All 22 Credit Control questions
More in Credit Control
How should credit limits be reviewed and adjusted over time? How does a credit policy document support consistent decisions? What external data sources inform credit decisions? How should credit be handled for export/international customers? How do you build or use a credit scoring model? What forms of security or risk mitigation can support extending credit? What KPIs measure credit control effectiveness? How do you manage credit risk for a concentrated customer base? How does credit control balance revenue growth with risk in practice? How do you set a credit policy's approval authority matrix?
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Accounts Payable & Receivable › Credit Control

How do deposits and prepayments reduce credit risk?

Intermediate

Answer

Requiring a deposit or full prepayment shifts risk to the customer by securing cash before delivery, useful for new, risky, or custom orders. It reduces exposure and improves cash flow, though it can deter customers, so it's targeted at higher-risk situations rather than applied universally.
Real-world example A custom-build order for a new customer requires a 50% deposit, cutting the exposure if they later default.

Common follow-ups: When are deposits appropriate? | What's the downside of demanding prepayment?

Payment Runs Collections & Bad Debts Credit Control
All 22 Credit Control questions