Payment and Default Risk

Created by Amy Sara Price, Modified on Fri, 3 Oct at 8:36 AM by Neil Parsons

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.

What is considered in our predictive model?

The Age of the company
The Number of directors
The age of the Directors as well as their tenure
Location of the business
The industry of the business
Economical factors
Number of Judgements against the business
How the customer pays YOU and other suppliers.
Historic ageing data and payment patterns.
Statutory data and any negative credit events.

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

Low – Consistently pays on time.
Reduced – Small chance of late payments.
Medium – Some late payment history.
Elevated – Frequent late payments.
High – High chance of late payments.
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:

The Age of the company
The Number of directors
The age of the Directors as well as their tenure
Location of the business
The industry of the business
Economical factors
Number of Judgements against the business
How the customer pays their 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

Low – Very unlikely to default.
Reduced – Low chance of default.
Medium – Some indicators of default risk.
Elevated – Notable warning signs.
High – Strong risk indicators.
Very High – High probability of default.

Credit Strategy Guide

Payment Risk ↓ / Default Risk →	Low	Reduced	Medium	Elevated	High	Very High
Low	Grow	Grow	Grow	Grow	Maintain	Reduce
Reduced	Grow	Grow	Grow	Grow	Maintain	Reduce
Medium	Grow	Grow	Grow	Maintain	Maintain	Reduce
Elevated	Grow	Grow	Maintain	Maintain	Reduce	Reduce
High	Maintain	Maintain	Maintain	Reduce	Reduce	Reduce
Very High	Maintain	Maintain	Reduce	Reduce	Reduce	Reduce

Very High	-50%	-60	-100
High	-10	-15	-20
Elevated		0		0
Medium	30	20	10	0
Reduced	40	30	20			-100
Low	60%	40%	30%	0%	0%	-100
	Low	Reduced	Medium	Elevated	High	Very High