{"id":30937,"date":"2025-06-03T08:47:01","date_gmt":"2025-06-03T12:47:01","guid":{"rendered":"https:\/\/www.sage.com\/en-us\/blog\/?p=30937"},"modified":"2025-06-03T08:47:03","modified_gmt":"2025-06-03T12:47:03","slug":"setting-customer-credit-limits","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-us\/blog\/setting-customer-credit-limits\/","title":{"rendered":"Setting customer credit limits"},"content":{"rendered":"
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\n\t\t\t\t\t\t\tMoney Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t
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\n\t\t\t\t\t\tSetting customer credit limits\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t

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\n\t\t\t\n\t\t\t\t\"Elizabeth\t\t\t\tElizabeth Ryan<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t<\/div>\n\t\t<\/div>\n\n\n\n

Credit limits are an essential tool for managing credit risk and protecting your company\u2019s cash flow. Orders in excess of credit limits are automatically placed on hold for credit review. If credit limits are set too low, your team will be tied up needlessly reviewing and releasing orders. If they are set too high, you risk overextending credit. <\/p>\n\n\n\n

The economic situation recently has seen a resurgence in the need for organization-specific credit limits, and the necessity of reviewing and adjusting them as circumstances change.<\/p>\n\n\n\n

Here are some suggestions for setting credit limits.<\/p>\n\n\n\n

Net worth<\/strong><\/h2>\n\n\n\n

One approach to setting credit limits is to use an amount equal to 10% of a customer\u2019s net worth. This may not work for all customers if their financial strength will not support the credit limit needed for order volume.<\/p>\n\n\n\n

Working capital<\/strong><\/h2>\n\n\n\n

Another approach is to use 10% of a customer\u2019s working capital, but as with net worth it may not support the credit limit required for orders.<\/p>\n\n\n\n

Average monthly sales<\/strong><\/h2>\n\n\n\n

Using 10% of average monthly sales can be a good alternative, but keep in mind that it is based on past sales and may not be adequate for future orders.<\/p>\n\n\n\n

Trade references<\/strong><\/h2>\n\n\n\n

An average of credit amounts reported on trade references can be a good approach, but make sure that the limit you set is consistent with your company\u2019s appetite for risk.<\/p>\n\n\n\n

Customer request\/need<\/strong><\/h2>\n\n\n\n

Customers may request or need a certain amount of credit to handle their anticipated order volume. You have to decide if you are comfortable with the amount of credit needed.<\/p>\n\n\n\n

Finding balance<\/strong><\/h2>\n\n\n\n

There is no perfect way to set credit limits. The objective is to find a happy medium between commercial requirements and your company\u2019s capacity to absorb bad debt losses. That is why it is important to keep track of credit limits and adjust as needed.<\/p>\n\n\n\n

When a customer is constantly exceeding their credit limit, it is obvious that a review is needed to set an appropriate cut-off point. What is not always obvious is when it may be necessary to reduce a customer\u2019s credit limit because of an unfavorable change in payment behavior.<\/p>\n\n\n\n

Leveraging tools and technology to monitor credit risk<\/strong><\/h2>\n\n\n\n

Monitoring credit risk is done more efficiently and effectively with automated credit and collection solutions. Sage AR Automation<\/a> has a number of solutions which can help you monitor credit risk including:<\/p>\n\n\n\n