Sum And Substance Of ‘Credit Limit’

What Is Credit Limit?The financial institutions set a maximum amount of credit that can be offered to their customers, which is known as the “Credit limit/Cash Credit” in financial terms. A cash credit is a short-term fund loan offered to a company. Usually this forms a part of secured loan and is offered against collateral. Banks check the credit worthiness of client basis past historicals, repayments track record for previous loans & type of business and collateral offered. Once a security for repayment is established, the business houses can draw up to pre-fixed amount mentioned on the Sanction letter.Credit Limit for Customers:If the customers want to avail credit limit, it is essential for them to have a great credit history with periodic higher value payments. This can also act as an absolute form of leverage for the customers. Banks do offer ad-hoc facilities under special request made by customer basis type of business, seasonality and repayment track record, but for all such credit limit amount, he might have to face consequences like paying higher interest rate for ad-hoc limitsCustomer should ensure that a right product mix is offered to him at the time of sanction and credit limits offered is in line with his future business requirement.To Evaluate And Estimate The Credit Limit, Following Are The Mandatory Questions:The foremost question that is asked to assess your credit limit is- how long are your payment terms? It is said that the prior sales influence the future sales, the longer the better.What is the stretch of the company's sales contracts?What is the level of competition in the market for the product or the service that is offered by different financial institutions.Is the growth rate of the borrowing company substantial or is the profit margin facing constraints?Are the bank references evident? What are the financial information you can obtain from the  customers?Can the company manage to buy credit default swaps or trade credit insurance on the customers?What is the level of confidence bestowed on the in-house collections team and their processes?What is the stretch of the company's sales contracts?Based on what criteria and formulas are companies applying to assess the credit limit based on customers' financials (i.e. percentage of net worth, etc.)?Can the sales transactions on open account or letter of credit (LC) be used? LC serves as a good tool for credit risk management, but LC requires line of credit.What is the margin of the product or the service and what is the loss rate that can be assumed? Like the credit card companies do to build the card volumes.The Benefit of Informing Credit Limit to the Customers:The customers can plan their actions on purchases when they know their credit limit.    If the credit limit extended is inadequate, it can be discussed with the credit department and additional information that increases the credit line can be provided to the credit manager.Cash can be paid for the new shipments, or it can either be paid down to the account if the customer is in need to make further purchases above the credit limit. If the customer is not qualified for a large credit, the credit manager can have a dialogue on what conditions the credit limit can be increased in the future.Informing a customer on their credit limit reduces the chances of having to tell in the future that a pending order is being held and cannot be released.The business customers are informed on the maximum amount that can be lent, as it allows them to order goods to the available limit and mitigate their risks. Credit limit is consistently done to re-evaluate the customer creditworthiness and their financial health, and all of this analysis is covered in the company’s credit policy.
Saravana Bhaskar
Rated 4.0/5 based on 20 customer reviews
Sort by :

Sum And Substance Of ‘Credit Limit’

Saravana Bhaskar
News Article
13th Nov, 2017
Sum And Substance Of ‘Credit Limit’

What Is Credit Limit?

The financial institutions set a maximum amount of credit that can be offered to their customers, which is known as the “Credit limit/Cash Credit” in financial terms. A cash credit is a short-term fund loan offered to a company. Usually this forms a part of secured loan and is offered against collateral. Banks check the credit worthiness of client basis past historicals, repayments track record for previous loans & type of business and collateral offered. Once a security for repayment is established, the business houses can draw up to pre-fixed amount mentioned on the Sanction letter.

Credit Limit for Customers:

If the customers want to avail credit limit, it is essential for them to have a great credit history with periodic higher value payments. This can also act as an absolute form of leverage for the customers. Banks do offer ad-hoc facilities under special request made by customer basis type of business, seasonality and repayment track record, but for all such credit limit amount, he might have to face consequences like paying higher interest rate for ad-hoc limits

Customer should ensure that a right product mix is offered to him at the time of sanction and credit limits offered is in line with his future business requirement.

To Evaluate And Estimate The Credit Limit, Following Are The Mandatory Questions:

  • The foremost question that is asked to assess your credit limit is- how long are your payment terms? It is said that the prior sales influence the future sales, the longer the better.

  • What is the stretch of the company's sales contracts?

  • What is the level of competition in the market for the product or the service that is offered by different financial institutions.

  • Is the growth rate of the borrowing company substantial or is the profit margin facing constraints?

  • Are the bank references evident? What are the financial information you can obtain from the  customers?

  • Can the company manage to buy credit default swaps or trade credit insurance on the customers?

  • What is the level of confidence bestowed on the in-house collections team and their processes?

  • What is the stretch of the company's sales contracts?

  • Based on what criteria and formulas are companies applying to assess the credit limit based on customers' financials (i.e. percentage of net worth, etc.)?

  • Can the sales transactions on open account or letter of credit (LC) be used? LC serves as a good tool for credit risk management, but LC requires line of credit.

  • What is the margin of the product or the service and what is the loss rate that can be assumed? Like the credit card companies do to build the card volumes.

The Benefit of Informing Credit Limit to the Customers:

  • The customers can plan their actions on purchases when they know their credit limit.    

  • If the credit limit extended is inadequate, it can be discussed with the credit department and additional information that increases the credit line can be provided to the credit manager.

  • Cash can be paid for the new shipments, or it can either be paid down to the account if the customer is in need to make further purchases above the credit limit.

  • If the customer is not qualified for a large credit, the credit manager can have a dialogue on what conditions the credit limit can be increased in the future.

  • Informing a customer on their credit limit reduces the chances of having to tell in the future that a pending order is being held and cannot be released.

The business customers are informed on the maximum amount that can be lent, as it allows them to order goods to the available limit and mitigate their risks. Credit limit is consistently done to re-evaluate the customer creditworthiness and their financial health, and all of this analysis is covered in the company’s credit policy.

Saravana
Blog Author

Saravana Bhaskar is the Brain Child behind incubation of White Matter. With over a decade of rich banking experience, he has handled many eminent positions in bank from Global Gateway Coordinator to Portfolio Head -South India. He is catalyst in steering White Matters’ association globally, with his proven abilities of leadership; his vision is to achieve transformational changes at White Matter. Bhaskar is true Car enthusiast, who has an insatiable interest in cars. He is an avid reader, and has ear for Music.

Leave a Reply

Your email address will not be published. Required fields are marked *

SUBSCRIBE TO OUR BLOG

Follow Us