Customer Credit Policy: How to Set B2B Credit Limits

Quick answer: A customer credit policy sets the rules for selling on payment terms: who qualifies, how you check them, what credit limit each customer gets, which terms apply and what happens when payments slip. A good policy sizes each limit to expected purchases and to the loss you can absorb, and is reviewed regularly.

Every time you deliver work and send an invoice payable in 30 days, you are lending money to your customer, interest-free. For most B2B businesses that is unavoidable: buyers expect terms. The question is how much to lend, to whom, and for how long. Without a written customer credit policy, those decisions get made under sales pressure, one order at a time, and the result shows up months later as overdue invoices and write-offs. This guide explains what to put in a policy, how to calculate a credit limit with a worked example, and how to monitor accounts so problems surface early.

What a customer credit policy covers

A credit policy does not need to be long. One or two pages is enough for most small businesses. It should answer these questions:

• Eligibility. Which customers can buy on credit, and which must pay upfront or by card?
• Information required. What goes into the credit application, and which checks you run.
• Credit limits. How the limit is calculated and who can approve it.
• Payment terms. Standard terms, such as net 30, and when longer or shorter terms apply. Our guide to invoice payment terms explains the common options.
• Security. When you ask for deposits, guarantees or other protection.
• Monitoring. How often balances and payment behavior are reviewed.
• Escalation. What happens at each stage of lateness, from reminder to stopping supply to collections.
• Write-offs. When an unpaid balance is treated as uncollectible and who approves it.

Step 1: Decide who gets credit

Start with a default and allow exceptions. A sensible default for many small businesses is: new customers pay upfront, by card or with a deposit on the first order, then apply for terms once there is a relationship. A deposit invoice is a simple way to collect part of the price before work begins.

Exceptions might include large, well-known organizations, public bodies and customers introduced by trusted partners. Even then, collect the basic application information, because you will need it for collections if something goes wrong.

Step 2: Collect a credit application and check it

A credit application gathers the facts you need and gets the customer's signature on your terms of sale. At minimum, collect:

• Full legal name, registration number and tax ID.
• Registered and trading addresses.
• Owner or director names and years in business.
• Accounts payable contact, invoicing email and any purchase order requirements.
• Two or three trade references from other suppliers.
• The credit limit and terms requested.
• A signed acceptance of your terms, including late payment interest and the right to suspend supply.

Then verify what you can. Check the company exists and is active in the official register: in the UK, for example, Companies House shows filing history and any overdue accounts. Call the trade references and ask how much credit they extend and how promptly the customer pays. For larger limits, consider a report from a commercial credit agency and ask for recent financial statements.

Step 3: Calculate the credit limit

A credit limit is the maximum the customer may owe you at any one time, including invoices not yet due. A practical formula uses expected purchases and how long invoices actually stay open:

Credit limit ≈ expected monthly purchases × (expected days to pay ÷ 30)

Then apply judgment. Reduce the result for thin or negative information, and cap it at the amount you could lose without endangering your own business.

Credit limit worked example

Illustrative figures for a packaging supplier evaluating a new retail customer:

• Expected purchases: $8,000 per month.
• Requested terms: net 30. Trade references say the customer pays in about 40 to 45 days. Use 45.
• Base limit: $8,000 × (45 ÷ 30) = $8,000 × 1.5 = $12,000.
• Risk adjustment: the company has traded for only two years and one reference was mixed. The supplier applies a 25% reduction: $12,000 × 0.75 = $9,000.
• Affordability cap: the supplier decides no new customer may owe more than $10,000, because a loss above that would wipe out a month's profit. $9,000 is below the cap, so it stands.

The customer gets a $9,000 limit on net 30, reviewed after six months. If they pay reliably within terms, the supplier can raise it toward the base $12,000. Note what the limit means in practice: with $8,000 of orders a month, the customer will hit the limit if more than about one month of invoices is unpaid, which is exactly when you want a conversation to happen.

Credit risk tiers: matching terms to risk

Many businesses group customers into tiers so decisions stay consistent. An example structure:

Tier	Typical profile	Terms	Limit approach	Review
A: Low risk	Long history, strong references, pays on time	Net 30 (longer only if priced in)	Full calculated limit	Annually
B: Standard	Some history, acceptable references	Net 30 or net 15	Calculated limit less 20–30%	Every six months
C: Higher risk	New company, thin or mixed information	Deposit plus net 15, or payment on delivery	Small limit or none	Quarterly
D: Cash only	Past defaults, failed checks, no information	Payment upfront	No credit	On request

If a large customer insists on long terms, see our article on net 60 and net 90 payment terms for how to price the extra time into your quote.

Security options when the risk is higher

Sometimes the calculated limit is lower than the customer needs, but the business is still worth winning. Instead of saying no, your customer credit policy can list ways to reduce the risk:

• Deposits or staged payments. Collect a percentage before work starts and invoice the rest at milestones, so your exposure never reaches the full contract value.
• Shorter terms. Net 15 instead of net 30 halves the amount outstanding for the same monthly sales.
• Personal guarantees. For small companies, an owner's guarantee adds a second source of payment. Have the wording reviewed by a lawyer.
• Retention of title. A clause stating that goods remain yours until paid for can help recover stock if a customer fails, depending on local law and how the goods are used.
• Trade credit insurance. An insurer covers a share of the loss if an approved customer does not pay. Premiums and the insurer's own limits apply.
• Letters of credit. For export orders, a bank undertakes to pay against compliant documents. Our guide to the letter of credit invoice explains what the bank checks.

Handling a request for a higher limit

Good customers grow, and growth often arrives as a request to raise the limit. Treat it as a fresh, smaller credit decision rather than an automatic yes. Look at how the customer has paid so far: average days to pay, any disputes, any returned payments. Ask why the higher limit is needed; a seasonal peak justifies a temporary increase with an end date, while a permanent increase in orders justifies recalculating the limit with the formula above. If the information supports the increase, approve it in writing with the new figure and the review date. If it does not, offer an alternative, such as a higher limit in exchange for shorter terms or a deposit on large orders. Customers usually accept a clear, reasoned answer more readily than a vague delay.

Step 4: Put the terms on every invoice

A credit policy only works if every invoice reflects it. State the due date as a calendar date, not just "net 30," show the payment methods you accept, and include any late payment interest your contract allows. Our guide to late payment fees covers how to word them. You can add all of these to the notes and terms field in the free invoice generator, which also shows the amount paid and the balance due so customers on installments can see what remains.

Step 5: Monitor accounts and act early

Credit risk changes over time. Build a short monthly routine:

• Run an accounts receivable aging report and look at every customer with a balance over 30 days past due.
• Compare each customer's balance with its limit. Flag anyone above 80%.
• Watch for changes in behavior: a customer who always paid at 30 days now paying at 50 is a stronger signal than one who always paid at 50.
• Track your overall days sales outstanding to see whether credit is loosening across the board.

Set an escalation ladder in advance, for example: reminder at 1 day overdue, phone call at 14 days, order hold at 30 days, final notice at 45 days, and collections or legal action after 60 days. The invoice collections guide covers each stage in more detail.

Common credit policy mistakes

• Letting sales set the limit. Limits approved by the person paid on the sale tend to be generous. Separate the decision, even informally.
• Never reviewing limits. A limit set three years ago reflects a different customer and a different economy.
• Ignoring concentration. If one customer owes a third of your receivables, its failure becomes yours. Cap exposure to any single customer.
• Extending terms without pricing them. Longer terms tie up cash. Your working capital pays for every extra day.
• Not getting terms signed. Late payment interest and suspension rights are much easier to enforce when the customer has agreed to them in writing.
• Treating overdue as normal. If you keep shipping to a customer who is 60 days late, you are increasing a loan that is already in trouble.
• No write-off rule. Without one, uncollectible balances sit in receivables for years and overstate your assets. Our guide to the bad debt write-off explains the process.

Customer credit policy checklist

• Written eligibility rules, including the default for new customers.
• Standard credit application form with signed acceptance of terms of sale.
• Verification steps: official register, trade references, credit report above a set limit.
• Credit limit formula and a maximum exposure per customer.
• Named approvers for new limits and temporary increases.
• Risk tiers with matching terms and review frequency.
• Due date, payment methods and late payment terms printed on every invoice.
• Monthly aging review with limit utilization flagged.
• Escalation ladder with days and actions.
• Write-off rule with approval and documentation steps.

Next step

Write the first version of your policy this week, even if it is half a page. List your top ten customers by balance, calculate a credit limit for each using the formula above, and compare it with what they owe today. Any customer already above its calculated limit deserves a conversation now, not after the next missed payment.