Credit Limits

Is the maximum amount of money that can be charged on a particular credit account.

Setting up Credit Limit - when setting up credit limit for a customer the following financial data needs to be considered:

• Monthly sales figure for the customer in question
• Net Worth or Working Capital

Hence, there are two ways of calculating credit limit:

1. If trade references are good enough, the credit limit is set at twice the monthly sales figure for that customer.
2. Credit limit set at the figure that is the lower of 10% Net Worth or 20% Working Capital (Net Current Assets).

N.B. calculation 1 requires regular review as sales figure increases. Calculation 2 is more effective as sales people can sell up to the Credit Limit, which requires less regular revision.

Credit Rating Agencies - the most accurate credit rating can be obtained from professional agencies assessing financial liquidity. Credit Rating Agencies gather relevant data form all the companies registered in the country and based on that information perform financial analysis and generate reports providing with customer details, financial score, payment experience of its suppliers, County Court Judgements and recommended credit rating. Credit rating report can be found no the agency website or delivered by post or fax.

Non-financial factors that should be taken into account when setting up credit limit:

• relationship with the supplier - a long-term ongoing relationship with a customer favours higher credit limit
• the customer's payment history
• customer's cooperation - willingness to pay on time
• role of sales representative in collection process