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Credit Risk Glossary

Credit Risk Glossary

Table Of Contens

Administration
AML
AML 4D
API
B2B
Bankruptcy
CRM
CCJ
CVA
CVL
EDD
FCA
GDPR
ICO
KYC
LPA Receiverships
MDM
MVL
New Incorporations
PEP's
Receiverships
Red Flag Alert Health Ratings
Winding Up Petition

What is Administration?

A process in which an insolvency practitioner is appointed by an administrator by the company directors, creditors, or Court. The administrator controls business assets and operations, in an attempt to recover the most funds possible for the creditors. During an administration legal action against the insolvent company is stayed for around eight weeks.

Administration is a significant sign of financial distress and trade creditors can expect to recover less than 10% of outstanding payments at this stage. Red Flag Alert’s health ratings are designed to help creditors predict an insolvency and take action before a business enters administration.

What is AML?

Anti Money Laundering – a set of fairly stringent legal controls that place a responsibility on financial institutions and other regulated industries to monitor money laundering. With a renewed focus on terrorist financing and the new AMLD4 regulations, businesses have even more responsibility to get these controls right.

Red Flag Alert has a dedicated AML service that helps businesses ensure they’re using data that has been rigorously checked.

What is AML4D?

Fourth Anti Money Laundering Directive – designed to make companies more accountable for connections they have to money laundering. Compared to AMLD3 it covers more industries, places more emphasis on risk, increases checks on high-risk countries, has more stringent sanctions and enhances focus on beneficial ownership.

Red Flag Alert’s anti-money laundering service is AML4D compliant.

What is API?

Application Programming Interface – a set of protocols for building software applications that allows two applications to talk to each other. The API delivers a request to a provider and then delivers a response.

The Red Flag Alert API allows users to integrate Red Flag Alert’s data directly into their CRM. This functionality means that a business can ensure its data is completely up to date and consistent across the organisation.

What is B2B?

Business to Business Sales – refers to a business that is selling a product or service to other businesses rather than consumers.

Using Red Flag Alert can supercharge your B2B sales operation. We have up-to-date information on 6.5 million businesses and 20 million decision-makers, with the data segmented across dozens of filters. This allows marketers to build highly targeted B2B outbound marketing lists that can dramatically increase sales and marketing efficiency.

What is Bankruptcy?

In the UK the term bankruptcy is often used to describe a company that enters liquidation, but a UK based company can’t be made bankrupt. In the UK bankruptcy is only applicable to individuals, sole traders and partnerships. Bankruptcy allows an individual with debts they can’t service an ‘automatic stay’ where creditors can’t pursue monies owed while a decision is made on the bankruptcy application. A receiver will control property and assets that will be distributed between creditors. 

Red Flag Alert tracks all bankruptcy which is critical for understanding individuals and unincorporated businesses you work with. A company director being made personally bankrupt may also have an impact on the company.

What is CRM?

Customer Relationship Management – the strategy a business develops to manage key relationships, including tactics to improve customer service, close more sales, shorten the sales cycle and many more.

Data is a key component of an effective CRM. Without accurate data on customers, businesses aren’t able to effectively deliver the myriad tactics their CRM offers. Red Flag Alert’s real-time business intelligence can be integrated into all leading CRMs using our API.

What is a CCJ?

County Court Judgments – an order from the County Court to pay a debt; having CCJs on a credit file can affect the ability to obtain credit.

Red Flag Alert use CCJs as one of the tools to determine whether a business is likely to become insolvent. Although this is important, we also use 100+ other industry-specific indicators to give you the best view possible of the likelihood of insolvency.

What is a CVA?

Company Voluntary Arrangement – an insolvency process that allows a company that is either insolvent or has debt issues to reach an agreement with creditors regarding repayment of its debts. CVAs are seen as controversial because they can leave creditors, particularly landlords, in a position where they have little choice but to accept poor repayment terms.

Red Flag Alert’s financial health rating gives you an accurate view of the likelihood of insolvency for any business in the UK. This gives you a very specific time frame for possible insolvency so you will have information about this long before it materialises, giving you critical time to act and avoid bad debt.

What is a CVL?

Creditors’ Voluntary Liquidation – when the director of an insolvent company voluntarily chooses to close their business. A CVL is recognition that a company is beyond rescue, while the process attempts to recover debts for creditors there is often a significant shortfall. 

If a company enters a CVL it will probably be hard for creditors without a charge to recover debts in full. Red Flag Alert’s health ratings are designed to help creditors predict liquidation in advance and take action before it’s too late.

What is EDD?

Enhanced Due Diligence – if there is an increased risk of money laundering or terrorist financing, EDD is employed. It is unsurprisingly a more detailed due diligence process to assess a high-risk situation.

EDD is a feature of Red Flag Alert’s AML service so we’ve got you covered on this.

What is the FCA?

Financial Conduct Authority – a financial regulatory body that is financed by membership fees. It regulates financial firms that sell consumer products and aims to maintain the integrity of the UK financial markets.

What is GDPR?

General Data Protection Regulation – a legal framework with guidelines on the collection and processing of individuals’ data within the EU. It came into force in May 2018 to much fanfare and is  considered a big step change towards more data rights for individuals.

A big part of GDPR is having a clear handle on the data you hold. By plugging your CRM into the Red Flag Alert database, you can be sure that your data is completely up to date – a critical step in GDPR compliance.

What is the ICO?

Information Commissioner’s Office – reports directly to Parliament with a mission to “uphold information rights in the public interest promoting openness by public bodies and data privacy for individuals”. Since the inception of GDPR and a greater focus on data privacy, it has had an enhanced profile.

What is KYC?

Know Your Customer – due diligence that businesses must perform in certain circumstances that govern the collection of relevant information from their clients. Initially focused on financial institutions, the range of companies affected has grown significantly. KYC terminology is also used in reference to AML regulations.

Red Flag Alert offers a KYC solution that uses the most up-to-date available information to ensure you are compliant with regulations.

What is an LPA Receivership?

The Law of Property Act or Fixed Charge Receivership is a toll to help lenders recover debt on a property loan that is in default. It allows the creditor to assume control of property and appoint a receiver to recover the funds by selling the property or collecting rental income. 

Red Flag Alert includes detailed information on any charges that are held over a business - critical information when assessing the risk of trading with a company. Generally the greater the number of charges the less chance of recovering funds in the event of insolvency.

What is MDM?

Master Data Management – a method that defines and manages the critical information a business holds into one single point of reference. MDM has become more relevant in recent years as regulations have increased and businesses are holding more data, often across multiple systems and locations.

Red Flag Alert’s business database is the perfect tool for ensuring solid MDM practices. By integrating real-time business data into their database, an organisation can ensure that their data is up to date. This hurdles one of the big barriers to solid MDM – updating information. 

What is an MVL?

Members Voluntary Liquidation - A process for closing down a solvent business in a simple and cost effective way, an MVL is an exit planning tool for when a business has reached the end if its lifecycle. MVLs are generally used when there are assets to distribute or there are complications with closing the business. 

Red Flag Alert tracks the closing of all businesses which can provide useful information when assessing trends in a certain area or the strength of a sector.

What is a New Incorporation?

Every month 50,000+ new companies are incorporated in the UK; this data provides insight into business confidences across sectors and geographies. 

The data helps business development teams determine viable new sales prospects and helps account managers look for new subsidiaries that may represent additional income streams. It provides rich data in the commercial interests of key individuals, opening up new commercial opportunities and providing critical insight from a compliance perspective.

What are PEPs?

Politically Exposed Persons – someone who holds high public office. PEPs present a high risk for involvement in bribery due to the influence they can wield.

There have recently been enhanced guidelines on the treatment of PEPs; the Red Flag Alert PEPs and sanctions database is fully compliant with the latest regulations.

What is a Receivership?

When there is a legal charge over a company asset the charge holder may appoint a receiver to “receive” the assets; once this happens assets can be liquidated to pay the lender back. 

If a company enters receivership it will probably be hard for any creditor without a charge to recover debts in full. Red Flag Alert’s health ratings are designed to help creditors predict receivership and take action before a business enters the receivership process.

What are Red Flag Alert Health Ratings?

Gold
Companies will be very healthy overall. They will have sound financials, a good history of filing compliance, with ideal levels of gearing (proportion of loan capital), optimal liquidity, and a generally favourable trend, with no significant or recent legal notices. 

Advice for creditors: Considered to be very low risk and open credit is recommended. 

Silver
Companies will be stable overall. They will have healthy financials, and a normal history of filing compliance. Gearing will be within an acceptable range, with reasonable levels of liquidity. If the trend is not upward, any declines will be modest, with few if any significant or recent legal notices. 

Advice for creditors: Considered to be low risk and open credit is recommended.

Bronze
Companies will be in acceptable health. They may not have published accounts or are a newly formed, but nothing significantly detrimental is known. Where financials are present, gearing may be higher than normal, or liquidity may be lower than ideal. The financial trend may be down, and there may be some history of legal notices. 

Advice for creditors: Considered to be a fair trade risk and open credit is recommended.

Amber
Companies are newly incorporated or have only passed the lower threshold of the credit score algorithms, and display some financial, payment or filing characteristics that make them an elevated risk. 

Advice for creditors: Considered to be moderate risk and open credit is only recommended with caution.

1 Red Flag
Companies are in the weakest 20% in their size category and display risk factors that might include a deteriorating financial position, sub-optimal gearing/liquidity, and/or the presence of more recent, or significant legal notices. 

Advice for creditors: The risk is elevated, and suppliers should seek suitable assurances or guarantees.

2 Red Flags
As above, but with additional risk factors, such as recent county court judgments of a materially significant value. 

Advice for creditors: Very high risk and guarantees advised.

3 Red Flags
As above, and 56% of companies with three red flags will cease to trade in the next seven days.

What is a Winding Up Petition?

The most serious legal action a creditor can take against a company. If unresolved the winding up petition leaves a company unable to trade, and ultimately leads to the business entering liquidation. 

Red Flag Alert track all petitions and ensure that they’re weighted immediately into financial health ratings. While a petition doesn’t necessarily always lead to liquidation, it is a serious indicator of distress.

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