Understanding Credit Risk - Npower

Understanding Credit Risk – a guide for small and medium-sized businesses What is Credit Risk? What is Counterparty Risk? Amid increasing media coverage and Counterparty Risk refers to the danger confusion about credit and supply, a customer won’t meet its contractual npower has created this guide for small obligations, usually concerning payment. and medium sized businesses. An assessment is typically based on a customer’s credit score, which is a numerical It will help you to better understand expression of their creditworthiness, the Credit Risk, how it is calculated, what result of statistical analysis of their credit level of risk you present and how we can history and files. work with your business to mitigate it. Many credit reference agencies allow

Once Credit Risk has been calculated, businesses to check their credit reports online suppliers can make an informed decision and offer advice on how to improve credit about supplying a business. We assess all score. When assessing credit, we use scores potential new customers and continually provided by credit reference agencies. monitor the Credit Risk of all existing customers. Counterparty Risk may also be based on an assessment of statutory accounts, although Credit Risk refers to the danger that management accounts can also be taken your business won’t be able to meet its into consideration, which can provide a more contractual payment obligations. It is recent financial profile of your business. calculated by assessing: • Counterparty Risk and • Settlement Exposure. When assessing Counterparty Risk we consider: • External credit score. • Industry and economic trends. • Material Adverse Change – when a customer’s credit status materially declines. • Statutory Accounts. • Management Accounts. Counterparty Risk is assessed alongside Settlement Exposure. What is Settlement Exposure? Settlement Exposure is based on energy delivered, but not yet paid for. When assessing Settlement Exposure we consider: • volume • unit rates • payment terms and • deal duration. How it works Settlement exposure Debt Chase £ e r u s o p x Energy delivered E but not yet paid for Month 1 Month 2 Month 3 Month 4 Month 5 Time Bill Bill Bill Bill Termination & generated generated generated generated Disconnection for the next for the next for the next for the next 30 days 30 days 30 days 30 days usage usage usage usage Payment Payment Missed Missed received received Payment Payment Settlement Exposure typically consists of 30 until the debt is paid. Energy suppliers cannot days supply for monthly billed customers and cease delivering energy to your business 90 days supply for quarterly billed customers, immediately after a payment is missed. three days creating and sending the invoice Therefore, Settlement Exposure increases and 14 days payment (dependent upon as energy continues to be delivered, but not payment terms). By the time payment is paid for. received supply is already into month two for monthly billed and month four for quarterly billed, which is why Settlement Exposure never returns to zero. Questions we consider: When factoring in time taken to chase missed payments and potentially • What is the amount and value of disconnecting supply (six weeks), peak unpaid energy...

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