Understanding the Concept of Credit Limit

August 17, 2023

Within the business scenario, credit is a tool of significant impact, providing companies with the ability to secure financing and enhance their activities. However, to avoid unnecessary financial risks, it is essential to understand the concept of credit limit and the relevance of exposure.

In this article, we will explore what the credit limit means, how it is determined, and the importance of monitoring and managing its exposure.

What is it and what are the advantages of providing credit limit to your customers?The credit limit corresponds to an amount established by the company and offered to its customers. This limit is defined based on various factors such as credit history, income, payment capacity, and risks associated with the borrower. Providing a credit limit to customers results in significant advantages, especially for loyal customers who have made purchases before and always paid on time. It can be seen as a form of recognition aimed at reinforcing the relationship and stimulating consumption, resulting in increased revenue for your company.

How is the credit limit determined?Determining the credit limit that a company is offering to customers involves a careful evaluation of the applicant's financial profile. In this case, it is important to keep customer data up to date, see the average ticket of each customer, and consult credit protection agencies.

What is credit exposure?Credit exposure occurs when a company is exposed to the total amount of credit granted to its customers at a given time and form of payment. Monitoring credit exposure is crucial for several reasons:

Risk management: It is important to consider the risks of defaults occurring. In this case, it is necessary to impose limits according to each customer and evaluate each case separately.

Future negotiations: The existing credit exposure can affect a company's ability to obtain more in the future. Companies consider the current exposure before approving new credit requests.

Financial costs: Credit exposure can influence interest rates and terms of future loans. Proper exposure management can result in better long-term financial conditions.

ConclusionThe credit limit is a useful strategy to provide access to financial resources, but its use requires responsibility and knowledge. Credit exposure is a key factor that deserves careful attention as it can affect the financial health of companies. Monitoring and managing credit exposure properly are essential steps to ensure solid financial decisions and mitigate unnecessary risks.

If you liked this article, be sure to check out other updates on our blog.

Raquel Sales

Head Marketing - Sales Journey

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