Credit Limit
Maximum amount of unpaid credit you'll extend to a customer.
Definition
A credit limit is the maximum balance you'll allow a customer to owe before requiring payment. If a customer has a $50,000 credit limit and owes $45,000, you'll only extend another $5,000 in credit until they pay down the balance.
Credit limits protect against bad debt and manage risk. They're based on customer creditworthiness, payment history, and your risk tolerance. New customers typically get lower limits until they prove reliable.
Why It Matters
Credit limits prevent catastrophic losses from customer defaults. Without limits, a large customer could accumulate massive debt, then go bankrupt, leaving you holding worthless receivables.
Managing credit limits requires balancing sales growth with risk. Too restrictive limits lose sales; too loose limits increase bad debt. Monitor customer payment behavior and adjust limits accordingly.
Examples
- 1
New customer approved for $10,000 credit limit—requires payment before exceeding this amount.
- 2
Long-term customer with perfect payment history granted $100,000 credit limit to support larger orders.
- 3
Customer exceeds credit limit: stop new orders until balance is paid below limit or increase limit based on review.
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