Glossary - Credit Risk
Credit risk refers to the potential that a borrower may default on any type of debt by failing to make required payments. For lenders and investors, it is the risk of loss arising from a borrower who does not make payments as promised. This risk is inherently tied to the borrower's creditworthiness, which is often assessed through credit scores or ratings.
Also known as
- Default Risk
- Credit Default Risk
Use cases examples
- Loan Agreement: The Lender has conducted a thorough credit risk assessment of the Borrower before the execution of this agreement to ascertain the likelihood of timely repayments.
- Bond Prospectus: The issuer's credit risk is rated 'BBB' by S&P, indicating a medium default risk associated with this bond investment.
Considerations for investors
- Assess the credit risk of potential investments through due diligence to minimize potential losses.
- Diversify investment portfolio to spread and manage credit risk exposure across different sectors and credit profiles.
Considerations for founders
- Understand how credit risk affects the cost of borrowing, with higher risks leading to higher interest rates.
- Work on improving the company's creditworthiness to reduce credit risk and improve terms of financing.
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