Here’s why your credit risk should matter to you

Credit risk measures the likelihood of incurring a loss if one party to a financial transaction fails to follow through on their obligations.

Credit risk often comes up when in relation lending and how likely an individual or business entity is to pay back money they’ve borrowed. Banks and lenders assume a certain amount of risk when making loans based on the credit profile of the borrower.


Character is an assessment of a borrower’s background. This can include their level of education, experience operating a business and overall reputation. Lenders may also look at someone’s personal credit history to gauge their character and measure credit risk when granting business loans.

Cash Flow

Cash flow represents the movement of cash in and out of a business. In lending situations, cash flow is often synonymous with the ability to repay what you borrow. Lenders can use business revenues, expenses and cash flow to determine credit risk.


Capital is a measure of how much skin you have in the game, so to speak, in terms of how much money you’ve personally invested in your business. The more money you have tied up in a business venture, the less likely you may be to default on a loan and jeopardize the business.


Conditions refers to the business’ overall market. For example, lenders will look at how much demand there is for the products or services your business offers as well as your competitors. Your experience with operating this type of business can also come into play.


Collateral is used to mitigate credit risk by requiring you to offer some type of security against a loan. For example, if you’re getting a loan to buy equipment, the equipment itself could serve as collateral. If you default on the loan, the lender can repossess the equipment and sell it to try and recoup some of its losses.