How to Manage Credit Risk

by Greg DePersio

1 min read

Credit risk refers to the risk that a client may not pay you for a product or service rendered. This risk can apply to deals with individual clients and business clients. For example, if a food supplier delivers food to a restaurant but allows the restaurant to pay the invoice later, the food supplier takes a risk that the restaurant may not pay. Similarly, if a contractor remodels a client’s home but receives payment after the project is complete, the contractor also assumes a risk of nonpayment. It’s important to manage your small business’s credit risk effectively. If clients don’t pay their invoices, your cash flow may dwindle, making it difficult to stay on top of other obligations. Additionally, accounting for bad debts due to uncollectible accounts can be time-consuming. To mitigate the risks of dealing with customers with poor credit, you may want to do a credit risk analysis of your clients. When dealing with business-to-business clients, you may want to check the company’s rating with the Better Business Bureau and look at any online reviews you can find. For more extensive analysis, you can access business credit reports from Dun & Bradstreet. Additionally, you may want to consider credit insurance. Offered by private insurers, credit policies help to cover losses due to unpaid invoices. Organizations such as Export Development Canada also offer information on credit insurance related to exporting goods.

References & Resources

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