Credit Limit Review

A credit limit review tests whether the amount a business allows a customer to owe is still appropriate, since the original limit may have been sensible when granted but no longer fit the customer's payment behaviour, order size or finances. A review can increase, reduce or retain the limit, and it can also change terms, require security or move an account to prepayment.

Define what the limit covers, because some suppliers count unpaid invoices only while others include orders already shipped but not invoiced, open orders and taxes. If the system uses a narrower balance than the policy, actual exposure can pass the intended ceiling, so write down the exposure measure before calculating utilisation or deciding whether another order may be released.

Limit utilisation is current measured exposure divided by the approved limit, so a customer owing $180,000 against a $200,000 limit has 90% utilisation if no other exposure is counted. Add pending orders and the figure may be above 100%, and utilisation is a capacity signal, not a credit score, since a reliable customer can operate near its limit while a risky customer remains far below it.

Review payment history over a meaningful period, looking at invoices paid on time, average days late, disputed balances, failed transfers and whether a customer has needed repeated extensions. Separate a genuine billing dispute from inability to pay, but do not ignore a pattern of disputes that delays cash, and compare the trend with order growth because higher sales can mask a worsening collection cycle.

Current information can include accounts, management figures, credit reports, trade references and public notices, though each source has limits, since a report can lag events while customer management figures may be unaudited. Record when information was obtained and which claims were verified, and if a large increase is requested, ask what changed in the customer's business and how it expects to pay.

Review cadence should follow exposure and risk rather than a universal calendar rule, so a small, stable account might be reviewed periodically while a large or deteriorating balance warrants earlier attention. Trigger reviews after late payments, major ownership changes, sudden order growth or adverse sector news, and keep a diary date for routine reviews so quiet accounts do not go unchecked indefinitely.

The sales team often sees a higher limit as a way to win orders, so finance should show the cash and loss exposure behind that request. If the margin on new orders is thin, one unpaid balance can erase the profit from many sales, and the business must decide who can approve an exception and whether the owner of the commercial account can approve their own credit increase.

A reduction needs operational planning, because if a customer already owes more than the proposed limit, one should consider a repayment plan, staged shipments or prepayment for new orders, while remembering that abruptly stopping deliveries can damage a relationship or even reduce recovery in some cases and that the contractual terms and applicable law also matter. Coordinate the decision with sales while preserving independent risk review, and record the exposure, payment trend, supporting information, new limit, terms, approver and next review date; if an account is declined for an increase, explain the commercial alternative and any evidence that could change the decision.

A portfolio view can reveal concentration, because even if each customer is below its individual limit, a supplier may have too much credit tied to one group or sector, so map connected legal entities and the ultimate payer where practical and consider both the account and the business's capacity to absorb a loss. The outcome is not to freeze limits forever, since a customer that pays reliably and grows profitably may justify more credit, provided cash flow and concentration remain acceptable, so review the evidence, make a documented choice and check later whether the decision improved the balance of sales and risk.