Set up the credit limit

how to calculate a credit limit When a seller make a sale to a buyer with a payment term, he grants a loan to his customer. This loan will be resorbed only after bills are paid.

The credit limit is the maximum amount of loan that the seller accepts to grant to its customer.

It depends on:
  • The assessment of creditworthiness that you previously made. See Credit analysis tutorial and Credit notation,
  • Your customer's financial capacity,
  • The commercial stakes (key account?),
  • The payment term negociated,
  • The expected amount of the business.
 Set up a credit limit for each customer! If credit limit is reached, you will need to renegotiate the payment terms to limit your risk with your client.
 Credit limit does not mean limit of orders. Negotiate advance payments, get additional guarantees (bank guarantees, delegations of payment, credit insurance ... etc) to maximize your sales while controlling the risk of bad debts and improving your working capital.

What is a Credit Limit?

The credit limit corresponds to the maximum credit risk that the supplier agrees to take on a particular client.

The credit risk includes the accounts receivable (invoices including taxes + other receivable) and the backlog (orders in hand not yet invoiced).

  • Your Cash Collection Software available for all sizes of companies

    Credit limits management in My DSO Manager

    Use the credit limit set up tool included in My DSO Manager.

    It is based on business requirements and customizable financial criteria.

    My DSO Manager includes a workflow to validate credit limits according to approbation levels.

    Then, use the risk report and alerts to manage credit risk and outstanding receivable compare to the credit limits of your customers accounts.

    The software provides with all indicators required to assess the credit limit and the risk. See more with the online demo.

The criteria used to set up credit limits and the level of risk acceptance should be consistent with your company's credit management strategy. Do you have a policy of strong commercial development, even assuming risk of non-payment or do you want to preserve the profitability of your business above all?

How set up a credit limit?

First step is to collect information about your customer:

  • Business expected:
    • Amount of sales expected with the client,
    • Period (in months),
    • Payment term considered,
  • Sales Manager feedback:
    • Key customer or not?
    • Position on the market, growing business?
    • Reliable or not?
  • Legal and financial information about the customer:
    • Last profit and loss accounts and balance sheet,
    • Company legal form,
    • Date of creation,
    • References from other suppliers,
    • Payment behaviour.
  • Customer visit: When the business or the credit risk stakes are high, it is needed to visit the customer to:
    • Get fresh information about customer’s financial situation,
    • Create a personalized contact with the customer,
    • Negotiate financial conditions of the business (payment terms, payment guarantees, schedule of payment...etc.)
Second step is to calculate the required credit limit:

The required credit limit is the business need of credit limit. It is the product of the estimated sales to come, the schedule of invoicing and the payment term granted to the customer.

Required credit limit can be challenged by negotiation with the customer

Third step is to set up the Credit Limit:

Once required credit limit is calculated, it must be compared to the information collected about legal & financial situation of the buyer, and its payment behaviour.

The Credit Limit has to be consistent with financial capacities of the customer and its payment behaviour.
There are several ways to set a credit limit. Each has advantages and disadvantages.
We have created an innovative method which first includes in the calculation the required credit limit related to your volume of orders and payment terms negotiated. Then the tool (Excel file to download or online tool) compares the amount obtained with the result of the credit ranking (obtained with the credit notation tool) and financial capabilities of your customer.
Main criteria are:

Equity in order to compare the credit limit with stable financial resources of your client.
Tangible Net Worth to ensure that the credit limit is proportionately consistent with the intrinsic financial value of your buyer.
Accounts Payable to ensure that you do not switch from the position of single creditor to the principal funder of your client, especially if the credit exceeds what has been invested by shareholders and bankers. By becoming a primary supplier, you can make your customers dependent on the credit granted.
Turnover. The credit limit should be very significantly lower than the turnover of your client. Be careful to the proportion of credit limit amount / company size of your client.
Operating income. Compare the credit limit to the operating income of your client. It may not exceed 50% of the operating income.

Pilot your credit limits

Economical context is changing very fast and it will change faster in future. It is the same for the financial situation of your customers.

Once calculated and validated, the credit limit is a living data which influences daily business relationships.

It is compared to the outstanding receivables plus the portfolio of accepted orders, the sum of which must not exceed it. If the total outstanding reaches the same level then an action to review the limit must be carried out:

  • Either new tangible elements make possible to increase the credit limit (new positive financial information, quality of payment behavior, etc.).
  • Or this threshold cannot be increased because it is consistent with the financial structure of the buyer. In this case, several solutions are available to pursue the growth of turnover with his client without increasing the risk:
    • Request advance payments (possibly against discount) to reduce the outstanding amount.
    • Negotiate new payment conditions (reduction of the payment term, get advance payments).
    • Obtain an additional guarantee (credit insurance, bank guarantee, parent company guarantee, etc.).
    • Finance receivables without recourse (factoring, bank discount without recourse, mobilization of means of payment like drafts or commercial transfer, etc.).
Define levels of validation of credit limits involving the decision-making chain of your company (collection officer, credit analyst, credit manager, CFO, CEO) and have them validated according to these approval thresholds. This approach allows information sharing improving the quality of the decision and its transparency.


The set up of credit limits for each of its private / limited company customers is necessary to manage customer risk and limit its commitment according to buyer's capabilities.

Another advantage, this practice pushes salespeople and other managers to negotiate better terms of payment with customers because it allows to make more sales.

This practice is therefore very beneficial for the company to develop its business while improving its WCR and limiting its exposure to the risk of bad debts.

Even customers can find their interest because some will be happy to negotiate a down payment or an advance payment against an attractive discount.


Online tools:
Credit limit calculation
Comment this page
Do not enter sensitive data
Comments are subject of editor's review before publication
Last comments Comments are displayed in chronological order and have been reviewed by the editor before publication.
E. - 21/12/2017
I have downloaded the Credit limit set up file. it is really good work, however , some field i found it not really clear. for example and i am refering to the excel sheet: what is the meaning of "Duration of the period in months" in C7. is it the means the period of the sales to be finish like delivery date ? in the Customer Date section in the Balance sheet , what is the Suppliers debt is it the Liabilities ? and what is the "Turnover" meaning in Profit and loss , I7 ?
Duration: this the period on the sales value you enter.
Suppliers debt is Account Payable value
Turnover is the sales.
Thank you for the quality of the tools!
Thank you for the quality of the tools!
Great job. Really like it.
Every credit limit has to be reviewed at least twice a year or every time the buiness relation is changing (overdue invoices, new orders, negative or positive information obtained about the customer...etc.).
Very interesting, helpful website!
Very helpful

I am interested to learn more about credit limit set up and credit control of my buyers.
You can download the tool "credit limit setup" to learn more about this essential analysis.

Articles on the same topic
Tools to download Online tools Not yet registered?
Sign up now to enjoy the download and unlimited use of all tools of Credit tools.
Find Credit Management tools on social networks
Credit Management Tools on Facebook Credit Management Tools on Twitter Credit Management Tools on LinkedIn