How can I know by how much I can increase or reduce the credit limit for a customer? Are there any guidelines that I can implement for my company?

The answer to your question depends on the situation with your customer, how much exposure your management team feels is reasonable and your credit evaluation process. We are not aware of a standard practice, since it can vary widely among industries and even companies within an industry. Here are some considerations.

When increasing a credit line, you want to consider how much more your customer expects to purchase from you. If the increase is expected to be 20 percent, then maybe consider increasing their credit line by the same percentage. However, you need to make sure that the customer is adhering to your payment terms based on your expectations. Raising a credit limit and then finding yourself with higher amounts of past due invoices is not the situation that you want.

Decreasing a credit limit is generally correlated with either a customer reducing their purchase volume or becoming a much slower payor. The reduction is oftentimes a consideration of how much your management team is willing to be exposed as a risk of write off.

Some thoughts on guidelines consider the maximum amount either as a percentage of accounts receivable, or as a dollar amount that your management team is willing to live with as past due; for instance, you may choose to set a limit that only less than 5% of any balance owed by a customer is allowed to be past due.

If a client is consistently paying you past your terms, then you either change their terms or you request payment on any past due amount before you can release current orders. Consider creating a set of metrics with minimum thresholds, such that if a customer consistently falls below the thresholds, then they have their credit limits adjusted. For example, calculate a Z-score; obtain the company's Paydex score from Dun & Bradstreet; review their liquidity ratios; determine how often the customer adheres to their payment terms (i.e., 90% of their payments are within terms).

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