Trade Finance Advice

credit risk

Credit risk refers to the risk that a borrower will default on any type of debt by failing to make required payments. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial and can arise in a number of circumstances. For example: A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan A company is unable to repay asset-secured fixed or floating charge debt A business or consumer does not pay a trade invoice when due A business does not pay an employee’s earned wages when due A business or government bond issuer does not make a payment on a coupon or principal payment when due An insolvent insurance company does not pay a policy obligation An insolvent bank won’t return funds to a depositor A government grants bankruptcy protection to an insolvent consumer or business To reduce the lender’s credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance or seek security or guarantees of third parties. In general, the higher the risk, the higher will be the interest rate that the debtor will be asked to pay on the debt.

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