer’s credit score to make decisions about how much, if any, credit to give them.

Inflation

Inflation is the rate that the price for goods and services rise over time. Inflation goes up and down all the time – but if you find yourself paying more for the same order of materials, then inflation will have gone up. In debt collection, inflation is important because it can increase the risk of debtors being unable to pay their debts. If costs rise, businesses often choose to protect their cash flow by delaying payments to their suppliers, or prioritise certain debts over others for repayment.

Written Off Debt

If you’re struggling to recover a debt, you might consider writing it off. That essentially means that the debt is no longer payable, and you’re releasing the debtor from all responsibility for the debt. This should always be considered as a last resort. No matter how challenging it may seem, there may still be ways to recover at least some of the money owed to you. Whether that’s a payment plan or instalments, or even taking the debtor to court. From an accounting perspective, writing off a debt means it becomes a ‘bad debt’, and is written off against your accounts receivable, reducing the turnover and profit of your business.

Debt collection can be incredibly complex and challenging, but it doesn’t have to be. At Debtcol we work with our clients to help them understand the world of debt collection and exactly what our role is within it. If you would like to know more, just get in touch with the team today