Once the credit worthiness of the customer has been determined on a general scale, the specific credit limit must be set for each individual customer. Clearly, many factors may be taken into account when determining a credit limit for each individual customer — some of those, however, will likely be the customer’s business credit score and the value of the customer company. Clearly, a better credit score and larger business generally equates to a better credit risk, so more credit can be extended. Since those pieces of information are either contained in your thorough credit application, or otherwise easily available, you can create a chart or matrix to streamline the process for creating individual credit limit decisions.
Creating a Credit Matrix Streamlines Credit Limit Decisions
From the customer’s business credit score, and the size of the customer business, that potential credit customer may be placed in your newly created matrix of credit worthiness and the exact credit limit may be fine tuned from there. This type of process can be beneficial for a couple of reasons: 1) it allows the process to be streamlined and frees up employee time; and 2) pre-set basic credit limits decrease potential error and minimize risk — if the chart puts a company’s expected credit limit in a certain range there is little chance that a non-credit-worthy customer will be approved for a credit limit that later proves to be disastrous. This, in turn, results in more manageable risk. While the chart must necessarily be set according to the specifics of your individual business and industry, it may look something like the following.
|Credit Score||Value of Company||Credit Limit (Base)|
|> 75||$5,000,000 or more||$ ____________ (Highest)|
|50 — 75||$5,000,000 or more||$ ____________ (High)|
|25 – 50||$5,000,000 or more||$ ____________|
|< 25||$5,000,000 or more||$ ____________|
|> 75||$500,000 – $5,000,000||$ ____________ (Med.)|
|50 – 75||$500,000 – $5,000,000||$ ____________|
|25 — 50||$500,000 – $5,000,000||$ ____________|
|< 25||$500,000 – $5,000,000||$ ____________|
|> 75||Less than $500,000||$ ____________|
|50 — 75||Less than $500,000||$ ____________|
|25 — 50||Less than $500,000||$ ____________|
|< 25||Less than $500,000||$ ____________ (Low)|
|> 75||Not Known||$ ____________|
|50 — 75||Not Known||$ ____________|
|25 — 50||Not Known||$ ____________ (Low)|
|< 25||Not Known||$ ____________ (Zero)|
The credit limits set in the third column are dependent on your business, the industry in which your business operates, your individual risk aversion, and your sales strategy. However, once the credit limits have been determined once on this general scale, you will have the ability to quickly and easily determine a potential credit customer’s likely credit limit. This, in turn, can help grow sales, minimize credit risks, and help protect your cash flow.