Definition
A credit limit is the maximum amount a customer may owe you at any one time before new orders on credit are held or need approval.
What is a credit limit used for?
A credit limit protects the seller from having too much money tied up with one customer. Finance sets it from the customer’s payment history, financial statements or credit insurer guidance, and reviews it regularly. Exposure usually counts unpaid invoices plus confirmed orders not yet invoiced.
Checking a new order against the limit
Example- Credit limit
- USD 200,000
- Currently owed
- USD 168,000
- New order
- USD 45,000
Exposure after the order
USD 213,000
Don’t confuse it with credit days: the limit caps the amount, credit days cap the time. Both feed into accounts receivable management.