Setting credit limits requires a detailed knowledge of a customer’s payment history and financial condition. This is not an easy task.
Understand the Risks Customers Present
Customers are important to a small business, since success would be impossible without sales to customers. However, customers also present a risk to your small business. When you make a sale, your business will often deliver the goods or services that you produce to the customer on credit. The credit terms will usually require payment in a fairly short amount of time.
Payment in as little as ten days may be required, in some instances. It would seem unlikely that a business could encounter severe financial problems in such a short time. In reality, problems may build slowly, but over time, they could suddenly become impossible to work around.
Setting the proper limit will require access to information about a customer’s payment history, and insight into their current financial condition. Most customers will be reluctant to provide this information, and most businesses lack the expertise to analyze the data if it was available.
Obtain Recommended Credit Limits From Experts
Dun & Bradstreet is a company that offers a wide variety of useful tools for evaluating a business’s credit. They collect data from thousands of businesses and have the expertise to analyze that information. One service they offer includes a Credit Limit Recommendation, which provides two suggestions as to the amount of credit a business may receive. A Conservative Limit is a dollar benchmark that can be used if your policy is to extend less credit to minimize risk. An Aggressive Limit is a dollar benchmark that offers guidance if your policy is to extend more credit with potentially more risk
These recommendations are made based upon the size of business, industry, and likelihood of slow payments or financial distress. Recommended limits are especially useful when dealing with a new customer or prospect that you do not have a previously established credit record for.