When granting credit, it has always been a policy for some companies to set a credit limit, be it across-the-board where a limit is set for all types of customers, or the credit limit is set for each type of customer depending on certain factors.
Extending credit to customers can raise sales, and most companies would agree with this. A credit limit also simplifies and speeds up the credit monitoring and collection process. Another advantage of a credit limit is that both you and your customers build trust over a period of time with the customers being aware of how far they can go with their accounts and strive to settle their obligations to be able to maintain the credit line, and even raise it eventually.
But in a majority of cases, companies have a set of credit limit or “credit line” for each type of customer they have. The credit limit is based on several conditions. So how do you set a credit limit? Here are some quick tips:
- Know your customers – try to do a background check before granting a credit line. Try to collect more information from various sources.
- Monitor credit payment or credit history of existing customers before raising their credit line by keeping your records up-to-date.
- Inform your customers promptly if they have missed payments and try to work out a payment arrangement.
- Determine how far you can go in extending a credit line and what your exposure might be.
Setting credit limits may have both its pros and cons. But the priority should be on how extending credit can affect your profitability. Flexibility and direct communication with your customers can go a long way in ensuring that you get to collect at the end of the day from a customer who is equally happy with the arrangement.