top
»
risk
»
business risks
»
investing risk
»
credit risk
What is Credit Risk? John Spacey, updated on
Credit risk is a potential that an organization, business or person is unable or unwilling to pay a debt. Typically, investments with a higher credit risk pay a higher rate of interest. Credit risk fluctuates with time as the financial condition of a debtor changes. Credit risk can result in a delayed flow of payments, loss of principle and in many cases results in legal costs as creditors may need to launch legal action in an attempt to recoup losses. The following are a few examples of credit risk.
1. BondsBonds issued by governments, organizations and businesses are typically rated for their credit risk by organizations known as Bond Rating Agencies. The interest paid on a bond depends upon these ratings and the appetite for credit risk in financial markets.2. LoansLoans to organizations, businesses and individuals include a wide variety of financial products such as mortgages, lines of credit and credit cards. Loans may be secured or unsecured with a secured loan being based on the value of an asset that will be sold to pay the debt under certain conditions. Financial institutions that make loans may use a variety of credit rating agencies to calculate credit risk. Interest rates are usually based on such risks. For example, unsecured loans often have a higher interest rate than secured loans.3. Accounts ReceivableCompanies that sell things typically have customers that owe them money. These debts are known as accounts receivables. Customers have incentive to keep their money as long as possible and often try to delay payments. Customers who are in poor financial condition may delay payments for long periods of time even when legal actions are taken to recover funds. In some cases, customers will ultimately fail to pay due to bankruptcy or as the result of some dispute. According to accounting rules, companies must regularly judge the credit risk associated with their accounts receivable and recognize losses for doubtful accounts.RiskThis is the complete list of articles we have written about risk.If you enjoyed this page, please consider bookmarking Simplicable.
Business RisksA list of common business risks.Risk TreatmentThe five things that can be done about risk.Risk Management Effectiveness
A metric for measuring risk management.
Positive RiskThe potential that you'll achieve too much of a good thing.Dread Risk
Any risk that people have a strong aversion too.
Risk TakingThe definition of risk taking with examples.Risk ExamplesA list of risk examples by type.Risk Probability vs Risk ImpactThe two main factors in modeling a risk.Calculated RiskA definition of calculated risk with an example.Relative Risk
How to calculate relative risk with examples.
Economic TheoriesA list of economic theories that are particularly useful for business.Adverse Selection
The tendency for people at high risk to buy insurance.
Economic Advantage
A list of economic positions or capabilities that allow you to outperform in a particular industry.
Knowledge WorkA definition of knowledge work with examples.ProductionA definition of production with examples.Post Scarcity
An overview of post-scarcity.
Economic InfrastructureThe common types of economic infrastructure.
Business Competition
The common types of business competition.
InefficiencyThe common types of inefficiency.Supply Examples
An overview of supply with common examples.
TrendingThe most popular articles on Simplicable in the past day.New ArticlesRecent posts or updates on Simplicable. Site Map
Business
Business Analysis Business Risks Change Management Competency Management Compliance Crisis Management Economics Failure Types Goals Governance Information Technology Knowledge Management Management Metrics Objectives Operations Management Organizational Culture Planning Project Management Quality Assurance Risk Risk Analysis More ...
© 2010-2024 Simplicable. All Rights Reserved. Reproduction of materials found on this site, in any form, without explicit permission is prohibited. View credits & copyrights or citation information for this page. |