Credit Risk Management Glossary
Credit Risk Management Terms & Definitions
In the credit risk management glossary below you will find definitions for many of the most common terms:
- Credit – the exchange of good or services for a promise of payment sometime in the future.
- Risk – the probability of non-payment usually due to external factors
- Credit Sales – revenues generated through the extension of credit to your customers.
- Credit Management – the function of managing the risk of credit sales within an organization.
- Credit Policy – the outline of the direction that a firm’s senior management has chosen for the credit granting process.
- Terms of Sale – Conditions under which credit sales are made. Includes, but not limited to time to pay, the interest rate and type to be charged, and the authority of warranty approvals
- Credit and Collection Procedures – A manual that simplifies training through provision of information on how to carry out certain credit functions. Used during audits to explain the purpose, controls, and processes used to manage the department
- 30 Day or Commercial Accounts – these types of accounts require payment in full within thirty days and are most common; however, other examples include weekly, bi-weekly, and monthly.
- Revolving Accounts – allow for continuous credit, unless payment is late or the credit limit reached. Examples include Visa, MasterCard, and operating lines of credit.
- Installment Accounts – credit agreements that require monthly payments over a fixed period.
- Demand Loan – loans that require scheduled payments, or payment in full on demand (usually with interest), depending upon the agreement
- Mortgage – long-term lending of funds from one party to another, with the expectation of repayment and interest, secured by real estate.
- Credit Investigation – the analysis of an applicant’s past behaviors as it relates to the repayment of other credit agreements. Includes examination of credit bureau information, as well as discussions with current trade creditors
- Credit Bureau – an automated information repository of a debtors payment history and current repayment patterns with other creditors. Examples include Experian, Trans Union, Equifax, and many others.
- Credit Application – a questionnaire, filled out by potential customers, that asks for information about the customer which will enable a credit investigation to be completed. (See our page Credit Application Form Template)
- Personal Guarantee – An agreement from an individual, that if the primary debtor is unable to pay, the individual will guarantee repayment
- Legal Entity – can enter into legal agreements, to enter into repayment arrangements, and sue or be sued. Typical forms of legal entities include: corporations, limited companies, partnerships, associations, and proprietorships
- Trade Reference – an existing supplier of goods or services to your customer, used to determine payment habits
- Financial Statement Analysis – review of a company’s financial statement can provide details on financial capacity, capitalization, as well as character and conditions
- Commercial Credit Report – a comprehensive report of a companies credit history. Includes: active creditors, repayment history, banking details, public records, risk analysis, and special events. To evaluate risk, Dun and Bradstreet Canada helps companies to obtain information about other Canadian businesses and each business record is given a DUNS number, which uniquely identifies the business.
- Credit Group – Exchange of credit information by Industry specific members.
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