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Credit Risk
Every decision made by the credit department relating to customer credit limits and payment terms is an effort to balance the company's objectives relating to sales and profits against potential risk of slow payment or non-payment. Credit risk, sometimes referred to as payment risk, involves the risk that a customer to which credit terms have been extended either:
- Will not or does not pay the creditor or
- Will not or cannot pay on time
One of the more difficult aspects of credit decision making involves the fact that usually no readily acceptable alternatives to denying credit or holding orders exists. The credit decision is either to release or to hold, or alternatively to approve and grant credit or deny open account terms. The fact that there are no readily acceptable alternatives when a negative credit decision is made puts more pressure on the credit decision-maker to (1) think carefully about any negative credit decision (2) look for ways to say yes rather than reasons to say no, and (3) to listen carefully and objectively to input provided by customers, applicants, salespeople, senior management and others before making a final negative decision.
© 2011. Michael C. Dennis. All Rights Reserved.