Pre-credit risk: why it matters

Businesses trading on credit terms are familiar with credit risk, the risk of not being paid for goods already delivered. Far fewer businesses know the concept of pre-credit risk. Pre-credit risk begins as soon as an order is placed, from which point you are investing time, money and resources with no guarantee of payment. This is particularly common in sectors where personalisation is crucial, as investments made are difficult to recover if the client fails to pay.

In this article, we’ll explore pre-credit risk and the damage it can do to your business, as well as strategies to mitigate it.

What is pre-credit risk?

Pre-credit risk refers to the potential for financial loss if a customer fails to pay after a business has already commenced production that cannot be easily repurposed. Because it applies to goods awaiting shipment it is sometimes known as pre-shipment or work in progress risk. 

Think it does not apply to your business? You might need to think again. Whether you produce items for a food brand, precision parts for machinery or tailored dashboard components for a specific car model, once production starts, you’re committed to the process. You’ve bought the materials, booked the time and begun work.

Even if your stock is generic, it may be labelled specifically for your buyer. The cost of removing and relabelling stock could exceed any resale proceeds—leaving you with unrecoverable losses.

A buyer’s insolvency already means that the supplier may have lost a profitable route to market, but being left with half finished manufactured goods can mean that sunk costs are unrecoverable.

Across industries, businesses commit thousands in cash, sometimes millions, in materials and production before they’re paid. That’s a scale of exposure many don’t realise they have.

The risk of pre-shipment insolvency

Such a risk may seem negligible, especially if you’ve had smooth dealings with your customers for previous orders, and they show no signs of financial difficulty. 

Unfortunately, insolvency can strike without warning, often before any clear signs of financial distress appear.

Customer insolvency is not the only threat. A customer facing financial pressure may cancel the order before shipment. Conflict or sanctions could make delivery impossible. In any of those cases, the supplier is financially exposed because they are investing in production or preparation. The nearer the order gets to completion, the greater the potential for significant financial loss.

How PCR cover works

PCR cover is an extension of credit risk cover that protects businesses during the crucial period between starting work on an order and delivering the finished goods.

“PCR cover ensures that if your buyer becomes insolvent before delivery, you’re not left absorbing the full financial impact,” says Tracey McIntyre, UK Manager of Special Risks and Recoveries at Atradius. “It’s designed for businesses, where the risk starts long before the invoice is raised. This makes buyer risk assessment critical before insureds accept orders, and we provide guidance to help them make informed decisions.”

PCR offers more than simply covering your financial losses.  Atradius PCR cover protects your business with essential benefits, including: 

How Atradius’ Special Risks Management team can help

Backed by our Special Risks Management experts, Atradius monitors buyers for early signs of financial distress, drawing on extensive experience in insuring multiple suppliers with pre-credit risk cover.

“Delayed payments, sudden contract changes, requests for early payment or unexplained delivery issues can all signal financial instability,” says McIntyre. Atradius uses structured data, market intelligence and behavioural indicators to assess buyer health in real time. We draw on multiple sources - financial filings, payment patterns, credit scores and sector trends - to help businesses identify when a transaction might be turning risky. This level of insight is rarely available to individual businesses.”

The priority shifts to limiting losses and improving recovery prospects. Pre-credit risk cover can help. Limiting damage requires deep sector and legal knowledge, alongside an understanding of the nature of the goods, their resale potential and the dynamics of the sector. This sort of insight requires strong relationships with businesses across all industries, which is the bread and butter of our Special Risks Management (SRM) team. 

“In distressed situations - whether through legal action or insolvency proceedings - limiting losses and improving recovery prospects is vital for businesses,” says Rhys Davies, Head of UK Special Risks Management and Recoveries at Atradius. 

“Suppliers shouldn’t underestimate the value of their stock – they may be a critical component in a supply chain and Atradius is on hand to help you leverage maximum value.”

How Atradius supports international recovery

Recovering debts can be daunting when your buyer is located overseas and subject to an unfamiliar legal framework. With offices all over the world, SRM is on hand to help; “Our recovery teams have decades of experience handling large, complex cross-border insolvencies,” says Davies. “This expertise, combined with the benefits of Pre-Credit Risk cover, gives suppliers confidence when venturing into overseas markets.”

Our global network of experts can also support when trading internationally, as whilst this offers broader opportunities, it comes with its own complexities. Dealing with overseas buyers requires confidence and expertise to navigate cross-border challenges. SRM will support companies every step of the way.

Atradius offers this expertise and experience alongside a raft of complementary services. We enhance recovery efforts by recognising the bespoke value of goods, which often exceeds scrap value. Our expert recovery teams help businesses negotiate from a position of strength, understanding how to leverage your irreplaceable product. Our legal expertise and contacts significantly improve recovery prospects. 

Make PCR cover a cornerstone of your credit risk management strategy. It is not just about managing risk, it is about enabling opportunity and ensuring your business thrives in any market conditions.

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