Del credere risk: analysis and management for companies
Del credere risk is a key consideration in business for both buyers and sellers. In this article, we will take a closer look at this risk, break it down and shed light on possible ways to reduce it. We will focus, in particular, on the entitlement to payment under a purchase contract.
Definition and description of del credere risk
In principle, the term del credere risk relates to the risk that the debtor will default on a payment obligation. In other words, it is the risk that a buyer will not pay the agreed sum for goods or services and the seller will suffer financial losses as a result. This risk may materialise for various reasons such as:
- the buyer’s insolvency
- liquidity bottlenecks at the buyer
- the buyer’s intent to commit fraud
- disputes concerning the quality of the goods or services
Possible ways to reduce del credere risk
There are various ways to reduce del credere risk and ensure that the seller is protected financially. These can be applied before the deal is concluded or even once the relationship has already been established.
1. Performing credit checks and gathering information
One fundamental measure for reducing del credere risk is to check the credit rating of potential business partners. Sellers can gain some idea of the potential default risk by collecting information on a buyer’s ability and willingness to pay. Various sources can be used for this, including:
- credit bureaus (Schufa, Creditreform)
- references from other suppliers
- the buyer’s financial statements and balance sheets
- ratings from credit rating agencies
2. Hedging with collateral and guarantees
To reduce the risk of non-payment, sellers can require the provision of certain collateral before a purchase contract is concluded. This may take the form of a bank guarantee or deposit or may involve the retention of title. The granting of a guarantee by a third party (e.g. a parent company) may also help to minimise the risks. In that case, guarantees must also be enforceable by a company’s credit management team if a claim arises. Collateral and guarantees are especially advisable when it comes to an export contract with importers and exporters from far-away countries with different jurisdictions.
3. Adjusting the payment terms
The payment terms in the purchase contract can also be structured in a way that helps to reduce del credere risk. For example, if there is a high risk of default, sellers can insist on advance payment in full or in part to ensure that they receive at least some of the agreed-upon fee. Agreeing on shorter payment deadlines or discounts for early payment may also incentivise buyers to meet their payment obligations on time.
4. Taking out credit insurance
Another way to reduce del credere risk is to take out credit insurance. This is an insurance policy that protects the seller against the risk of default for trade receivables. If the buyer defaults on a payment, the credit insurer steps in and pays the seller a pre-determined percentage of the outstanding debt. This type of cover can be taken out for both individual deals and the entire portfolio of debtors.
In contrast to credit insurance policies with private insurers that focus more on smaller deals with private insurance, usually domestically, SERV and other export credit agencies (ECAs) ensure that even the biggest deals can be executed securely across borders.
Conclusion: active management of del credere risk
Del credere risk poses a significant challenge for many companies. However, this risk can be reduced through active management and by applying various measures. It is vital to consider the individual circumstances of the deal and of the partners involved and to draw on external expertise, if necessary. This allows sellers to maximise their financial protection and to be successful in the market for the long term.