Final answer:
The cost incurred by a business when a customer fails to pay their credit debt is known as uncollectible accounts or bad debt. This is factored into the business's financial planning, but an unexpected increase in defaults can cause significant financial strain.
Step-by-step explanation:
The cost that arises when a business is unable to collect from a credit customer is known as the expense associated with uncollectible accounts or bad debt. A well-run bank, or any business offering credit, expects that some loans or credit transactions may not be repaid in full. They account for this risk by including a calculated factor for non-repayment in their financial planning and the valuation of their loans on the balance sheet.
However, if a business encounters a higher rate of defaults than anticipated, which can occur during economic downturns, significant financial strain can result. For example, if the Safe and Secure Bank's loans unexpectedly drop in value from $5 million to $3 million due to a rise in defaults, its assets and net worth would be negatively impacted, leading potentially to insolvency for the business if corrective actions are not taken.