What is an example of a counterparty?

A counterparty is an individual, company, or organization involved in a business or financial transaction with another party. For example, if a bank provides a loan to a manufacturing company, the manufacturing company is the counterparty to the bank in that lending relationship.

Other common examples include:

• Supplier: A company purchasing raw materials from a supplier has the supplier as a counterparty.
• Customer: A business selling goods on credit treats the customer as a counterparty.
• Borrower: A bank or NBFC considers a borrower its counterparty.
• Distributor: A manufacturer working with a distributor has the distributor as a counterparty.
• Business partner: Two companies entering into a joint venture are counterparties to each other.

Because a counterparty may fail to meet payment or contractual obligations, businesses often conduct counterparty risk assessment and due diligence before and during the relationship.