What is Credit Risk?

Credit risk is the risk of loss due to a default on a contract, or more generally, the risk of loss due to some “credit event”. Traditionally, this only applied to situations where debt holders or business owners were concerned that the debtor or customer to whom they made a loan or extended credit might default on a payment. For that reason, credit risk is sometimes also called default risk.

In business, almost all companies carry some credit risk, because most companies do not demand up front cash payments for all products delivered and services rendered. Instead, most companies deliver the product or service, and then bill the customer, often specifying their terms of payment. Credit risk is the time in between when the customer leaves with the product or service and when you get paid.

This is an excerpt from my new e-book Effective Collections, a proactive approach to credit management.