The four methods
Percent of tangible net worth. A classic solvency-anchored method: extend no more than 5–10% of the customer’s tangible net worth (equity minus intangibles). The calculator uses 10%; drop toward 5% for weaker financials or cyclical industries.
Percent of working capital. Anchors the limit to short-term paying capacity: 10% of (current assets − current liabilities). Useful when the balance sheet is asset-heavy but illiquid — a customer can be rich in fixed assets and still unable to pay invoices on time.
Requirement-based. Works from what the customer actually needs to buy: expected monthly purchases × (terms ÷ 30) × 1.5. The safety factor covers invoice timing overlap. This method keeps limits honest in both directions — it stops over-granting to strong customers who simply don’t need it, and it flags when a requested limit far exceeds any plausible purchase volume.
Median trade high credit. What comparable suppliers have already extended successfully, taken from trade references or bureau trade lines. It is evidence of demonstrated capacity, not theory.
Turning methods into a decision
The conservative anchor (the lowest method) is the right starting point for a new account with no payment history with you. The median of methods is a reasonable ceiling once the account has 6–12 months of clean payments. Adjust upward for security — personal guarantees, credit insurance, letters of credit, or preserved lien rights on construction accounts — and downward for concentration: a limit that is fine in isolation can be wrong if the account would become 15% of your total AR.
The full framework — including seasonal limits, temporary increases, and utilization monitoring — is in Setting credit limits: a practical framework.