Credit Risk Basics
Overview
Credit risk is the chance a customer or counterparty won’t pay. Managing it balances growth with the cost of bad debt and cash delays.
When to Use
- Credit policy design
- Large deal credit approval
- AR risk segmentation
- Reseller or partner credit exposure
Core Practices
- Define credit limits and approval authority
- Assess new customers with proportionate diligence
- Monitor concentration in top accounts
- Escalate past-due systematically
- Reserve for expected credit losses appropriately
Principles
- Revenue to a non-paying customer is not success
- Terms are a pricing and risk tool
- Early warning beats late legal action
- Sales and finance need shared incentives on collectible revenue
Verification
- Credit policy is documented and applied
- Large exposures are visible
- Collections escalation path is clear