mark ngina’s sari-sari store has a sign that reads “your credit is good but i need cash.” what type of risk is mr. mark trying to avoid by putting up that sign?
What type of risk is Mr. Mark trying to avoid by putting up the sign stating “your credit is good but I need cash” at his sari-sari store?
Answer:
By displaying the sign “your credit is good but I need cash” at his sari-sari store, Mr. Mark is trying to avoid credit risk. Credit risk refers to the risk that a borrower will not repay a loan as agreed. In this case, Mr. Mark is essentially stating that while he acknowledges that his customers may have good credit, he prefers to receive cash payments rather than extending credit.
By requesting cash payments, Mr. Mark mitigates the risk of non-payment or delayed payment that comes with extending credit to customers. Cash transactions eliminate the uncertainty of whether the customer will fulfill their payment obligations, providing immediate liquidity for the store. This helps in maintaining steady cash flow and reduces the possibility of bad debts that could arise from offering credit to customers whose creditworthiness may not be fully known.