How to set trade credit limits

Setting the right trade credit limit is an essential part of managing risk when selling to other businesses. When you offer trade credit, you are effectively lending money to your customers until they pay their invoices. This means your business takes on financial risk, so you need a clear, structured way to decide how much credit to offer and to which customers.

A well managed credit limit protects your cash flow, reduces the likelihood of bad debt and helps your business grow safely. This guide explains how to set appropriate trade credit limits, what information to review before making a decision and how tools such as credit checks and credit monitoring can help you trade with confidence.

What is a trade credit limit?

A trade credit limit is the maximum amount of credit you are willing to extend to a customer at any one time, this helps you manage the amount of unpaid invoices you are exposed toYou can increase or decrease it as you learn more about a customer’s payment behaviour and financial stability. They’re important because they allow you to balance the opportunity to grow sales with the need to protect your business from cash flow pressure or bad debt. Setting the right limit gives your customer enough flexibility to trade comfortably while still keeping risk at a manageable level.

Why setting clear credit limits protects your business

When you set a limit that reflects the customer’s ability to pay, you reduce the risk of taking on more exposure than your business can afford. A clear limit also makes it easier to manage your own cash flow because you can monitor how much you are owed at any time. Having a clear and strong credit limit process also supports consistent decision making. Your team can follow a clear framework, helping you avoid offering generous terms to high risk customers, or making rushed decisions during busy periods.

Step 1: Gather information about the customer

The first step in setting a trade credit limit is to understand the customer’s financial position. You need accurate and up-to-date information so that your decision is based on evidence rather than guesswork. 

You can start by checking the customer’s credit score. This score summarises their financial health and payment behaviour, giving you an indication of how likely they are to pay their invoices on time. A high business credit score normally suggests a low level of risk, while a low score can indicate that the customer has struggled to meet financial commitments in the past. You’ll also need to review the customer’s business credit limit, which you’ll see on their credit profile. This limit is calculated by the credit reference agency and shows the level of credit they believe the business can safely manage. This can be a great benchmark for the limit you set. If their financial accounts are publicly available, take the time to review them. They can tell you a lot about profitability, cash reserves, liabilities and overall stability. A company with strong financials is usually in a better position to manage a higher credit limit. And if you’ve traded with them before, use your own data. A customer with a solid track record of paying on time may justify a higher limit than one who routinely pays late.

Step 2: Understand the customer’s trading needs

A credit limit should fit how your customer buys from you. Look at their typical order size, how often they purchase and whether their buying pattern is steady, seasonal or ad-hoc. Small but frequent orders may require only a small limit and shorter payment terms. Larger bulk or seasonal orders might need more flexibility. It’s also worth considering the customer’s growth plans. If they expect their trading volume to increase and their credit profile supports it, you may choose to set a limit that allows room to grow. By aligning the limit with real trading behaviour, you help your customer operate smoothly while keeping your own exposure under control.

Step 3: Assess the level of risk you are willing to take

Every business has a different risk appetite. Your ability to manage financial exposure depends on your cash reserves, your operating model and the strength of your own supply chain. Before setting a credit limit, consider how much risk your business can absorb. If you operate on tight margins, or need cash in quickly, you may prefer lower limits to keep exposure manageable. If your financial position is stronger, you might feel comfortable extending higher limits to reliable customers. It’s also sensible to consider the wider economic climate. During uncertain periods, taking on extra credit risk may not be the best move. A more cautious approach can help protect your business until conditions improve.

Step 4: Set the initial credit limit

Once you’ve gathered the right information, you can set your initial limit. This should reflect both the customer’s financial profile and the level of risk your business is comfortable taking. For new customers, it’s often best to start with a moderate limit. This gives you time to build a picture of their payment behaviour without exposing your business too heavily. When you share the limit with the customer, explain how it works and what might cause it to change. Clear communication sets the right expectations from the start.

Step 5: Monitor payment behaviour and adjust the limit

A trade credit limit doesn’t need to remain fixed forever. As you trade with the customer over time, you’ll gather new information about their payment habits and financial stability. If the customer pays consistently on time, demonstrates growth and maintains a strong credit profile, you might decide to increase their limit. This can support larger orders and help strengthen your relationship. 

If the customer pays late, disputes invoices or shows signs of financial difficulty, it might be necessary to reduce the limit or place the account on hold until the issues are resolved. Regular monitoring allows you to make these adjustments early, before problems escalate. When you monitor your customers with Capitalise, you’ll receive alerts as soon as there’s any changes to their credit profile. That means you can react quickly, protect your cash flow and lower your exposure before issues escalate.

Step 6: Review limits regularly as part of your credit policy

Credit limits work best when they’re part of a clear, structured credit policy. This policy should outline how decisions are made, when limits are reviewed and what to do when payments fall behind. Regular reviews, whether they’re quarterly, annually or in line with your trading cycles, ensure your limits stay relevant as conditions change.

Build a credit strategy that supports safe, sustainable growth

Setting the right trade credit limits helps you protect your business from unnecessary exposure while strengthening your customer relationships. If you want to start credit checking customers and set limits based on real, reliable data, sign up to Capitalise today.