Selling on credit is how most business-to-business relationships work, and it is also how small companies end up financing their customers. A credit limit is the maximum amount a customer may owe you at any one time. Set it too high and a single late payer can drain your cash; set it too low and you turn away good business. This guide walks through a practical process for setting, reviewing and enforcing limits.
What is a credit limit and why does it matter?
A credit limit is a ceiling on the unpaid invoices, and sometimes confirmed orders not yet invoiced, for one customer. It matters because it caps your exposure and moves the decision to a calm moment, instead of leaving your team to argue about each order under pressure.
Step 1: Check the customer before you extend credit
- Application form. Collect the legal name, registration number, address, directors, bank details and an accounts payable contact.
- Trade references. Ask for two or three suppliers and actually call them. Does the customer pay on time? What limit do they have?
- Public records. Look for filed accounts, court judgments and insolvency notices. A credit report from a bureau is worth the small fee for larger limits.
- Bank reference. Not always available, but useful when it is.
- Basic sanity checks. Does the website exist, is the address real, how long has the company been trading?
For brand-new customers with thin information, start small. Credit is earned through behavior, not promised on day one.
Step 2: Size the limit
Use payment history when you have it
For an existing customer, look at the last six to twelve months: average monthly purchases and average days to pay. A common rule of thumb is a limit of about 1.5 to 2 times typical monthly invoicing, adjusted for how slowly they pay. A customer who buys 4,000 a month and pays in 45 days on 30-day terms usually has about 6,000 outstanding, so a limit of 8,000 leaves sensible headroom.
Use revenue and financials when you do not
For a new customer, look at annual revenue, filed accounts and net assets. A cautious guide is to keep your limit to a small fraction of their net assets, often around 10%, and never more than you could afford to lose.
Consider your own capacity
Add up your exposure across all customers and compare it with your cash and margins. Many small businesses keep any single customer below 10 to 15% of total receivables, so one failure does not become a crisis.
A simple example
A new customer has traded for five years, has two good references, annual revenue of 600,000 and net assets of 120,000. It expects to buy about 15,000 a month. Ten percent of net assets is 12,000, so you cap at that. You start at 5,000 with 30-day terms. After three months of on-time payments you raise it to 10,000, and you note the date and reason in the customer file.
Reviewing limits
Review limits every six to twelve months, and sooner when something changes: a late payment, an unusually large order, a change of ownership or bad news about the customer. Raise limits for customers who pay on time and buy more. Lower or freeze them when payments slip. A limit is a living number, not a one-off decision.
Handling overruns
When an order would push a customer over the limit, do not ship by default and do not ignore it. You have clear options:
- Ask the customer to pay overdue or current invoices first.
- Request a deposit or partial prepayment for the excess.
- Approve a one-off, temporary increase in writing, with sign-off from both sales and finance.
- Ship part of the order and hold the rest.
Whatever you choose, record who approved it and why. Overruns that happen quietly tend to become the norm.
When to put an account on hold
Write the rule into your terms of sale, for example: orders pause when an invoice is more than 15 days past due or the limit is exceeded. Warn first. Call the customer, send a written notice, then apply the hold. Stay courteous, because most late payment is cash-flow trouble or an admin slip, not bad faith. Release the hold as soon as the overdue amount is paid, and keep notes of every contact in case you need them later.
Common mistakes
- Setting limits by gut feeling. A simple formula is fairer and easier to defend.
- Letting sales override finance without a record. Exceptions are fine, undocumented ones are not.
- Never reviewing. A limit set three years ago may no longer fit the customer or your cash.
- Waiting too long to chase. Reminders sent a few days after the due date work better than calls after sixty.
- Ignoring concentration. One very large customer can be a bigger risk than ten small ones.
Keeping track
A spreadsheet is enough to start: customer, limit, current balance, oldest overdue invoice and last review date. As the list grows, a tool that shows balances against limits and chases invoices automatically saves hours. FulcrumGrid Collection is built for that kind of invoice follow-up.
Check the customer, size the limit from evidence, review it regularly and enforce it calmly. Done well, a credit limit protects your cash without damaging the relationship.
Frequently asked questions
How much credit should I give a new customer?
Start small, often a few thousand at most, or around 10% of their net assets if you can see them. Raise the limit after a few months of on-time payments.
What is the difference between credit limit and payment terms?
The limit is how much a customer can owe at once. Payment terms, such as net 30, are how long they have to pay each invoice. You need both.
Can I raise a credit limit temporarily?
Yes. Approve it in writing, with a start and end date and sign-off from sales and finance, then return to the normal limit once the order is paid.
Do I need a credit report for every customer?
Not for small limits with good references. For larger limits or customers you cannot verify, a credit report is cheap compared with an unpaid invoice.
FulcrumGrid Collection
Keep invoices and limits under control
If chasing late invoices is eating your week, FulcrumGrid Collection helps you track what each customer owes and follow up on overdue payments in one place.