Setting limits is an art and not a science; but for this very reason, it is necessary to be able to use proper judgment when it comes to granting credit and letting customers into your business. Credit limits gauge the maximum limits a company can go to when it comes to offering credit based policies to their customers. This way, they can charge/purchase first and pay later. However, the risk of losing payments is always at the fore, due to which it is extremely important to be able to take the right decisions during the screening process.
What do you need to consider before setting limits?
The first and foremost thing which needs to be considered is a company’s self exposure and the appetite for risk. This way, a company can understand if it has a “Liberal or a Conservative policy”. Also, another thing which a company needs to figure out is the working capital requirements, which it can invest in its customers.
Methods of setting limits
- Trade references and background checks: Once you have the trade references in place, it becomes easier to perform a series of background checks. This way, one can compare between the high credits, average credits and low credits awarded to the customers.
- Credit Limits setting process: Bank references can go a long way in helping you set limits for your customers. By doing so, you would be able to figure out the right amounts of limits which need to be set on your customers. If these customers have an unsecured line of credit with the bank, you can safely set up higher limits for them with your company. Either way, you can decide the best course of action for your customers.
- Agency reports: Credit agencies often give information related to payment performance and the ratings of the customers. Under the payment performance category, there is a section which lists down the paying habits of their customers. These reports often give a true picture of the paying capacity of each customer, under different sections, which make the reports extremely valuable and trustworthy.
- Financial statements: Another document which can be used to make judgments on the credit lines is the customers’ financial statements. They can go a long way in helping you understand the financial situation of your customers, their sources of income, expenditures, profits and losses. If a person/company is raking in good profits regularly, they would have no problem in paying their bills on time. However, if a person/company is constantly incurring losses, it would be best to avoid giving them any line of credit, irrespective of the amount.
- Physical verification: Sometimes, client’s physical location can also be verified to ensure they will not run off post making any charges on their account. This ensures utmost safety for the credit assignor, thereby giving some peace of mind and security at the time of granting credit.
These were some of the ways in which sound decisions can be made with respect to setting credit limits. At the time of analysis, it’s imperative to take well planned and carefully analyzed decisions, so that your company does not go into losses or on board customers who will default at later stages of payment. Make wise decisions and see your business flourish immensely.