Business Credit Risk Management: Prevention Over Recovery
Business Credit Risk Management: The €200K Problem You Can Prevent for €2K
The average European SME writes off 2.2% of annual revenue to bad debt. For a company doing €10 million in annual sales, that's €220,000 — gone. Not lost to competition. Not invested in growth. Simply given away to customers who didn't pay.
Now consider what credit risk management actually costs. A structured credit assessment programme runs approximately €15,000-25,000 annually for the same sized company. Call it €20,000.
That's €20,000 to prevent €220,000 in losses. A 10:1 return before you account for improved cash flow, reduced borrowing costs, fewer collection disputes, and the strategic advantage of knowing which customers deserve credit and which don't.
Most businesses don't have a credit risk problem. They have a credit risk management problem. The debts that become uncollectable were visible — if anyone had been looking — months before they defaulted.
What Business Credit Risk Actually Is (And Isn't)
Credit risk in business is the probability that a customer won't pay you for goods or services you've already delivered. Every time you issue an invoice with payment terms, you're extending credit. You're a lender. The only question is whether you're a lender who assesses risk, or one who lends blind.
The three types of credit risk that matter for B2B operations:
Default risk: The customer fails to pay entirely. Pure default accounts for roughly 15% of bad debt losses.
Slow-payment risk: The customer pays eventually, but 60, 90, or 120+ days late. Approximately 55% of B2B bad debt costs come from slow payment, not default. It destroys cash flow, increases borrowing costs, and forces you to choose between paying your own suppliers late or drawing on credit facilities.
Concentration risk: Too much of your revenue depends on too few customers. If your top three customers represent 40% of your receivables and one defaults, you have a business crisis. Most businesses don't look at their receivables as a portfolio.
The Credit Assessment Nobody Does (But Should)
A real credit assessment answers five questions:
1. Can they pay? Financial statements, credit scores, payment history with other suppliers. A D&B PAYDEX score below 50 indicates the company pays most suppliers significantly late.
2. Will they pay? Payment behaviour is more predictive than financial position. A company with strong financials and a history of paying 90 days late will pay you 90 days late too.
3. How much should I extend? A credit limit should never exceed the amount you can afford to lose. For new customers, start with a limit that covers one order. Increase after three on-time payments.
4. What are the warning signs? A customer requesting extended terms after previously paying on time. Disputing invoices they've never disputed before. Orders increasing sharply without explanation.
5. What's my concentration exposure? No single customer should represent more than 15% of outstanding receivables.
Building a Credit Risk Policy (The One-Page Version)
Tier 1 — New customers: Credit limit: maximum of one order value or €5,000. Payment terms: 30 days. Credit check required before first shipment. Review after three successful payments.
Tier 2 — Established customers (3+ on-time payments): Credit limit: up to €25,000 or 2x average order value. Payment terms: 30-45 days. Annual credit review.
Tier 3 — Key accounts (12+ months, consistent payment): Credit limit: negotiated. Payment terms: up to 60 days. Quarterly review. Named credit manager assigned.
Automatic escalation triggers: Any invoice 30+ days overdue: hold new orders. Any invoice 60+ days overdue: refer to professional collection. Credit score below threshold: require prepayment or letter of credit.
The specific numbers aren't sacred. What matters is that the policy exists, is applied consistently, and the escalation triggers are automatic.
The Cost of Not Managing Credit Risk
Direct bad debt losses (visible): The 2.2% of revenue that becomes uncollectable.
Financing costs (hidden): Interest cost of financing €500,000 in overdue receivables at 6% borrowing cost is €30,000 per year — buried in finance charges.
Opportunity cost (invisible): Every hour your finance team spends chasing payments is an hour not spent on planning, forecasting, or analysis.
Relationship cost (unmeasurable): A structured credit policy prevents relationship damage by setting expectations upfront.
The Credit Risk Decision You're Making Right Now
The cost of prevention is roughly one-tenth the cost of recovery. A credit check costs €10-50. A collection agency fee costs 15-25% of the recovered amount. A legal proceeding costs thousands. A write-off costs everything.
If you want to assess the credit risk across your current receivables portfolio, we'll evaluate your exposure for free within 48 hours.
