Long-term customer relationships reduce the cost of information collection and make it easier to screen out credit risks. Credit risk is the chance of suffering a loss as a result of borrower's failure to make loan payments or fulfil contractual commitments.
It typically refers to possibility that lender won't get the main and interest that is owed, which would disrupt cash flows and raise collection costs. Excess cash flows could be written to offer more protection against credit risk. A higher coupon rate, which generates more cash flows, can be used to reduce credit risk when it is present for a lender.
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