Credit limits for a business are the threshold limit that is set by the business creditor owed to customers at any given time without having to go back to review credit file. It is the maximum amount that an organization or firm is willing to risk in a given account. Credit limits for a business help in more ways than one. The credit management tasks for Australian business loans are thereby better and efficient saving more valuable time for the creditor firm.
The sales procedure of the firm becomes better because of the business credit limit as it is more standardized as well as of high quality in processing transactions. The risk of loans for business are lower thereby leading to much better collections, activity of debt collection is easy and convenient. By becoming an account monitoring tool the overall activity for the creditor firm is processed and maintained. But the issue of better credit limits for customers is left with the firm as there are some disadvantages as well. The credit limit in a business firm usually upsets customers in that they need to be approached for credit payments.
Issues to consider
There are several important aspects to consider before allowing the credit limit to become effective. One aspect that is topmost in priority is that of the product or service being sold. The aspect of competitive advantage of the product or service in the market or the competitiveness of the available commodity is a reason why business credit limits become effective. If the commodity has a better competitiveness and market demand is high the credit limit is a key factor to review or consider. The financial strength of the customer or the individuals purchasing commodity is relevant to be understood by the technical financial professionals belonging to the firm who intend to set these limits.
Methods to set limits
Reputation management, customer strengths in numbers and the likelihood of new product purchases all are important to be ascertained in credit limit determination. Other important factors that generate interest in credit limit scaling are the margin of commodity to bottom line, confidence of the firm in in-house collection process and length of terms of business to customer. Business credit limits are significant in developing the customer confidence or deliberately setting customer to handle finances or purchases. This can be done by taking information from credit reports (payment performance and rating of the firm) and the more easily available financial statements.
Setting of credit limits for a business is no easy task and is a complex decision making model. There is no one given way of setting credit limit while the task of managing credit limits is certainly much more daunting for credit professionals. Many experts believe the credit limit setting is an art while knowing how much a firm is conservative or liberal is the clue for credit limit to be ascertained. The question of applying these credit limits for a business is achievable while being open ended in the method utilized for setting the same.