Credit limits are the maximum amount of credit that a credit card company; a bank; or a lender will extend to a customer. Credit limits come into all aspects of business and everyday training.
The credit facility with a set credit limit can take on many forms - both secured and unsecured. A line of credit, credit cards and other forms of borrowing all have credit limits. For example a secured debt can come in the form of credit involved in getting a mortgage. On the other hand, the credit limit on a credit card is unsecured and is based upon an individual's credit worthiness.
In many instances, creditors can raise or lower credit limits at their own discretion.
Credit Card Credit Limits
Personal and business credit cards have credit limits that range from the low hundreds to thousands of pounds. Some credit card companies even offer unlimited credit for their exclusive customers.
Increasing the credit limit on your card is normally only granted after a credit check, a confirmation of your income with your employer and a look at your history in paying off your card.
Exceeding your credit card limit usually always results in a fee, and can affect your credit rating, and further applications for credit limits.
Company Credit Limits
Credit limits are extended on various basis and many companies have their own credit limit table for risk assessment. Many follow these three methods of setting the credit limit:
- Analyse published accounts on the business and allow 10% of net worth or 20% of working capital, with the lower of the two figures becoming the credit limit.
- Allow twice the monthly turnover of the company to allow for growth.
- Allow whatever credit limit you feel comfortable with, without calculations
However these methods may or may not be suitable for the size and cash flow situation of your company. What's more calculations can be time consuming and guessing an amount can be a dangerous road to travel down. So how can you assign a credit limit to a company quickly and simply?
Online Credit Reports for Assigning Credit Limit
Purchasing a credit report on your target company is the ideal way to set a credit limit. checkSURE full reports all contain a credit score and credit limit on companies to give you an idea on the levels of credit to set and the terms of repayment to allow.
The credit limit stated in a full credit report is a calculation on figures from the annual accounts. The three principle areas used to calculate a credit limit are pre-tax profit, working capital and tangible net worth. Therefore you can have a good indication on the amount of credit to extend a customer. These figures should always be taken as a guide, and should not be the only indicator taken into consideration when extending credit.
Many factors can be reviewed when making the decision to extend credit. Another very useful indicator in a checkSURE credit report is the list of county court judgements the company has had in the last 72 months. The report shows whether these CCJ's are satisfied and settled with the court or if they are unsatisfied and still outstanding.
Looking at the whole picture, the history, financials and background of the company are the best ways to avoid risk in setting credit limits.