Final answer:
The largest risk for a business selling on account is the risk of high loan defaults, affecting liquidity and profitability due to the asset-liability mismatch and interest rate risk.
Step-by-step explanation:
The largest risk of a business selling its products or services on account is the risk of an unexpectedly high level of loan defaults. This can be a critical issue for financial institutions like banks, which deal with the asset-liability time mismatch. Banks have liabilities in the form of customer deposits that can be withdrawn quickly, whereas their assets, such as loans and bonds, are repaid over a longer period. If loan defaults are higher than anticipated, it can cause liquidity problems. Moreover, if a bank faces rising interest rates but does not adjust the interest rates it offers on deposits, it may lose depositors to competitors. Conversely, if it increases the rates paid on deposits, the bank might pay out more in interest than it is receiving from loans made at lower rates, leading to profitability issues.
This scenario highlights the importance of managing credit risk and interest rate risk, which if not addressed properly can lead to a financial crisis for the bank. This is also a concern for businesses selling on credit, as they face the risk of customers not paying their debts, thus affecting cash flows and overall financial stability.