Credit Limit

A credit limit is the ceiling a seller places on a customer's total open exposure: unpaid invoices plus, in tighter regimes, unshipped orders. It converts a qualitative judgment about creditworthiness into an operational control that order entry, shipping, and AR systems can enforce automatically. Orders that would push the balance past the limit are held for review rather than shipped on autopilot.

Setting the number is part analysis, part policy. Common approaches include a percentage of the customer's net worth or working capital (10 to 20 percent is a traditional rule of thumb), a multiple of the median high credit reported by other suppliers on the bureau report, a fraction of the customer's monthly purchase volume times the payment terms, or a scorecard-driven matrix that maps risk grade and requested volume to a limit band. Whatever the method, the limit should be sized to the relationship the seller actually wants: a limit far above realistic purchase volume is unmonitored risk, and one far below it creates constant friction and manual releases.

Limits decay in accuracy from the day they are set. Good practice ties every limit to a review date, triggers early re-review on signals such as days beyond terms deterioration, NSF checks, or bureau alerts, and distinguishes between a hard limit (system blocks) and a temporary or seasonal uplift with an expiry. A limit that has not been reviewed in two years is not a control; it is a historical artifact.