Credit risk

When a company, bank or lender extends credit, there is always a risk that the debtor or borrower will not be able to repay the loan. This risk is called credit risk and is something both large and small businesses should take seriously.

Factors affecting credit risk

Credit risk depends on several factors, primarily the size of the loan in relation to the borrower's financial situation. A high credit risk occurs when there is a large credit or a large loan combined with a low income. Conversely, a low credit risk will be present if the loan is small in relation to a high income.

The term of the loan can also affect the credit risk. Long maturities can increase risk, while shorter maturities can decrease it.

Debt factor

An important method for assessing credit risk is the calculation of the debt factor, which is the ratio between the debtor's total debt and annual income. The debt factor is calculated as follows:

• Total debt: 2,100,000 kr
• Annual income: 750.000 kr
• Debt factor: 2,100,000 / 750,000 = 2.8

A debt factor of 4 or above is often considered high, while a factor of 3.5 or below is considered acceptable for mortgages. Banks strive to keep the debt factor low in their portfolio to minimize credit risk.

Credit risk mitigation

To minimize credit risk, banks and lenders employ a number of strategies, including credit ratings and background checks. This involves reviewing financial statements, residence, marital status, number of children and existing loans.

In addition, ongoing monitoring of customer creditworthiness is important. This can include regular credit assessments to ensure that the customer's financial situation does not change negatively, such as registering in a debt register.

Use Qatchr to reduce credit risk

Qatchr is an online platform that helps businesses obtain credit information by offering comprehensive credit checks on both private and business customers. The platform gives you access to a wide range of relevant information, such as name and address changes, published financial statements and status changes(bankruptcy, death, etc.).

With Qatchr, you can not only do one-off checks, but also subscribe to ongoing updates on your customers' finances, helping to protect your business from potential losses.

Interested in trying Qatchr today? Contact us for a free, no-obligation demo.