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Credit risk is the risk of loss due to breach of contract, or, more generally, the risk of loss due to a credit event. Traditionally, this only applies to situations in which the holders of the debt or business owners are aware that the debtor or customer who made a loan or credit granted can be a default. For this reason, credit risk is sometimes also called default risk.

In business, most companies also carry credit risk, as most companies do not require cash payments compared to all products delivered and services provided. Instead, most companies deliver the product or service, then the customer's bill, stating often the terms of payment. Credit risk is the time between when the customer leaves with the product or service and when paid.

Managing this risk is important for any business but especially for small businesses or. For large companies, there may be a credit risk department whose job is to assess the financial health of their customers and extend credit (or not) accordingly, as a credit manager. For example, a new company which sells its products to customers with problems can seek to reduce credit risk by tightening payment terms "net 15" or actually selling fewer products on credit to retailers, or even cut off any credit and demand payment in advance. You can even reduce the existing credit limit and boost demand for credit to reassess the risk factors of credit. This will probably cause friction in relations with the client, but the end result will be better if the late payment from customers of its debt, especially if you default and you must save the account for collection, take them to court or file bankruptcy.

Credit risk is not really manageable for very small customers with only one or two. This makes these companies very vulnerable to defaults or delays in customer payments. Thus, the rationale for Credit Policy up strong.

Some things you can do to reduce the risk include:

 • Obtain a security team
A month • Offer credit this month
• Provide a ship to another credit
 • Get a guarantee
 • Get a deposit of 50% on every order

This is an excerpt from Michelle Dunn’s e-book “Effective Collections, a proactive approach to credit management” Called the Nations authority on collecting money, Michelle Dunn is an award winning author and columnist. She is the founder and CEO of the American Credit & Collections Association, one of the Top 5 women in Collections, and one of the Top 50 most influential collection professionals in her industry. Michelle has been quoted and featured in The Wall Street Journal, Smart Money Magazine, CNN & other National publications.

Visit http://www.michelledunn.com and http://www.credit-and-collections.com for more information.

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