What is trade credit risk?

Look around you. Almost everything you see, even the simplest objects, is the result of materials and components sourced from across the world, assembled through deeply complex and interconnected value chains. The global trade that makes this possible rarely operates on immediate payment. Instead, goods and services are delivered with the expectation that payment will follow at a later date. This practice, known as trade credit, comes with an unavoidable consequence: trade credit risk. What happens if the buyer does not pay? 

That question is even more pressing today. Global trade is being reshaped by geopolitical tensions, financial volatility and increasingly digital supply chains that demand ever faster decision-making. And yet, millions of transactions continue to take place every day. How is that possible? 

Understanding trade credit 

When we think about the forces that move the global economy, our minds usually jump to central banks, interest rates, shipping lanes, oil prices or geopolitics. What almost never comes to mind is trade credit. Yet it quietly keeps global commerce running and, in many respects, remains one of the most important financial mechanisms that few talk about: the engine that sustains the daily functioning of international trade.

Trade credit is the agreement between a supplier and a buyer to defer payment, typically for 30 to 120 days. It allows buyers to manage cash flow while continuing to operate and grow. In fact, trade credit is the dominant form of short-term finance for firms worldwide, often exceeding the scale of bank lending. It supports a significant share of cross-border transactions. According to the IMF, up to 60% of international trade is financed through inter-firm credit arrangements rather than banks. 

In their working paper "The macroeconomics of trade credit", Wharton finance professor Gideon Bornstein and Stanford economist Luigi Bocola provide one of the clearest and most rigorous analyses of how trade credit shapes modern economies. As they note, “In most countries, suppliers of intermediate goods and services are also the main providers of short-term financing to firms.”

The paper also explains the mechanism that gives trade credit its macroeconomic weight: a credit multiplier. As the authors write, “Trade credit is the outcome of a long-term contract between firms linked in the production process, and it is sustained in equilibrium by reputation forces as customers lose the relationship with their suppliers in case of a default. These financial links give rise to a credit multiplier: suppliers can enforce repayment of these IOUs [I owe you], and they can discount these bills with banks to obtain liquidity. This process can either dampen or amplify the output effects of financial shocks, depending on the borrowing capacity of suppliers”. 

Defining trade credit risk 

Trade credit may be one of the great engines of the global economy, but it also involves taking on significant exposure. Accounts receivable typically represent between 20% and 40% of a company’s current assets, and each of them is subject to the possibility of non-payment. 

Trade credit risk refers to the possibility that a buyer fails to settle invoices within the agreed terms. This can take different forms: late payment, bad debt, or insolvency. When payments are delayed or not received, the consequences can be substantial. These include cash flow disruption, increased borrowing needs, reduced liquidity, pressure on profitability, and in extreme cases, business failure.

“Companies worldwide are dealing with customer payment patterns that have become increasingly unpredictable. Over the past few years, our Payment Practices Barometer has consistently highlighted this reality. Nearly half of B2B invoices globally are now overdue, and sustained pressure on liquidity is forcing businesses to plan around less reliable cash inflows. It is a persistent challenge rather than a temporary shift, which is why the payment landscape feels more uncertain for many companies today,” says Silvia Ungaro, Senior Editor and expert in business-to-business (B2B) payment behaviour at Atradius. 

The drivers of trade credit risk 

Trade credit risk does not arise in isolation. It is shaped by a combination of interrelated factors, ranging from the specific characteristics of the buyer to broader economic and geopolitical forces. 

Knowing your buyer is not enough. A useful way to think about this is through a simple metaphor. Companies are like boats, and the macroeconomic environment is the sea. To understand whether a business will be able to pay, it is not enough to look at the strength of the vessel. You also need to understand the waters it is navigating. 

Managing trade credit risk 

Trade credit ultimately rests on a simple but powerful principle: trust. Every invoice issued with deferred payment is, in essence, a bet that the buyer will honour their commitment. But as this exposure grows, trust alone is no longer enough. Businesses need ways to turn that trust into something more robust and measurable. This is where credit insurance becomes particularly relevant, offering one of the most comprehensive ways to turn uncertainty into managed risk and enabling companies to trade with confidence. 

In its detailed assessment of the trade credit insurance, the European Systemic Risk Board — the EU’s macroprudential watchdog charged with identifying and preventing systemic risks that could undermine the bloc’s financial stability — highlights the scale of protection that trade credit insurers quietly provide to global commerce. The Board estimates that trade credit insurance covers 60% of the risk of international trade credit. It goes on to underline the basic reality faced by exporters and suppliers every day: “There are, in general, three alternative ways in which firms can deal with this credit risk. First, sellers can avoid any trade credit risk by requiring advance payment. Second, sellers can bear the trade credit risk. Third, they can seek cover for trade credit risk.” 

That choice, however, plays out very differently depending on where the transaction takes place. As the paper notes, “In international trade, insurers cover 60% of trade credit risk, banks cover 20% and sellers retain 20% of the risk. By contrast, for domestic trade, sellers retain 85% of the risk. It is likely that the greater relevance of trade credit insurance for international trade reflects a different monitoring capacity and a reduced ability to recover repayments.” 

The message is clear: in cross‑border trade, where distances, legal systems and political environments complicate the recovery of unpaid invoices, trade credit insurance becomes not just a financial tool but a structural necessity. Without it, much of global commerce would operate on far shakier ground. Across the industry, this work depends on underwriting teams capable of interpreting shifting risks with discipline and foresight.  

Trade credit insurance plays a critical role in sustaining confidence in global trade, but only a limited number of companies have the scale, expertise and reach required to underwrite such complex and fast-moving risks. What truly sets Atradius apart is the combination of global reach, deep connectivity solutions and human expertise. Our network allows us to read risk across markets, sectors and supply chains in real time; our technology brings that insight directly into your decision-making; and our people turn data into judgement, working alongside you as an extension of your own credit capability. In an increasingly complex trading environment, it is this combination that transforms information into confidence and enables you to act with clarity.

To explore how to strengthen your own credit risk strategy, get in touch with us and see how we can help you stay ahead.