What is Business Credit Risk?
The way in which a company conducts business and interacts with its customers and creditors has a direct bearing on its professional image. The way that a company handles its business matters involving finances and debts is a reflection of its ability to properly manage debt, pay its bills and use credit wisely. The business’ behavior is what creditors use to determine a corporation’s business credit risk and whether the company is financially worthy of taking a risk by issuing it credit.
Vendors and creditors rely on the financial solvency of a business to determine its creditworthiness. They evaluate past financial records, current bank statements, prior payment history to other vendors and credit reports. This information is compiled and used as a tracking mechanism to notate any patterns or trends that noticeably stand out. They look for inconsistencies and fluctuations and take note of extenuating circumstances surrounding the business’ financial health. The business credit risk is assuming that all of these factors together will help determine whether credit should be extended to the corporation.
In determining business credit risk, the factors that are considered include how long the business has been in existence, its annual sales, its credit report and the skills and experience of its leaders. The date the business started helps in determining the business’ likelihood of longevity and soundness. The longer the business has been in operation, the likelier it is that it will receive credit.
The business leaders' skills and experience are used for the purpose of assigning financial risks to the organization in case the business does default. The leaders would be held responsible for the incurred debt. The business' annual sales helps determine whether the business credit risk is worth the transaction and whether it’s likely to be repaid based on the amount of income that the business sees. The company’s credit file is an overview of the financial soundness of the corporation. It also shows repayment history on other loans and whether any other default situations have occurred with the company.
When there is risk involved, there is often a denial to credit requests. Even after a business has received a credit extension, however, the borrower can still default on the loan and fail to make any payments as contractually agreed. This is known as a default risk, and any future chances of securing a business loan are negatively affected by this behavior. The business credit risk of the corporation is affected severely, and the credit activity of the company can stay on its financial history for five to seven years.
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