Setting Credit Limits for B2B Customers: A Simple Policy for a Small Distributor

A snack distributor supplies sixty small shops. One of the largest, a minimarket chain with four outlets, orders more each month and pays a little later each time. The salesperson is pleased with the volume. By the time the owner looks closely, the chain owes 180 million across eleven invoices, the oldest four months overdue, and the distributor is borrowing to pay its own suppliers. The chain was never refused, because nobody had ever decided where refusing began. Credit limits for B2B customers are that decision, taken calmly in advance.

What a credit limit is

A credit limit is the largest amount a customer may owe you at any time. It counts everything unpaid: all open invoices, whether due or not, plus orders delivered and not yet invoiced.

Alongside it sit the payment terms: how long the customer has to pay each invoice, such as 14 or 30 days.

Together they bound your exposure. Terms limit how long. The credit limit sets how much.

Why even a small business needs them

• To cap the loss from any one customer.
• To protect cash. Every unpaid invoice is your money working in someone else's business.
• To take the decision out of the moment. A salesperson facing an eager customer is the wrong person, at the wrong time, to decide how much to lend.
• To have an honest reason to pause. "Your account has reached its limit" is easier to say and to hear than "we do not trust you".

Step 1: decide who gets credit at all

Credit is something a customer earns.

New customers: cash before delivery or on delivery for the first three to five orders. No exceptions for size or confidence.

To qualify for terms, a customer should have:

• Several orders paid without problems.
• A registered business with a known address.
• Named people: who orders, who pays.
• Agreement to your terms in writing.

For larger accounts, add:

• A simple application form: legal name, tax number, owner, bank, two trade references.
• A call to the references. Ask how long they have supplied the customer and whether payment is on time.
• A look at how they run their business when you visit.

Step 2: set the limit

Three inputs.

What the customer needs

Their expected monthly purchases, and the terms. A customer buying 20 million a month on 30-day terms will naturally owe around 20 million at any time, sometimes more when orders bunch up.

A starting formula: average monthly purchases, multiplied by the terms in months, plus a margin of about a quarter.

• 20 million a month, 30-day terms: 20 x 1 x 1.25 = 25 million.
• 20 million a month, 14-day terms: 20 x 0.5 x 1.25 = 12.5 million.

What you can afford to lose

Ask the hard question for each customer: if they never paid this amount, what would happen to us? Set a ceiling for any single customer as a share of your own working capital. No customer, however good, should be able to sink the business.

Remember what a bad debt really costs. With a 10 percent net margin, losing 10 million in unpaid invoices takes 100 million of new sales to recover.

What their behaviour tells you

• Pays early or on time: eligible for the full formula, and increases.
• Pays a week or two late, consistently: a lower limit or shorter terms.
• Pays late and needs chasing: cash on delivery.

Step 3: classify customers simply

Three classes are enough.

Customers move between classes on evidence, reviewed quarterly.

Step 4: put it in writing

A one-page credit agreement for each customer with terms:

• Credit limit and payment terms.
• When an invoice is due and how to pay.
• That orders are held when the limit is reached or an invoice is overdue beyond a stated number of days.
• Any late-payment charge, if you apply one and the law permits.
• That the limit may be reviewed.
• Signature of someone authorised.

Tell the customer the limit. It is not a secret. Customers who know their limit plan their payments around it.

Step 5: enforce it

A limit that is not enforced is a wish.

The hold rule. New orders are held when either:

• The balance plus the new order would exceed the limit, or
• Any invoice is overdue by more than an agreed number of days, for example 15.

Who releases a hold. Not the salesperson. The owner or finance person, on one of two conditions: a payment is received, or a documented exception is approved.

The conversation.

"Mr. Joko, thank you for the order. Your account is at 24 million against a limit of 25, so we need a payment before we can send this one. Invoice 1182 for 8 million fell due last week. Once that is in, the order ships the same day."

Factual, specific, with a clear way forward. Most customers pay within a day or two when an order depends on it.

Exceptions. Sometimes justified: a seasonal peak, a long-standing customer with a temporary delay. Record who approved, why, how much and until when. Exceptions with no record become the new limit.

Step 6: watch the numbers weekly

• Aged receivables. Every customer's balance by age: not yet due, 1 to 30 days overdue, 31 to 60, over 60.
• Customers above 80 percent of their limit. Contact them before the limit is reached.
• Overdue invoices by salesperson.
• Concentration. The share of all receivables owed by your five largest debtors.

Fifteen minutes each week with this report prevents the four-month surprise.

Step 7: review quarterly

For each customer with terms:

• Purchases and payments over the quarter.
• Average days to pay.
• Any holds or exceptions.
• Decision: raise, keep, lower, or withdraw terms.

Raise when a customer has paid on time for six months and needs more room. In steps, not leaps.

Lower when payments slow, orders become erratic, or you hear they are in difficulty. Reduce exposure before it becomes a problem, and tell the customer plainly.

Warning signs

• Payments getting later month by month.
• Part payments in round sums.
• Disputes raised just as invoices fall due.
• A change in who answers the phone.
• Unusually large orders from a customer who has been slow.
• News of the customer's own customers not paying them.
• Requests to extend terms "just this once".

One sign is a reason to look. Two is a reason to lower the limit.

Align the sales team

Salespeople are paid to sell, and a credit hold feels like an obstacle. Remove the conflict:

• Pay commission on money collected, not on invoices issued.
• Show each salesperson their customers' balances and limits.
• Involve them in collection. The relationship is theirs.
• Explain the reason. A sale that is never paid is a loss, not a sale.

Common mistakes

• Credit from the first order.
• No limit, only terms.
• Limits set and never reviewed.
• Salespeople releasing their own holds.
• Continuing to supply a customer with old unpaid invoices.
• One customer holding a large share of all receivables.
• Exceptions without records.
• Not telling customers their limit.

Tools

A spreadsheet with each customer's limit, terms and current balance, updated from the invoice list, is a workable start. The balance must be current for the hold rule to mean anything, which is where recording invoices and payments in one system helps. Polynusa's bookkeeping keeps invoices and payments by customer in one workspace alongside the sales records. See the pricing page.

Summary

Make new customers earn terms with paid orders. Set each limit from their monthly purchases and terms, capped by what you could afford to lose, and adjusted for how they pay. Put it in writing and tell the customer. Hold new orders at the limit or when an invoice is overdue, with release only on payment or a recorded exception. Review aged receivables weekly and every limit quarterly, pay commission on collections, and act on the first warning signs.

FAQ

How do I decide a credit limit for a new customer?

Start small and let it grow with payment history. A common approach is to ask new customers to pay in advance or on delivery for the first few orders, then grant a limit equal to roughly one to one and a half times their average monthly purchases, on short terms. Raise it after several months of on-time payment.

What should happen when a customer reaches their credit limit?

New orders are held until a payment brings the balance below the limit, or until someone with authority approves an exception. The rule should be known to the customer in advance and applied consistently by the system or the sales administrator, not left to each salesperson's judgement.

How much total credit can a small business afford to give?

It depends on your cash reserves and how you pay your own suppliers. A practical test is to ask what would happen if your largest debtor did not pay at all. If that loss would threaten the business, the limit for that customer is too high, whatever their reputation.