Trade Credit Risk Solutions
Trade Credit
How deferred payment underpins European commerce — and why accurate business information is essential
What is Trade Credit?
Trade credit is an agreement between a buyer and seller where 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, sometimes on preferential credit terms.
From a macroeconomic perspective, 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.
Macroeconomic Significance
Trade credit amounts to very large sums in all EU Member States, although it is very often not publicly known. Its scale is remarkable:
France
€800 billion
3× the amount of bank lending
Spain
55% of GDP
Estimated outstanding trade credit
Austria
€57 million
Trade credit outstanding
Italy
~€500 billion
Credit outstanding
From the business point of view, trade credit is used as a means of managing cash without relying on bank lending. By granting a payment delay to a customer, a business enables its customer to manage cash in a less constrained timeline.
The Role of Business Information
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.
ECB SAFE Report — Access to Finance of Enterprises
net 14%
Improvement in firms' own capital position (up from 10%)
net 15%
Improvement in creditworthiness (up from 12%)
The assessment of creditworthiness is a key element in enabling trade credit and access to finance. According to the latest Survey on the Access to Finance of Enterprises (SAFE) report by the European Central Bank, "firms reported an improvement in their own capital position (net 14%, up from 10%) and creditworthiness (net 15%, up from 12%), thus continuing to have a positive impact on access to finance. For both large firms and SMEs, a larger net percentage of firms indicated an improvement in the firms' own capital and credit history, compared with the previous survey round. Furthermore, the willingness of business partners to provide trade credit is seen as one of the key factors that have an impact on the availability of external financing for enterprises". The SAFE report also shows that the firms' credit history (and thus the creditworthiness and solvency report) is a key element in the availability of external financing.
FEBIS Position
Business information and credit scoring providers have seen a rise in demands for solvency reports or business updates, but struggle to get real-time updated data.
In some EU countries, insolvency databases are not accessible in real-time or are not updated enough to reflect evolving situations. The same applies to active business status: making sure that all entrepreneurs can access real-time, accurate credit information data is crucial. It is of the utmost importance for a business to know if its clients or suppliers are still active and solvent.
This is even more crucial when decisions must be made on a very tight timeframe — sometimes on a daily basis for businesses most affected by rapid market changes. Without timely data, businesses extending trade credit face unnecessary risk and potential cash flow disruption.