How Credit Managers Can and Should Use Credit Limits
Help streamlining the order release process
by Kym Price and Michael Dennis
Here are a few ways that customer credit limits established
by the credit department can and should be used to help streamline
the order release process while helping to control credit risk:
- Establish a credit line for every active customer, including
COD customers. Make certain customers are aware that credit lines
can be changed from time to time, with or without advanced notice
at the sole discretion of the credit department.
- Always remember that credit line established for a customer
is intended only as a guideline, and should not be used arbitrarily
to deny credit to a customer.
- It is important to update credit files and review credit lines
at least once a year and adjust them based on the amount of credit
risk associated with doing business with a customer. Major credit
lines may need to be reviewed quarterly.
- Work proactively with sales to determine what credit limit
customers will need. Try to qualify customers in advance for
higher credit limits. Why? Because it places a serious strain
on the business relationship if orders are held by the credit
department pending receipt of additional information needed to
make an informed decision about whether or not to release the
- Don't rely on personal guarantees to 'shore up' a high-risk
account when establishing a credit limit. In a worst case scenario
both the company and the individual guarantor will file for bankruptcy
- When establishing a credit limit for a high-risk applicant
that is a subsidiary of a low risk parent company, recognize
that a parent company normally has no liability for the debts
incurred by its subsidiaries.
- Don't over-use credit limits. Establishing appropriate credit
limits will reduce the number of orders that end up on credit