Definition
A credit limit is the maximum unpaid balance a business allows a customer to owe at any time when buying on payment terms. Once open invoices reach the limit, new orders are held until the customer pays down the balance. Credit limits cap the business's exposure to any single customer that might fail to pay.
Also called: Customer credit limit, Trade credit limit
Credit limit in practice
Set limits based on the customer's payment history, size, credit references, and how much you could afford to lose. Review them regularly, raising limits for customers who pay reliably and lowering them for those who slip into late payment.
Frequently Asked Questions
How do I set a credit limit for a new customer?
Start conservatively, often around one or two months of expected purchases, using credit references or a business credit report. Increase it once the customer has paid on time for a few months.
What should I do when a customer goes over their credit limit?
Hold new orders or work until they pay down the balance, or ask for payment upfront on the next order. Tell the customer early and politely, and raise the limit only if their payment record supports it.
Related terms
- Payment terms Payment terms are the conditions on an invoice that state when and how the client must pay.
- Accounts receivable Accounts receivable is the total amount of money owed to a business by its clients for invoices that have been issued but not yet paid.
- Bad debt Bad debt is an invoice amount that a business concludes it will not be able to collect, usually because the client has gone out of business, disappeared, or refuses to pay and legal action is not worthwhile.
- Cash in advance Cash in advance (CIA) is a payment term requiring the buyer to pay the full amount before the seller ships goods or starts work.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.