Risk scoring models for trade credit in small and medium enterprises

Trade credit refers to providing goods and services on a deferred payment basis. Commercial credit management is a matter of great importance for most small and medium enterprises (SMEs), since it represents a significant portion of their assets. Commercial lending involves assuming some credit risk due to exposure to default. Thus, the management of trade credit and payment delays is strongly related to the liquidation and bankruptcy of enterprises. In this paper we study the relationship between trade credit management and the level of risk in SMEs. Despite its relevance for most SMEs, this problem has not been sufficiently analyzed in the existing literature. After a brief review of existing literature, we use a large database of enterprises to analyze data and propose a multivariate decision-tree model which aims at explaining the level of risk as a function of several variables, both of financial and non-financial nature. Decision trees replace the equation in parametric regression models with a set of rules. This feature is an important aid for the decision process of risk experts, as it allows them to reduce time and then the economic cost of their decisions.