What it means
In an ordinary agency, the agent finds buyers and passes the orders to the seller, the principal. If a buyer never pays, the principal absorbs the loss and the agent keeps the commission.
A del credere agent is different because they promise to make good any amount a customer fails to pay. The extra commission, known as the del credere commission, rewards the agent for carrying the credit risk.
This is attractive to principals, especially those selling in distant or unfamiliar markets where they cannot easily judge a customer's creditworthiness. The agent usually knows the local buyers and is better placed to decide whom to trust.
The scope of the guarantee matters. Under many legal systems the agent is liable only if the customer is unable to pay, such as through insolvency, and is not liable if the customer simply disputes the goods.
The contract should state exactly when the agent must pay, how quickly and whether there is a cap. For the agent, the arrangement turns a sales role into one that also carries financial risk, so the agent should price it carefully.
Strong credit checks, credit limits and prompt follow-up of late accounts are essential. An agent who accepts every customer in order to win more commission can easily lose more than they earn.
For the principal, a del credere arrangement can reduce bad debts and the cost of credit control, but it does not remove all risk. The principal still depends on the agent's own financial strength, because a guarantee is only as good as the person who gives it.
Principals often check the agent's accounts as they would for any other counterparty. Accounting treatment follows the contract.
The agent records the extra commission as income and sets aside a provision for the bad debts it expects to cover, while the principal records the sale and a receivable that is effectively backed by the agent. Both sides should agree how and when claims are notified, so that no one is surprised at the year end.
In practice
Real-world examples.
Example
A wine producer in France appoints an agent in Singapore to sell to restaurants. The agent agrees to guarantee payment from the restaurants in return for an extra 2% commission, so the producer avoids the cost of checking each new customer. The agent also pays the producer on time even when a restaurant is slow to settle its bill.
Example
A machinery maker uses a del credere agent to sell to small contractors in a region it does not know well. The agent's local knowledge helps decide which contractors can be trusted with credit.
Example
A fashion label sells through an agent who accepts credit risk on boutique customers. After two boutiques close owing money, the agent tightens its credit limits and asks for deposits. The change reduces its losses the following year, and the principal is happy to keep the agent on the same terms.
Formula
Calculation
Agent's net result = (basic commission + del credere commission) x sales - bad debts paid by the agent
An agent sells $400,000 of goods in a year. The basic commission is 5%, which is $20,000, and the del credere commission is 2%, which is $8,000. Total commission is $20,000 + $8,000 = $28,000. One customer defaults on $15,000 and the agent pays it to the principal. The agent's net result is $28,000 - $15,000 = $13,000.Case study
Seen in the real world.
Calloway Spice Traders is an illustrative, fictional exporter that sold through a network of local agents. In one region, several buyers failed to pay, and the company wrote off $60,000 of invoices in a single year.
The finance director moved the region to a del credere arrangement, paying the agent an extra 2.5% commission on sales. The agent began checking each buyer's payment history and refused to deal with two customers who had a poor record. The agent also asked larger customers for bank references before agreeing a credit limit.
Calloway is a made-up company, so the numbers are for teaching only. In the next year, bad debts in the region fell to $8,000, which the agent absorbed, and the extra commission cost less than the losses it removed. The finance director kept the arrangement for the following year and extended it to a second region.
Watch out
Common mistakes.
- Assuming the principal has no credit risk at all, when the guarantee depends on the agent's own ability to pay.
- Accepting the extra commission without pricing the real cost of defaults, which can exceed the commission.
- Leaving the scope of the guarantee vague, so that nobody knows when the agent must pay.
Questions
People also ask.
What does del credere mean?
It is an Italian phrase meaning of belief or trust, and it describes the agent's trust in, and guarantee of, the customer's payment.
Is a del credere agent the same as a guarantor?
Similar in effect, but the agent has an ongoing role in finding customers, and the guarantee is part of the agency agreement, usually in return for the extra commission.
Does the principal still need credit control?
Yes, although the agent shares the burden, the principal should monitor the agent's finances and the overall pattern of late payments.
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