A credit limit is the most a customer may owe you at any one time. Without one, credit grows quietly. A dealer who started at ₹50,000 is at ₹4 lakh three years later, and nobody decided that he should be.
Setting limits is a business decision. You are lending money without interest to your customers, and the limit is how much you are willing to lend to each.
01Two numbers, set together
Every credit customer should have two numbers:
- Credit period
- how many days they have to pay each bill, such as 30 days.
- Credit limit
- the most they can owe across all bills, such as ₹3,00,000.
The period controls how long money is out. The limit controls how much. A customer can be within the period and still over the limit, for example when they suddenly order three times their usual quantity.
02A simple starting method
For an existing customer, look at the last six months.
- Find the average monthly purchase. Say Hardware store, Nashik, bought ₹6,00,000 in six months: ₹1,00,000 a month.
- Multiply by the credit period in months. On 30 days, that is one month: ₹1,00,000.
- Add a margin for a busy month. Add 25 to 50 percent: ₹1,25,000 to ₹1,50,000.
- Round it. Set the limit at ₹1,50,000.
For a new customer, start lower than you think. A first limit of one month's expected purchase, or ₹25,000 to ₹50,000 for a small dealer, is common. Raise it after three to six months of payments on time.
03What to check before you give credit
Large companies run credit reports. A small firm can still ask sensible questions:
- How long have they been in business,
- and at the same address?
- Is their GSTIN active,
- and are they filing returns? You can check a GSTIN on the GST portal.
- Who else supplies them,
- and would those suppliers vouch for them?
- How did they pay their first few bills?
- The first three months tell you more than any form.
- Is the order size normal for their shop?
- A small counter in a lane ordering a full truckload is worth a second look.
Ask for a cheque or a post-dated cheque as security where your trade allows it, and keep a signed account opening form.
04Size the limits against your own capacity
Add up all your customers' limits. That total is the most you could have outstanding. Compare it with what your business can carry.
| Item | Amount |
|---|---|
| Total of customer credit limits | ₹85,00,000 |
| Actual outstanding today | ₹52,00,000 |
| Your bank overdraft limit | ₹40,00,000 |
| Credit your suppliers give you | ₹30,00,000 |
If customers took their full limits, this Ahmedabad electrical distributor would need ₹85 lakh, more than its supplier credit and overdraft together. The total of limits can safely exceed what you can fund, since customers rarely use their full limits at the same time. Know the size of the gap all the same. See working capital.
05Limits by customer type
Not every customer needs the same treatment. A common split:
- Cash customers
- walk-in buyers, new buyers and those who defaulted before. No credit.
- Regular dealers
- a limit worked out as above, reviewed every six months.
- Key accounts
- large buyers such as a construction company or a hospital chain. Higher limits, but often longer payment cycles. Track their payment run dates.
- Government and PSU buyers
- payment depends on their process. Plan for longer periods and price accordingly.
06When a customer goes over the limit
Decide in advance who can approve an order over the limit. In a small shop it is the owner. In a firm with a sales team, it might be the sales head up to 10 percent over and the owner beyond that.
The usual options:
- Ask for a payment first that brings them back under the limit.
- Supply on cash for this order only.
- Approve a one-time increase with a reason written down.
The worst option is the silent one, where the godown dispatches because the salesperson asked, and the owner finds out at month end.
07Make the limit visible to everyone who sells
A limit that only the owner knows is not a limit. The person taking the order, the person billing and the person loading the truck all need to see it.
- Show the limit and the current balance
- wherever an order is booked, so the salesperson knows before promising delivery.
- Tell the customer their limit
- Most dealers prefer to know where they stand. It also makes a hold on supplies less personal, because the rule was known in advance.
- Record every exception
- with the name of the person who approved it and the reason.
Take a Kanpur leather goods maker whose overdue money comes mostly from orders dispatched over the limit on a salesperson's word. Showing the balance on the order screen, and needing the owner's approval above the limit, closes that gap at the point where it opens.
08Review limits on a calendar
Review every limit at least twice a year. Raise limits for customers who pay on time and buy more. Lower or remove them for customers who are often late, even if they eventually pay. A dealer who pays every bill at 75 days on a 30 day term is using you as a bank.
Watch for warning signs between reviews: cheques returning, payments in many small parts, a request to change the billing name, or a sudden large order with a request for longer credit.
09For larger firms
Once you have several salespeople or branches, write a short credit policy: who sets limits, who approves exceptions, and when supplies are held. Report customers over their limit each week. Keep credit decisions with someone other than the person whose incentive depends on the sale.
This is general guidance and not legal or financial advice. In MatruOS, each customer's page shows their balance and payment history, which is the starting point for setting a limit.