Trade Credit Risk is the risk that a buyer fails to pay for goods or services delivered on invoice. This directly impacts your cash flow, working capital, and financial stability. Effective risk management is crucial, especially now that companies increasingly offer credit to stay competitive and drive revenue.
But managing Trade Credit Risk will become significantly more challenging over the next 2 to 3 years. Thatโs due to several global developments unfolding simultaneously.
The five most important challenges at a glance:
1. More bankruptcies
High interest rates and slow economic growth are driving an increase in business bankruptcies, especially among SMEs. Companies with less financial resilience struggle to refinance their debts or face difficulties when demand declines. The risk of non-payment rises. This calls for a reassessment of your risk appetite, stricter credit terms, and better customer monitoring.
2. Geopolitical unrest and supply chain disruptions
Conflicts such as those in Ukraine and the Middle East, along with sanctions and trade restrictions, disrupt international trade. Supply chains are destabilized, and payments may suddenly stop. Geopolitical risk must be part of your credit decisions, often requiring swift action. At the same time, itโs crucial to diversify your supplier and customer network to reduce risk.
3. Volatile interest rates and tight liquidity
Borrowing is becoming more expensive and financing harder to obtain. As a result, companies are facing increasing pressure on their liquidity. Payments are delayed or missed, especially in capital-intensive or cyclical sectors like construction, automotive, and luxury goods. Risk managers need to reassess thresholds and stress-test portfolios for potential interest rate hikes or financing issues.
4. Low-quality data and lagging digitalization
Accurate and reliable data are essential for credit risk assessment. Yet many companies lack integrated systems to effectively track customer behavior and financial health. AI-driven credit tools and digital platforms are still underused, especially among SMEs and in emerging markets. Closing this gap is necessary to detect risks earlier and automate the credit process.
Interesting read: D&B Finance Analytics: the intelligent credit risk platform for every company
5. Climate and ESG-related risk
Environmental and social factors are becoming increasingly important in credit risks. Think of climate damage disrupting operations or ESG regulations impacting business models. At the same time, ESG data is often inconsistent, and methodologies for accurately assessing these risks are still immature. This makes it challenging to accurately incorporate ESG risks into credit terms.
Interesting read: What is ESG and why does it matter to your business?
The playing field is becoming more complex and unpredictable. Economic pressure, geopolitical instability, tight liquidity, data scarcity, and ESG issues are putting existing risk models under strain.
The solution? Smartly combine all available data, both internal and external. This gives you an up-to-date 360-degree view of your customers and suppliers. Pair that with customized scoring models and automated decision-making, and you increase your agility. That makes you more resilient to risks that change rapidly.
