How Black Swans and Grey Rhinos damage unsuspecting businesses

Severe defaults can often be linked to two phenomena: black swans and grey rhinos. Understanding these concepts is critical for businesses looking to safeguard themselves against serious unforeseen trade credit risks and to tailor their risk mitigation strategies to address both types of threats effectively.

What is a black swan business failure?

Coined by risk analyst, Nassim Nicholas Taleb, a black swan event refers to an unpredictable, unimaginable and improbable occurrence that has a massive impact. By definition, black swans are events that are almost impossible to anticipate due to their rarity. Examples in global finance include the 2008 financial crisis or the sudden collapse of a seemingly stable entity like the Lehman Brothers investment bank in 2008. 
 
In the context of trade credit, a black swan could be a sudden geopolitical upheaval, an unexpected bankruptcy of a major customer, or a natural disaster disrupting the supply chain. These events catch businesses off guard, making it difficult to anticipate their impact. 

What is a grey rhino event?

Grey rhinos are highly probable, high-impact events that can severely damage or even destroy a business, but are often ignored despite clear warning signs. The grey rhino concept was introduced by policy analyst and commentator, Michele Wucker. Unlike black swans, grey rhinos are visible and predictable but tend to be overlooked due to a range of reasons which could include complacency, denial, ignorance, or a focus on short-term gains. 
 
For instance, a customer’s deteriorating financial health could be a grey rhino. Examples include delayed payments, declining revenues, or negative industry trends. Businesses that fail to address these red flags until it’s too late, could be faced with defaults that could have been prevented. 

How to minimise the risk of black swans and grey rhinos

While black swans may be impossible to predict, building resilience—through financial reserves, contingency planning, flexible operations, or trade credit insurance—can help mitigate their impact. On the other hand, addressing grey rhinos requires proactivity: recognising risks early and taking decisive action to reduce vulnerabilities. By combining these approaches, businesses can create a robust framework for managing trade credit risks, ensuring long-term stability and success in an uncertain world.

The best way to minimise the risk of black swans or grey rhinos events is to take proactive risk management. Credit insurance is the first step to peace of mind, because it provides cover against the risk of customers not being able to pay their debts. 

Often, the triggers for these defaults are a combination of events showing that no company is too big to fail and that even the most experienced credit manager can be caught by an unexpected insolvency. In addition, they show that these types of defaults require special expertise and are reason to take ‘special’ measures.

How credit insurance can help minimise sudden default risks

In the dynamic world of domestic and international trade any business can be hit by sudden defaults that impact its financial health or threaten its survival. But timely recognition, sound crisis management and strong credit management policies, including appropriate levels of trade credit insurance, can help reduce or even prevent existential dangers.

Most businesses don’t have the in-house resources to continually monitor the financial health of their current and potential customers, so third party help can be hugely valuable. A good credit insurance policy will give businesses access to industry experts that can help them identify fragile customers before they default. It is always wise to assess these companies before doing business with them anyway.  

Role and added value of Atradius SRM 

With our Special Risk Management (SRM) service, our credit management expertise goes a step further. For example, our team of international specialists in underwriting, legal affairs, claims and recoveries help you monitor the risk environment and recover outstanding debt. They are ready to spring into action as soon as your insured customer shows signs of financial deterioration.  

For suppliers, our SRM service takes away a big headache when faced with late paying or defaulting customers. Whether it’s about restructuring the debt or developing an optimal exit strategy, our dedicated team can help you achieve the very best outcome in difficult circumstances. Not only they have the knowledge and foresight to anticipate and mitigate risks – but can also help finding new business opportunities. After all, thanks to the close proximity to our customers and markets we can not only help managing risks but also enable safe trade. 

It is how we respond and interact in such cases that makes the difference to your business.

5 Tips to recognise and reduce risks of sudden defaults 

1. Early detection and monitoring of warning signs 
Implement risk scoring systems and stay vigilant for indicators of financial distress among your customers. Warning signs may include delayed payments, requests for extended credit terms, frequent changes in key management personnel, and negative news reports about the company or its industry. 
Use data analytics and credit monitoring tools to track these signs in real time. We can support you with this. By intervening proactively, you can mitigate the impact and prevent further complications. 

2. Effective communication and strong payment terms 
Establish clear and transparent communication between you and your customers to foster a better understanding of expectations and avert default situations by addressing issues before they escalate. Additionally, implement clear and enforceable payment terms to reduce default risks. 
Consider advance payments for high-risk customers, early payment discounts to incentivise timely payments, and late payment penalties to discourage delinquency. Regularly review and update these terms based on customer performance and market conditions. 

3. Diversify your customer portfolio
Relying heavily on a few key customers increases your exposure to defaults. Spread your risk by diversifying your customer base across different regions, industries, and company sizes. A well-balanced portfolio can cushion the impact of a single customer’s default. 

4.  Perform regular credit assessments
Conduct thorough credit checks before onboarding new customers and periodically review the financial health of existing ones. Leverage financial statements, credit reports, and industry benchmarks to evaluate: 

• Debt-to-equity ratios 
• Cash flow trends 
• Credit ratings 

We can support you in this process and offer valuable insights and protection with your new customers. 

5.  Leverage trade credit insurance
Consider obtaining trade credit insurance to cover the risk of customers not being able to pay their debts. This provides coverage for unpaid invoices due to customer insolvency, access to expert risk assessment tools and global market intelligence, and peace of mind, enabling you to focus on growth. Trade credit insurance acts as a safety net, helping manage the financial impact of sudden defaults.

Get in touch today to explore our tailored solutions that protect your cash flow and keep you on track for continued growth.