Setting Credit Limits Checklist

Before you start

A credit limit is a risk decision, not a sales reward. Have the inputs ready so the number is grounded in evidence rather than optimism.

• The customer's estimated monthly spend and order pattern.
• The completed credit check and any commercial report.
• Your credit policy bands and approval authorities.
• A clear view of any security you hold — guarantee, deposit or PPSR.

Step 1 — Size the limit from need

1. Estimate the customer's average monthly purchases with you.
2. Factor in your payment terms — a 30-day account usually needs roughly one to two months of spend as headroom.
3. Avoid setting the limit far above genuine need; idle headroom only enlarges your exposure.
4. For seasonal customers, consider a base limit with a temporary uplift in peak periods.
5. Write down the need-based figure before you adjust for risk.

Step 2 — Adjust for risk and security

1. Move the limit down if the credit check shows defaults, a falling score or a thin trading history.
2. Move it up only where the customer is established, pays well and the spend justifies it.
3. Increase comfort with security — a personal guarantee, a deposit or a registered PPSR interest.
4. Cap new customers conservatively and let them earn a higher limit through clean payment.
5. Apply your policy bands so similar customers are treated consistently.

Step 3 — Affordability, record and review

1. Ask the blunt question: if this customer never paid, could the business absorb the loss? If not, reduce the limit.
2. Avoid concentrating too much credit in any single customer.
3. Record the approved limit, the approver, the date and the supporting evidence.
4. Tell the customer the limit and what happens when it is reached.
5. Diarise a review and reassess after a set number of clean cycles or if behaviour changes.

Common mistakes

• Setting the limit to match the customer's ask rather than their need and risk.
• Granting a new customer the same limit as a proven one.
• Ignoring affordability and concentrating large exposure in one account.
• Never reviewing limits, so they drift out of line with the relationship.
• Failing to enforce the limit when orders push past it.

A limit you have reasoned through and recorded is one you can defend and enforce. The Merion tools help you track exposure across accounts. This is general information, not financial advice — set limits in line with your own policy and risk appetite.