Why counterparty risk matters to a first-time founder
Counterparty risk can turn a profitable contract into a cash crisis if the other side pays late, fails, or delivers nothing. Founders should consider both the chance of failure and the amount exposed. Deposits, limits, guarantees, diversification, and checks can reduce risk, but each has a cost.
Examples of counterparty risk
A supplier receives a €40,000 prepayment for equipment due in three months. If the supplier fails, the buyer could lose the prepayment and delay launch. Requiring a bank guarantee for €30,000 reduces the unsecured exposure to €10,000, although recovery still depends on the guarantee terms and guarantor.
Common misunderstanding
Counterparty risk is broader than credit risk from customers. It can arise when any party fails to pay, deliver, return collateral, or honour another obligation. A signed contract does not remove the risk; it creates legal rights that may still be slow, costly, or impossible to enforce.
When to use it
Assess it before giving credit, paying large deposits, concentrating purchases, or entering long-dated and cross-border deals. Check legal identity, finances, dependencies, and enforceability. Then set exposure limits or seek security. Regulated financial businesses may face prescribed methods, while ordinary companies can use a proportionate commercial assessment.