Credit limit: deciding how much to let a customer owe

A credit limit is the most a customer may owe you at any moment. Setting one is an admission that selling on credit is lending, and that the amount you are prepared to lend to a stranger is not unlimited. Most small companies set limits once at account opening and never revisit them, which means the limit reflects a customer who no longer exists.

How to set a credit limit

• Start from what you can afford to lose rather than from what the customer asks for.
• Use their actual trading pattern once you have one — three months of behaviour beats any credit report.
• Check a credit reference for a new account, and read the payment history rather than only the score.
• Consider concentration: a limit that is reasonable alone may be unreasonable when that customer is already a third of your ledger.
• Set it in writing and tell them, since an unstated limit cannot be enforced without an argument.

Reviewing it on something other than request

Limits usually get raised at the worst possible moment: a large order arrives, somebody wants to take it, and the review happens under pressure in favour of saying yes. The alternative is dull and effective — review limits for your top customers once a quarter against how they have actually paid, and move them in both directions. A customer who has paid on time for two years should have a limit reflecting that; a customer whose payments have stretched from thirty days to sixty should have a lower one before the next order, not after it.

Age matters more than amount. A customer at eighty per cent of their limit with everything current is fine; a customer at forty per cent with half of it past ninety days is a problem, and a limit expressed only as a number cannot tell you which you are looking at.

What happens when the limit is reached

1. Decide in advance who may authorise an exception, and make it somebody other than the person making the sale.
2. Stop further orders by default rather than by decision, since a limit that holds only when somebody remembers is not a control.
3. Tell the customer before the order rather than after it, which keeps the relationship intact.
4. Offer the alternatives — payment on account, part payment, proforma — so that the conversation is about how rather than whether.
5. Record every exception granted, because the pattern tells you whether the limit is wrong or the discipline is.

Ettex Invoices keeps the limit against the customer alongside what is currently outstanding and how old it is, so the question of whether to take the next order is answerable at the point it is asked. Where the balance is genuinely not coming in, the decision shifts from limits to writing it off.