Most businesses that sell on credit have limits. Far fewer have limits that change behaviour. The difference is whether the limit is visible and checked when an order is placed.
Start from what a customer can pay, not what they want to buy
Base the first limit on the customer's trading history, payment record with you, and the size of their typical order. A common starting point is one to two months of expected purchases.
Track exposure, not just the outstanding balance
Exposure is the outstanding balance plus confirmed orders not yet invoiced. A customer can be under their limit on invoices and well over it once open orders are counted.
Decide in advance what happens at the limit
- Below 80% of limit: order proceeds normally
- 80–100%: order proceeds, salesperson is alerted
- Over 100%: order is held for manager approval with a recorded reason
Review limits on a schedule
Customers that always pay on time deserve higher limits. Customers whose payment days are stretching need attention early. Review the top accounts quarterly and the rest twice a year.
Make it visible to sales
Salespeople aren't trying to create bad debt. Most simply don't know a customer's position when they take an order. Put the number in front of them and most problems never start.