Define: Credit Risk

Business, Legal & Accounting Glossary

Definition: Credit Risk


Full Definition of Credit Risk

Credit risk is the risk of loss due to a counterparty defaulting on a contract, or more generally the risk of loss due to some “credit event”. Traditionally this applied to bonds where debt holders were concerned that the counterparty to whom they’ve made a loan might default on payment (coupon or principal). For that reason, credit risk is sometimes also called default risk.

In business, almost all companies carry some credit risk, because most companies do not demand up-front cash payment for all products delivered and services rendered. Instead, most companies deliver the product or service, and then bill the customer, often specifying net 30 payment, in which payment is supposed to be completed on the 30th day after delivery. Credit risk is carried during that time.


Managing credit risk is important for any company, and significant resources are devoted to the task by large companies with many customers (whether they be businesses or individuals). For large companies, there may even be a credit risk department whose job it is to assess the financial health of their customers and extend credit (or not) accordingly. For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by tightening payment terms to “net 15”, or by actually selling less product on credit to the retailer, or even cutting off credit entirely, and demanding payment in advance. These strategies will probably impact the distributor’s potential sales, and cause friction in the relationship with the retailer, but the distributor will end up better off if the retailer is late paying its bills, or, especially, if it defaults and declares bankruptcy.
Credit risk is not really manageable for very small companies (i.e. those with only one or two customers). This makes these companies very vulnerable to defaults, or even payment delays by their customers.

The use of a collection agency is not really a tool to manage credit risk; rather, it is an extreme measure closer to a write-down in that the creditor expects a below-agreed return after the collection agency takes its share (if it is able to get anything at all).


Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Credit Risk. Payroll & Accounting Heaven Ltd. April 07, 2020
Chicago Manual of Style (CMS):
Credit Risk. Payroll & Accounting Heaven Ltd. (accessed: April 07, 2020).
American Psychological Association (APA):
Credit Risk. Retrieved April 07, 2020, from website:

Definition Sources

Definitions for Credit Risk are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 13th February, 2020