How to Set Credit Limits for Business Customers

Understand what a credit limit is protecting

A credit limit is a ceiling on the amount of unsecured credit exposure you are willing to carry for a single customer at any point in time. It is not a sales target and not a statement of trust — it is a risk management control. Setting limits poorly in either direction is costly: too low and you constrain legitimate sales; too high and a single bad debt can materially damage your cash position.

Before setting limits, calculate your current total debtor book and identify what proportion any single customer represents. Concentration above 15–20% in one customer is generally considered a significant risk factor by lenders and in your own financial planning.

Gather information before setting a limit

For new customers, the minimum checks should include a company credit report (available from providers such as Creditsafe, Experian Business or Dun & Bradstreet), confirmation of the company's registered status at Companies House, and if the proposed exposure is significant, a set of recent accounts or management accounts.

For existing customers, supplement external data with your own payment history. A customer who has consistently paid within terms for two years and whose orders are growing may warrant a higher limit than their formal credit score alone would suggest. Conversely, a customer who has recently started paying late or who has requested extended terms unexpectedly may need a reduced limit regardless of their historical rating.

Apply a consistent methodology

A simple starting formula: take the customer's annual turnover from their most recent accounts, apply a percentage (often 1–3% for standard B2B credit), and use that as the maximum unsecured limit. For a customer with £5m annual turnover, a 2% formula produces a £100,000 limit. Adjust up or down based on payment history, sector risk and the strategic importance of the account.

Document your methodology and apply it consistently. Inconsistent limit-setting — whether driven by relationship pressure or expediency — creates compliance risk and makes it difficult to defend your credit policy if a dispute arises.

Build a process for monitoring and adjustment

Credit limits should be active controls, not set-and-forget numbers. Review limits at least annually for all customers, and immediately when: a customer requests extended terms; a payment falls significantly overdue; a customer's public accounts show material deterioration; or a customer changes ownership or management.

Build a simple alert into your accounts receivable process: when a customer's outstanding balance reaches 80% of their credit limit, trigger a review before the next order is processed. Catching this proactively is far less disruptive than refusing an order at the point of dispatch.

Communicate limits professionally

Credit limits should be communicated in your standard terms or in a formal credit account opening letter. State the limit explicitly and include the right to reduce or withdraw credit with reasonable notice. Do not leave customers to discover a limit has been breached when an order is declined — that damages the relationship unnecessarily.

Where you are declining a new account or setting a lower limit than requested, you are not required to share your credit assessment in detail, but you can signpost the customer to the credit bureau whose data you relied on. Transparency about process, if not about the underlying data, maintains goodwill.