Credit risk management and how this can benefit business in a ...

Access to credit has been a key part of businesses since medieval times. In medieval Europe, the societies of England and Italy used ?forward contracts? in order to repay cash loans in wool. Investment is an important part of any business and many owners dont have the cash required to capitalize on a venture or underwrite new products. However, there is some risk involved in providing credit. Sometimes an account is paid late or goes into default. In order to reduce the risk involved, business owners need to consider credit risk management before they offer credit to clients or partners.

There is a very real risk to the process of offering credit. With todays economy, any small mistake can prove costly. For example, if ABC Company manufactures computer chips in the United States and is contacted by XYZ Ltd from India who wants to order ten million dollars worth for a new project? While this is a good deal for the ABC Company, they also need to be careful since they dont know a lot about XYZ Ltd. There is no history between the companies and there is no way to tell if XYZ Ltd is going to honor their contract or have the means to repay the bill.

This means that the ABC Company has two options. First, they can require cash payment up front with the balance due upon delivery. In this type of a transaction, the client will lose their deposit if they are unable to repay the balance while ABC will be able to sell the computer chips to someone else. However, this type of transaction is actually rare in the business world today. Today, credit is often the chosen method because of its specific benefits. After purchasing the chips, XYZ Ltd is going to increase their value by selling a finished product and earning a profit. XYZ Ltd will use these profits to repay the ABC Company rather than providing available cash up front.

Making an Informed Decision

Often the ABC Company will be open to providing credit to XYZ Ltd. Often there is going to be some kind of down payment along with terms of either ?net 30? or ?net 60? that are due upon delivery of the computer chips. As the creditor, ABC Company often wont have an interest on the account according to the contract terms of 30 or 60 days, but there may be interest attached to late payments.

So how can ABC Company be sure they are making a wide decision to extend credit to XYZ Ltd? Getting an accounts credit report is the best way to determine credit risk management. A credit report for a business will often include financial and payment-history information that is often unavailable. This report is a vital part of making wise business decisions.

The business credit report is useful because it offers accurate and up-to-date information on a companys credit history as well as background information on all major shareholders, top management, balance sheets and bank information. The credit report provides everything a business needs in order to completely understand the strength of a potential financial account.

All businesses require credit in order to operate and most companies do what they can to have a good rating. This makes it easier to gain credit from vendors. This process allows both businesses to have success. ABC Company has the reassurance that they are providing credit to a client that is trustworthy while XYZ Ltd is getting the credit it needs because of its good credit rating.

Learn more about Solvency or Credit Risk Management

Source: http://cannabismrsacure.letstalkaboutpot.com/credit-risk-management-and-how-this-can-benefit-business-in-a-number-of-ways/

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