Enough is Enough
Ever thought about capping the amount you’re happy to let a client owe you before enough is enough?
Setting credit limits for your customers can be a great way of minimising your exposure to poor payers and lower your risk to non-payers. However, it may also restrict a growing client from trying to spend more with you. So where do you set the limit?
Each customer will have different requirements – as well as different reputations or financial scores. There is no exact science to this, and sometimes you will need to go with your gut and assess your own risk appetite. Internally, you should also review the total debt you’re owed and analyse it by client. You may decide that you do not want any one client owing you more than x% of the total debt – if they went bust that could be a significant write off dependant on the overall value.
Here’s a few suggestions;
An ideal start would be to review the client on a credit scoring platform (such as company check or creditsafe). Soon, app integrators to platforms such as Xero, like Futrli, will be adding this to their system but there’s no word on what that may be.
Next up I would recommend setting yourself a base-line formula such as:
[Average monthly spend incl VAT x (average amount of time to pay in days / 30)] x 110% = Required credit limit
This way you have a limit that would not restrict current trade with room for 10% growth.
Then you should measure that against the credit score and suggested credit/contract limits to see if they are close – or at least not above the risk level.
For some customers that are a pain to pay on time, that need winding in a bit, you may decide to use the following formula instead;
[Average monthly spend incl VAT x (preferred amount of time to pay in days / 30)] x 110% = Required credit limit
There will be occasions there you will need to tailor the formula based on the client. So, for Big Company Ltd for example dictating 60 days, if they were a new customer, you would ask them what their expected monthly spend would be, and add in the 60 days as the average amount of time.
As I say, there’s no hard and fast rule for this. Just make sure that you keep debt levels monitored, payment terms watched and make sure your customers are able to grow with you as long as they’ve proven they can pay on time.