A credit limit caps how much one customer can owe. Combined with credit days, it is the main control a seller has over udhaar.
Setting a limit
A simple starting point is the customer's expected monthly purchases multiplied by the agreed credit period, with some headroom:
Credit limit ≈ monthly purchases × credit days ÷ 30 × 1.2
A retailer expected to buy ₹2 lakh a month on 30 days gets a limit of about ₹2.4 lakh. New customers usually start lower and move up after six months of paying on time.
What to look at
- Payment history with you and, where possible, in the trade.
- Their size and how long they have traded.
- Security such as a cheque, deposit or bank guarantee for large limits.
- The season: many trades extend more credit before festivals and expect payment after.
Using it
When a new order would take the balance over the limit, it should be flagged before the goods go out. The owner or accounts head decides: release, ask for part payment, or hold.
Limits should be reviewed at least twice a year. A customer who keeps hitting the limit and paying on time may need a higher one; one who keeps hitting it and paying late needs a conversation.