Credit risk: a threat to the self-employed and businesses

Last October, the newspaper 24 Heures reported that nearly 2,800 Swiss companies had gone bankrupt between January and September 2020 (according to a study by Bisnode). Although these bankruptcies occurred against the backdrop of a global health crisis, they remain attributable to multiple factors, in particular late and non-payment by third parties — a major financial risk known as “del credere risk”.

What is del credere risk?

Origin of the term “del credere”

In finance and law, the del credere obligation makes an intermediary jointly liable for its client’s debts in the course of its engagement. Usually arising from a signed contract, this obligation means the intermediary will only finalise the sale once the client offers sufficient guarantees of solvency.

The del credere obligation can therefore give rise to a risk, as the intermediary is not always able to accurately verify the client’s level of solvency, which may in particular change over time…

Good to know: although they share a common origin, the del credere obligation and del credere risk are indeed two distinct concepts.

Definition of del credere risk

By definition, del credere risk refers to a buyer’s (or its guarantor’s) refusal to pay, or insolvency. Also known as “commercial risk”, del credere risk therefore relates to the sale of goods or services on credit.

If a company (whether from the public or private sector) delivers its goods or services without delay, while the buyer is granted a payment term of several weeks or even several months, it exposes itself to the risk of late payment, or non-payment in the worst case.

This del credere risk then threatens the company’s financial health by unbalancing its cash flow, all the more so if the exposure concerns a significant share of its turnover.

Indeed, commercial risk is particularly present in B2B (where businesses supply other businesses). As orders are much larger than in B2C (where businesses supply private individuals), it is very common to grant customers payment terms of 30 to 90 days…

Of course, large companies with a comfortable cash flow can afford a certain amount of exposure to del credere risk. However, self-employed workers and SMEs are particularly exposed in the event of default or late payment by their customers, given their narrower room for manoeuvre.

The different types of del credere risk

Self-employed workers and businesses selling goods or services on credit are exposed to three main types of del credere risk, namely:

• The risk of late payment. This risk may seem minor at first glance (a delay of just a few days has little impact on the business), but it can lead to significant difficulties and costs once it drags on (a delay of several weeks or more requires substantial follow-up work and creates a cash shortfall that is dangerous for the business).

• The risk of refusal to pay. Highly damaging for the business, this risk covers all situations in which the customer refuses to pay for the goods or services purchased, regardless of the reason for the refusal. This results in a significant loss of earnings for the business, on top of lengthy and costly procedures (debt collection, legal proceedings…).

• The risk of inability to pay. This risk concerns situations where the customer proves unable to honour its debt to the business, for example due to temporary financial difficulties or even bankruptcy. Here again, the loss of earnings for the business can be substantial, and repayment can take a very long time to obtain (or even prove impossible).

How can you protect yourself against del credere risk?

Giving up sales on credit

As it is entirely inherent to the sale of goods or services on credit, del credere risk can only be fully avoided by simply giving up this type of sale! Requiring payment before the delivery of the goods or services sold (as is systematically the case in e-commerce, for example) is therefore one way to guard against commercial risk.

Taking out credit insurance

However, it is possible to protect yourself against del credere risk while continuing to grant your customers a payment term, by taking out credit insurance.

There are indeed insurance policies specifically designed for SMEs, to insure against non-payment of goods or services delivered on credit: if non-payment is confirmed, the company is compensated according to the terms of its insurance contract.

The terms of a credit insurance contract can vary quite widely depending on the situation. They generally take into account:

• the risk profile of the customers;
• the type and cost of the goods or services sold on credit;
• the cost of the insurance and the cover options preferred by the insured company.

Good to know: some credit insurance policies even cover companies against the risk that documents essential to the payment of goods or services delivered were not drawn up or recorded.

Calling on a specialist

Finally, some companies turn to specialist services to cover themselves against del credere risk. These generally offer comprehensive cover, including both credit insurance (which already provides good protection), invoice financing, and even a debt collection service in the event of confirmed non-payment.

This solution offers tailored cover, adapted to the needs of the business, and gives access to the services of experts.

Finally, another option available to you to remove your del credere risk is to sell your receivables to a third party. Your customer receivable then changes owner, and you recover a greater or lesser share of the amount originally invoiced to your customer (depending on the probability of recovery estimated by the acquirer).

In short, del credere risk is therefore the risk of non-payment by the buyer as part of a credit sale. If not managed properly, it can quickly put self-employed workers and SMEs without sufficient cash flow into difficulty.