Payment and Default Risk

Payment and Default Risk

Payment Risk

Definition:
Payment risk is the likelihood that a customer will pay you late or miss a scheduled payment.
It looks at how the customer trades with you now — their behaviour, consistency, and ability to pay within your current terms.

This measure is also used to calculate the Potential Credit Capacity (before risk adjustment) — the maximum amount a customer could reasonably spend with you based on their payment behaviour and available capacity across other suppliers.

Payment Risk Bands

1. Low – Consistently pays on time.

2. Reduced – Small chance of late payments.

3. Medium – Some late payment history.

4. Elevated – Frequent late payments.

5. High – High chance of late payments.

6. Very High – Persistent late payments and serious concerns.

Default Risk

Definition:
Default risk is the likelihood that a customer will be on a future payments/ Likelihood of protracted default.

It considers:

• How the customer pays other suppliers.

• Historic ageing data and payment patterns.

• Statutory data and any negative credit events.

This replaces the need for traditional trade references by providing a data-driven view of how the customer treats their accounts with all suppliers.

Default Risk Bands

1. Low – Very unlikely to default.

2. Reduced – Low chance of default.

3. Medium – Some indicators of default risk.

4. Elevated – Notable warning signs.

5. High – Strong risk indicators.

6. Very High – High probability of default.

Credit Strategy Guide