Del credere risk is a term used to describe the probability that a buyer who purchases through a buyer or a guarantor will be unable to fulfill his payment obligations. Del credere, which originates from the Italian word for trust, is also used for agents who are tasked with selling products for a principal. Such transactions are done on credit.
The del credere agent functions as a middleman in the transaction between the seller and the buyer, otherwise known as the vendor and the vendee. He is given a commission, which is likewise called a del credere commission, because going through a del credere agent gives the vendor a guarantee that the products will be indeed be sold and paid in full.
The del credere agent, who must accept a certain level of risk, also logically tries to minimize this as much as possible. He therefore sells only to individuals or businesses who have a good financial position and are known for being solvent.
Selling products with the help of a del credere agent presents an additional cost to the vendor. This is occurs because the agent functions as a surety in the event that the vendee fails to make the required payments. Such a situation would require the agent to cover vendee’s obligations. For this reason it is imperative for del credere agents to be able to distinguish between potential vendees who are financially solvent and responsible from those who are likely to default on payments.
The agent may use various information, such as the vendee’s credit history (also known as a FICO score) and debt-to-income ratio, in order to make an informed decision on whether to sell or not. An entity’s credit history, for example, can be very telling when it comes to an entity’s habits. It may help in predicting future payment behavior.
