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- Establishing Credit Limits
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- Written Credit Policy Manual
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Establishing Credit Limits
I have serious concerns about formula driven credit limits. Credit decisions should be customized and there is no single tool or formula that can or should be used to establish credit limits. I have used and find value in sophisticated credit scoring models that perform multi-variable analysis in providing guidance or recommending a credit limit. I would be concerned about using less robust software.
I recommend avoiding any simplistic approach to establishing credit limits such as these:
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The credit limit will be set at 50% of the highest credit limit listed on a third party credit report
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The credit limit will be a specific percent of a company's net worth
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The credit limit should be increased 10% each year a customer is a customer
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Every applicant with a federal tax identification number or a resale certificate should be offered a $5,000 line without additional research being required
© 2011 by Michael C. Dennis. All Rights Reserved.