Credit risks

Depending on the nature of the business, accounts receivable represent a substantial proportion of business assets. They frequently run above 40 percent. Thus, they are no less important than fixed assets, which are normally covered under a property insurance policy. Their impairment, caused by insolvency or payment delay of a client, is in a magnitude comparable to physical damage events, such as a fire for instance. Moreover, the probability and frequency of client default is much higher than probability and frequency of experiencing a fire, even though managers might think that certain clients are default-resistant. Statistics also teach us that some larger company defaults also trigger an illiquidity chain-reaction through a resulting domino effect. Every credit exposure therefore calls for active management.

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