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Credit risks

Credit risk is the potential for loss due to non-payment or overdue payment by the customer of its financial obligations. Both the lender (bank) and the lender (enterprise) are exposed to credit risk. Credit risk is understood to be the possibility that the company will not be able to repay its debts on time and in full.

Credit risk for banks consists of the amounts of debt of borrowers on bank loans, as well as from debt of clients on other transactions.

Companies may also be exposed to a certain credit risk in their transactions with the bank. If a company has many free funds that it places on a bank deposit, the company will lose most of its deposits if there is a risk of liquidation of the bank. There is also an interest risk when placing too much deposit in one bank, for this bank, aware that the company is a regular depositor, may not offer the same high interest rate on a new deposit that the company could receive from another bank.

Exposure to credit risk exists throughout the credit period. In the case of commercial credit, the risk arises from the moment of sale and remains until the moment of receipt of payment under the transaction. In the case of a bank loan, exposure to credit risk occurs at all times prior to the deadline for the return of the loan. Credit Risk Amount - the amount that can be lost in case of non-payment or late payment of arrears. The maximum potential loss is the full amount of the debt in case of non-payment by the customer, Overdue payments do not result in direct losses, but are indirect losses, which are interest costs (due to the need to finance the debtors for a longer time than necessary) or loss of interest that could be obtained if the money were returned earlier and placed on deposit. Although credit risk is high for loans to companies in difficulty, banks are still forced to provide these loans so as not to lose possible profits.

When the economy is at its lowest point of decline, credit risk when deciding to lend is significantly less than in the case of an economic boom. That 's because if a company makes profits during a recession period, it 's likely that in the long run, when economic conditions improve, it will survive and thrive.

Companies that exceed normal sales have a high risk. Excessive sales (overtrending) occur when the campaign is very high in evaluating its resources and trying to support too much business activity with insufficient sources of funding. An enterprise that is increasingly dependent on short-term loans, delaying the timing of payments to suppliers on tax bills, could eventually experience a cash flow crisis.

Companies whose costs are largely constant are able to benefit from a significant increase in profits while increasing sales, but they are vulnerable to any decline in sales. In this case, revenues will be lower and costs will remain the same. As a result, profits and cash receipts will decline. It can be said that companies that have high fixed costs and operate in a market with variable sales have a high degree of credit risk. Companies with excessive investment obligations have high credit risk.