46 3 Reduction of External Funding Needs
First, the risk category will be determined on the basis of the customer’s past
payment performance, financial status, field of activity, size, and home country.
The firm may also rely on external credit-rating reports (see Volume I).
Second, the payment behaviour will be monitored. The risk category can be
updated on the basis of changes in the estimated payment behaviour and on the
basis of the customer’s historical payment behaviour. For example, the firm
should not extend more credit but sell only against a cash payment where the cus-
tomer has exceeded its credit limit (“red light”). The firm should be more careful
where a customer is close to its credit limit (“yellow light”). An adverse change in
the risk profile of a customer can result in a race to collect payment or obtain more
collateral.
Integration of credit management. Credit management is part of the firm’s
business model. The business model of the firm consists of a distribution model
and a sales cycle.
The firm can sell directly to end-users or use various kinds of commercial
agents or distributors. Distributorship contracts and commercial agency agree-
ments are the most frequently used means for organising the distribution of goods
in a foreign country.
A distributor can be controlled by the firm itself (subsidiary) or be independent (such as an
independent sole distributor), in which case agency problems must be mitigated in other
ways. Distributorship contracts are largely standardised in commercial practice.^95
A commercial agent means a self-employed intermediary who has continuing authority
either to negotiate the sale of goods on behalf of the firm (the principal), or to negotiate and
conclude such transactions on behalf of and in the name of the firm.^96 Self-employed com-
mercial agents are typically protected by mandatory provisions of law, many of which are
based on the Directive on commercial agents.^97 Even commercial agency contracts are
largely standardised in commercial practice in Europe.^98
A del credere agent is one who guarantees to his principal that the third party buying the
goods will perform his contractual obligations to the principal.^99
The credit cycle starts with the conclusion of a sales contract, continues with pro-
duction and distribution, and ends with credit management. The credit cycle of the
firm consists of:
- the sales process (the sales process is the most important stage in credit man-
agement; the sales process ends when credit is outstanding); - the collection process (the collection process means that accounts receivable
are managed for the purpose of collection);
(^95) See, for example, the ICC Model Distributorship Contract.
(^96) See section 1(2) of Directive 86/653/EEC (Directive on commercial agents).
(^97) Directive 86/653/EEC on the coordination of the laws of the Member States relating to
self-employed commercial agents.
(^98) See, for example, the ICC Model Commercial Agency Contract and the UNIDROIT
Principles of International Commercial Contracts.
(^99) For German law, see § 394 HGB.