Credit risk
Credit risk is the chance that a customer or other counterparty will not pay what they owe, or will pay late. For a small UK business it usually comes from selling on invoice, offering payment terms, or relying on a small number of large customers.
Managing credit risk means choosing who you offer credit to, how much, and how you collect. Common tools are credit checks, credit limits, deposits or part‑payments, staged deliveries, and clear late‑payment steps. In your books, seriously overdue amounts may turn into bad debts; you can record an allowance for doubtful debts so that profit reflects likely losses.
Start with a simple credit policy
Write how you approve customers, set limits, take deposits, send reminders and when you pause supply. Keep it short so your team can follow it every time.
Warning signs that a customer’s credit risk is rising:
- More frequent late or part payments.
- Requests to extend payment terms or split invoices.
- Returned direct debits or bounced payments.
- Disputes about small items used to delay payment.
- Negative changes in credit reports or public filings.
- High sales concentration in one customer or sector.
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