Five Reasons you Should Set Customer Credit Limits and Stick to Them

Posted by Jenny Esau

Managing Director of Credit Management Group UK

Wed 25th, Nov

In an ideal world your business would be paid in full before any goods or services exchange hands, however, this is an unrealistic ideal for competitive businesses. Subsequently offering credit to your customers is an ideal to maintain a competitive advantage; there are, however, risks involved in offering credit and therefore we would highly recommend your implement Customer Credit Limits.

Why should you use customer credit limits within your business?

They are necessary for many trade credit insurers

Not so much a reason, but a requirement for many trade credit insurers is to set a credit limit, and often they may take some control over what the credit limit will be dependent on the financial standing of the customer and their ability to pay.

They encourage customers to pay quicker

A credit limit can act as a great form of leverage, for your customer to remain under their credit limit it will be necessary to make more frequent or higher value payments to bring them below their credit limit.

I must add that this only acts as a great form of leverage when you stick to your credit limit; if you highlight to your customers that you will allow them to go over their credit limit, they will not see this as a viable threat to encourage them to make payment.

They limit the amount of potential bad debt you could be exposed to

If you limit the amount of credit your customer can have without payment then you potentially limit the amount of money that can turn into bad debt. If no credit limit is set, then you could potentially find their credit rising and rising, without receiving payment, and subsequently the worst was to happen you are left with a much greater value of bad debt than you would if you had cut the credit off at a lower amount.

They enable you to implement a credit hold function for late payment or reaching credit limit

This must be in your terms and conditions, and you can indeed implement this without having credit limits, but in my opinion it is a much more effective form of leverage when credit limits are applied. Having a credit hold function in your terms allows you to stop any goods or services should there be issues of late payment, or if your customer reaches their credit limit without payment to bring it down.

The costs associated with offering credit

There are substantial costs involved in offering credit to your customers in interest, bank fees, staff costs of chasing outstanding debt, especially when late or non-payment occurs. By having a credit limit you potentially reduce these costs by using your credit limit as leverage and getting paid quicker.

There is a balance between giving a customer too little credit & too much. You don’t want to restrict sales but you should keep your exposure to bad debt to a minimum. Therefore it’s useful to have a documented methodology of setting credit limits that is adhered to. Business is about risk, but we strongly recommend risks should be known and evaluated.

Download our free guide on how much customer credit could be costing your business.

Leave a comment

Why now is the right time to take IoT seriously

Mon 27th, Jul

Guest blog by Alan Nunn – Communications Subject Matter Expert at CGI

How IoT can create a sustainable future for water

Mon 27th, Jul

Guest blog by Graham Hainsworth – Director Consulting in CGI’s Water Sector Business

Happy 9th Birthday 6th Door Ltd

Tue 19th, May

As I’m leaning on the stand-up desk in my makeshift home office, that over the weeks has been turned into a video and podcast recording studio

How to take back control of your water costs

Fri 13th, Mar

While most businesses already have a comprehensive strategy in place for their electricity and gas consumption, water management is often overlooked.

How to choose an energy consultancy

Fri 13th, Mar

Most business owners recognise the advantages of shopping around for the best energy deal, but without the time, resource and expertise to find the best tariff, it can be an almost impossible task.

Business energy: Don’t get caught out by rollover rates

Fri 13th, Mar

As a busy business owner, you may feel there are not enough hours in the day to secure your next energy contract. You know you’ll get around to it, but when you’ll get around to it is another matter.

Business water matters – Top 3 water saving tips

Fri 13th, Mar

Water is often referred to as ‘the forgotten utility’. While many large businesses are clearly focussed on their comprehensive energy strategies, it seems many are yet to implement a strategy around managing their water usage.

Know where your cloud data is stored or risk a GDPR fine

Thu 27th, Feb

For businesses who have chosen cloud-based data hosting services there’s a temptation to relax and think “great, we’re paying someone else to take care of our data, we don’t need to worry about it any more.”

Transparency plans could slow down region’s business growth

Thu 27th, Feb

Efforts by regional start-up initiatives that have led to Merseyside outperforming the rest of the UK when it comes to business growth could be hampered by new government proposals, a leading legal expert has claimed.

Backup or risk losing your business

Thu 13th, Feb

Maintaining a robust backup is hard work, it’s important to not only build the correct solution for your business and trust your IT support provider to look after it, but to also maintain a sense of urgency as a business owner to...