The credit limit decision is one of the most commercially sensitive in any B2B business. Set it too low and you lose sales to competitors who will extend more generous terms. Set it too high and you risk bad debt that destroys margin. Most credit teams navigate this with a combination of gut feel, payment history, and credit agency scores — but there's a better way.
Ground limits in filed accounts
The most reliable basis for a credit limit is the company's own filed balance sheet. A simple rule of thumb: your credit limit should not exceed 10% of the customer's net assets. This ensures that even if they fail to pay, the debt is proportionate to their financial capacity.
- Net assets £100k → credit limit up to £10k
- Net assets £500k → credit limit up to £50k
- Net assets £2m+ → credit limits up to £200k depending on other factors
Adjust for liquidity and trend
Net assets alone don't tell the whole story. A company with £500k net assets but £5k cash and £200k in trade creditors is in a very different position to one with £100k in the bank. Always check the cash position and the trend: is the company growing or declining? Three years of declining revenue with falling net assets is a warning sign even if the absolute numbers look acceptable.
Build a review calendar
Credit limits should not be set and forgotten. UK companies typically file accounts 6–9 months after their accounting date, meaning the data you're looking at can be 18 months old by the time it's filed. Set a calendar to review limits when new accounts are filed, and use a tool like FilingTrace to be alerted automatically.