| This week I would like to discuss the question of
credit limit versus credit line. First we should define the difference between the two.
Although many question if there is a difference, the fact is there is one. A credit limit
is the maximum amount a customer can have regardless of whether the account is current or
not. Once the limit has been reached, no more may be obtained until the balance has been
brought below the limit. A credit line is the maximum a customer
may have without specific authorization. Once the line has been attained, further orders
may be released, but it requires authorization.
There are many factors that are used to determine a credit line. Among these
are the customers ability to pay, demand for our products & services, condition of the
industry, terms of sale and, of course, let us not forget, formulas. There are a variety
of formulas, some good, some not so good, for establishing a credit line.
It is my opinion, however, that every customer should have a credit limit.
That limit should be determined by only one factor, our firm's net worth. In an unsecured
position we should give careful consideration to exposing our firm to an amount of credit
in excess of what we can accomodate in the event our customer chooses not to or is unable
to repay us.
No one customer should have a credit line in excess of our firms' net worth.
To determine net worth for credit limit purposes the formula would be total assets minus
accounts receivable minus total liabilities.
Establishing reasonable credit lines and limits allows us to better manage
the account receivable and be more diligent in our roles of risk management.
What do you think? Write and share your thoughts.
I wish you well.
( I can think of a few thoughts on this subject! Rich H ) |