Credit Risk

 

Credit Risk

Credit risk is the “chance” or probability that one will lose what they have loaned to another, or will lose some form of financial reward for loaning money, if the debtor fails to meet their obligation to repay the debt.  In our industry, credit risk tends to be as straight forward as a debtor not paying their past due bills.

Credit Risk Management’s goal is to have a policy and practice in place that allows the extension of credit to customers or clients that will maximize revenue, and will minimize the probability that  a customer will default on the debt.  It’s a balancing act between getting as much sales, weighed against the risk of customer default.

There are 4 major ways to manage credit risk:

1  Avoid the risk.  Simply don’t extend credit.  Of course, that negates the first part of the goal, maximizing revenue.

2.  Control the risk.  Create a detailed plan to reduce risk, and carry it out, using your receivables department to monitor and manage the credit to your consumer.

3.  Accept Risk.   Some businesses say..”well it’s the cost of doing business” and simply accept a certain percentage of defaults.  These businesses tend to be companies pushing into new markets, ones with high profit margins, or companies at risk themselves and pushing an “all or nothing” agenda.

4.  Transfer the Risk.   This strategy can be expensive but effective.   Transferring risk can be done by using a factoring company to “sell” your receivables at a reduced face value for the benefit of immediate cash, or using an credit insurance company.

When the risk pendulum has swung to the wrong side, and it’s time to call in the debt collection attorneys, Marcadis Singer, PA stands ready to support you collecting from your debtors in Florida.

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