Risk Assessment of Debtors - How We Calculate Default Risk

Introduction

One of the most critical tasks in factoring is the risk assessment of debtors. The risk of defaulting on receivables can have significant impacts on a company's liquidity. At Aequitex, we carefully assess the credit risk of the debtor and rate the invoices using the Aequitex Invoice Scoring Algorithm©, which is enriched with real data sourced from reputable global financial institutions such as Dun & Bradstreet and Creditform. In this blog post, we explain how we calculate the default risk and the measures we take to minimize it.

Debtor Check: The Basis of Risk Assessment

The debtor check is the first step in our risk assessment process. We assess the creditworthiness of debtors by analyzing their ability and history of payments. We use various sources, including credit agencies, financial reports, trade registers, and other publicly available information as well as using our Aequitex Invoice Scoring Algorithm©. This comprehensive approach provides us with a clear understanding of our debtors' financial health and enables us to identify potential risks early on.

Consideration of Industry-Specific Factors

We understand that each industry has its own peculiarities and challenges. Therefore, we also take industry-specific factors into account during risk assessment. For example, some industries experience seasonal fluctuations or are more affected by economic trends. By considering these factors, we can better assess the risks and take appropriate actions.

Historical Payment History

The payment history is a crucial indicator of default risk. We analyze debtors' past payment data to understand their payment behavior. A reliable payment history suggests that the debtor has a lower risk of payment defaults. At the same time, we identify any payment delays or defaults to take appropriate measures.

Credit Limits and Risk Classes

Based on our risk assessment, we assign each debtor an individual credit limit and corresponding risk class. We also consider individual arrangements with the customer. These measures enable us to better control default risk and protect our customers' liquidity.

Monitoring and Early Warning Systems

Our work does not end with a one-time risk assessment. We rely on continuous monitoring and early warning systems to detect changes in debtors' creditworthiness or payment behavior promptly. This proactive approach allows us to react promptly and take appropriate measures to minimize risk.

Diversification of Debtor Portfolio

A key strategy for risk reduction is the diversification of the debtor portfolio. To spread the risk, we recommend a balanced distribution of debtors. This reduces dependency on individual debtors and minimizes the overall risk.

Conclusion:

At Aequitex, debtor risk assessment is an integral part of our service. We attach great importance to a thorough and comprehensive analysis of the creditworthiness and solvency of the debtors in order to minimize the risk of default. By using industry-specific factors, historical payment history, individual credit limits and risk classes, as well as our own Aequitex Invoice Scoring Algorithm© and continuous monitoring and early warning systems, we ensure a secure and transparent factoring platform. Our goal is to provide our customers (SMEs and investors) with the best possible support in improving their liquidity and giving them the financial flexibility they need to be successful.”

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