NACM CMC key terms

A framework for judging a credit applicant by character, capacity, capital, collateral, and conditions. Each factor weighs the borrower's willingness and ability to pay against the risk and protection available to the seller.

The borrower's ability to generate enough cash flow to meet obligations as they come due. Analysts test capacity using cash flow statements, debt-service coverage, and existing debt burden rather than relying on reported profit alone.

The possibility that a customer will fail to pay according to agreed terms, producing a loss through nonpayment or delay. It is assessed at the account and portfolio level and drives limits, terms, and monitoring intensity.

A written set of rules governing who may receive credit, under what terms, how much exposure is allowed, and how exceptions and collections are handled. It translates management's risk appetite into repeatable daily decisions.

A structured request in which a customer supplies legal identity, ownership, banking, trade, and financial information to support a credit decision. It often includes authorization to obtain references and to pull business credit reports.

The maximum outstanding exposure a seller will extend to an account at any one time. Limits are set from financial strength, payment history, and exposure tolerance, then reviewed when conditions or balances change materially.

A statistical method that converts applicant characteristics into a numeric score predicting relative likelihood of payment behavior. Scores support consistency and speed but must be validated for the population and data actually used.

A third-party report summarizing a company's identity, ownership, public filings, payment experiences, and derogatory events such as liens or suits. It is one evidence source among several and should be read for recency and completeness.

An organization that collects and sells commercial or consumer credit information, including payment histories and public record data. Bureaus are regulated in many jurisdictions, and users must respect permissible-purpose and dispute rules.

A report from another supplier describing how a customer has paid, including high credit, current balance, and delinquency pattern. References are most useful when verified directly and when the reporting supplier sells similar volumes on similar terms.

The systematic review of balance sheets, income statements, and cash flow statements to judge liquidity, leverage, profitability, and repayment ability. Techniques include ratio analysis, common-size statements, and trend comparison across periods.

Computing relationships among financial statement items to reveal liquidity, efficiency, leverage, and profitability. Ratios are meaningful only against industry norms, prior periods, and the company's own business model and accounting policies.

Current assets divided by current liabilities, indicating short-term liquidity. A ratio above one suggests assets cover near-term obligations, but quality and timing of receivables and inventory matter more than the headline number.

Cash plus marketable securities and receivables divided by current liabilities, excluding inventory. It is a stricter liquidity test for businesses whose inventory turns slowly or is difficult to convert to cash.

Cash available for debt service divided by scheduled principal and interest payments for the period. Lenders and credit analysts use it to test whether operating cash flow can absorb required payments with a margin of safety.

Current assets minus current liabilities, representing the operating cushion available to fund day-to-day activity. Negative working capital signals reliance on trade credit or short-term borrowing and warrants closer review of liquidity.

A statement classifying cash movements into operating, investing, and financing activities. Operating cash flow is the key indicator for credit analysis because reported profit can differ sharply from cash actually generated.

Comparing financial data across several periods to identify direction and volatility in sales, margins, liquidity, and leverage. Deteriorating trends often signal risk earlier than a single-period balance sheet snapshot.

The agreed conditions of sale covering the payment due date, any discount for early payment, and consequences of late payment. Terms should be documented, applied consistently, and reflected in invoices and contracts.

A discount convention allowing a 2 percent reduction if the invoice is paid within 10 days, with the full amount due at 30 days. The implied cost of giving up the discount is high, so it strongly encourages early payment.

A measure of the average number of days it takes to collect receivables, typically ending receivables divided by credit sales times days in the period. Rising DSO indicates slower collection or looser terms and ties up working capital.

A report grouping open receivables by how long they have been outstanding, such as current, 1-30, 31-60, and 61-plus days. It highlights collection priorities and the share of the portfolio at elevated risk.

An invoice status indicating the payment due date has passed without full payment. Aging, escalation, and credit hold rules usually key off days past due, with thresholds defined in the credit policy.

A control that blocks new orders or shipments to an account until a credit issue is resolved, such as an overdue balance or exceeded limit. Holds should be applied by defined rule and released only with documented approval.

An outside firm that pursues overdue accounts for a fee or percentage of amounts recovered. Placement typically follows internal escalation, and the seller remains responsible for documentation and for conduct of the account.

A legal claim against property securing payment of a debt, allowing the holder to pursue the property if the obligation is not met. Liens may be consensual, such as a mortgage, or arise by operation of law.

A statutory claim on real property available to suppliers of labor or materials who are not paid for improvements to that property. Strict notice and filing deadlines apply, so suppliers must track project and jurisdiction rules closely.

A creditor's legal right in a debtor's property that allows the creditor to take or sell the property if the debt is not paid. It is created by agreement and perfected through filing or other statutory steps.

A public filing that gives notice of a security interest in described collateral, generally perfecting the creditor's claim against other parties. Priority usually depends on filing order and on compliance with the applicable commercial code.

A promise by an individual, often an owner or officer, to pay a company's debt if the company does not. Enforceability depends on clear written terms, consideration, and rules on spousal consent and waiver.

A claim against a surety bond posted on a construction project, used when a supplier or subcontractor is not paid. Deadlines and notice requirements are short and differ from lien rules, so both remedies are often tracked together.

A United States law governing collection, use, and disclosure of consumer credit information, including permissible purposes, adverse action notices, and dispute handling. Commercial credit is largely outside it, but owner guarantees can bring consumer rules into play.

A United States law limiting how third-party debt collectors may contact and pursue consumers, including restrictions on times, places, and misrepresentation. It generally does not cover a creditor collecting its own commercial debt.

A legal proceeding that provides relief to an insolvent debtor and governs distribution to creditors. Credit professionals must know how claims are filed, which liens survive, and how preferences and fraudulent transfers can be recovered.

The number of days cash is tied up from paying suppliers to collecting from customers, combining days inventory and days receivable less days payable. Shortening it frees cash and can reduce a customer's need for extended terms.

The shared norms and incentives that shape how consistently an organization applies its credit standards. A sound culture rewards disciplined decisions over volume targets and requires documented rationale for exceptions and overrides.

The professional obligation to assess and report credit information honestly, protect confidential customer data, avoid conflicts of interest, and apply policy without improper favoritism. Ethical conduct supports reliable decisions and preserves trust with customers and regulators.