Trade Credit Risk Solutions

What is Trade Credit?

Trade credit is an agreement between a buyer and seller, where the goods or services acquired do not need to be paid for immediately, but can be delayed for an agreed period, helping the buyer to manage their cashflow. Trade credit is also used as a sales tool: businesses identify creditworthy potential customers and sell more to them, perhaps even on preferential credit terms.

From a macro-economic point of view, trade credit refers to the sum of all credit granted by companies to their clients or suppliers with extended payment terms or contractual payment delays. This is what is used to obtain figures about trade credit in each country. Trade credit amounts to very large sums in all EU Member States, although it is very often not publicly known. For example, in France, trade credit represents 800 billion euros, which is 3 times the amount of bank lending. In Spain, it's estimated at 55% of the GDP and in Austria, it amounts to 57 million euros; while in Italy outstanding credit amounts to roughly 500 billion euros.

From the business point of view (micro), trade credit is therefore used as a means of managing cash without relying on bank lending or any similar financial lending. By granting payment delay to a customer, the business is therefore enabling its customer to manage cash in a less constrained timeline.

What is the Role of Business Information Providers Reports?

Before extending trade credit, businesses require information on the solvency of their trade counterparts and to do that they will typically consult a Business or Score Report. These reports contain information about the business and will also include a Credit Score and a suggested Credit Limit. Larger organisations, with a dedicated Credit Risk department, may have a more sophisticated internal credit process, using internal inputs as well as business information reports. Part of this process may be automated, with requests for credit above a certain threshold being referred for manual review, while the majority are accepted or rejected using a scorecard methodology. By not having to have 'cash now' businesses can avoid or reduce reliance on finance providers and other forms of lending which typically have associated costs and require security.