Credit limit
Credit limit is the maximum amount a supplier allows a customer to owe on account at any one time. It is part of trade credit: it helps control cash flow and the risk of late or non‑payment. The limit is a business decision, sometimes influenced by credit checks or credit insurance, not a legal requirement.
In practice, the limit is checked when you raise orders or invoices. If the customer’s open balance plus the new sale would go over the limit, the order may be put on hold, require upfront payment, or be reduced. Limits can differ by customer, currency or market, and can be raised or lowered based on payment behaviour.
Simple example
Your customer has a credit limit of 5,000. Their unpaid invoices total 3,200. A new order for 2,000 would take them over the limit, so the order is held until part is paid or prepayment is made.
Key points to remember about credit limits:
- The limit usually covers unpaid invoices on the account; approved credit notes free up headroom.
- Some systems also count open orders when checking the limit; review your settings to avoid surprises.
- Exceeding the limit does not cancel a sale automatically, but it may trigger a hold or require authorisation.
