A company’s professional image is related to how it handles its finances and interacts with clients and creditors. Creditors consider factors such as financial records, credit reports, and the experience of business leaders when determining credit risk. Defaulting on a loan negatively affects a company’s trade credit risk and credit activity can remain on its financial record for five to seven years.
The way in which a company conducts business and interacts with its clients and creditors is directly related to its professional image. The way a business handles its business affairs involving finance and debt is a reflection of its ability to properly manage debt, pay its bills, and use credit wisely. Business performance is what creditors use to determine a corporation’s trade credit risk and whether the company is financially worth taking the risk by issuing credit to it.
Suppliers and creditors rely on the financial solvency of a company to determine its solvency. They review past financial records, current bank statements, past payment history with other vendors, and credit reports. This information is compiled and used as a tracking mechanism to note any noticeable patterns or trends. They look for inconsistencies and fluctuations and take note of extenuating circumstances surrounding the financial health of the business. Business credit risk assumes that all of these factors together will help determine whether credit should be extended to the corporation.
When determining business credit risk, factors considered include how long the business has been in existence, its annual sales, its credit report, and the skills and experience of its leaders. The date the business started helps determine the likelihood of longevity and strength of the business. The longer the business has been in operation, the more likely it is to receive credit.
The skills and experience of business leaders are used in order to allocate financial risks to the organization in case the business defaults. The leaders would be responsible for the debt incurred. The company’s annual sales help determine whether the company’s credit risk is worth the transaction and whether it is likely to be repaid based on the amount of revenue the company sees. The company’s credit file is a general description of the financial strength of the corporation. It also shows the payment history of other loans and if there have been any other defaults with the company.
When there are risks involved, credit applications are often denied. However, even after a business has received an extension of credit, the borrower may default on the loan and not make any payments as contractually agreed. This is known as default risk, and any future chance of obtaining a business loan is negatively affected by this behavior. The corporation’s trade credit risk is severely affected, and the company’s credit activity may remain on its financial record for five to seven years.
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