CCP Credit Insurance & Risk Mitigation Flashcards
6 cards from real CCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CCP Credit Insurance & Risk Mitigation flashcards as text
A surety bond used in credit differs from trade credit insurance primarily because:
Answer: The surety has the right of subrogation and recovery from the principal (buyer) after paying a claim
In a surety arrangement the surety (bond issuer) can recover from the principal (the obligated party) after paying the obligee, unlike credit insurance where the insurer typically bears the loss.
What risk mitigation technique involves requiring a customer to pay for goods before or upon delivery, used when credit risk is unacceptable?
Answer: Cash in advance (CIA) or cash on delivery (COD)
CIA and COD eliminate credit exposure entirely by ensuring payment is received before or at the time the seller parts with goods.
Accounts receivable factoring transfers credit risk to the factor in which arrangement?
Answer: Non-recourse factoring
In non-recourse factoring the factor absorbs the credit risk of buyer non-payment due to insolvency, whereas recourse factoring leaves that risk with the seller.
Which credit risk mitigation tool requires the buyer's bank to guarantee payment to the seller upon presentation of compliant documents?
Answer: Documentary letter of credit (LC)
A documentary LC obligates the issuing bank to pay upon receipt of specified trade documents that conform to LC terms, shifting payment risk from the buyer to the bank.
When a credit manager uses a personal guarantee from a business owner, which risk is being mitigated?
Answer: The risk that a corporate entity lacks assets to satisfy a debt
A personal guarantee gives the creditor recourse to the owner's personal assets if the business entity cannot pay, addressing the limited-liability shield of incorporated buyers.
What is the main benefit of supply chain finance (reverse factoring) from a credit risk management perspective?
Answer: It leverages the buyer's strong credit rating to provide sellers with early payment at low discount rates
Reverse factoring uses the buyer's creditworthiness so the seller can access early payment at funding costs close to the buyer's borrowing rate, reducing both liquidity and credit risk for the seller.