What is a credit limit?

When a distributor sells "on account", it is lending money for the length of the payment term. The credit limit caps that loan, so one slow payer cannot put the business at risk.

This is a general explanation, not credit or financial advice. Your finance team or credit insurer should set the actual rules.

Why a credit limit matters

Most B2B sellers invoice after delivery, on terms such as 30 or 60 days. Until the customer pays, that value is exposed. A limit gives the sales team a clear line: sell freely up to it, ask before going over it.

It also protects the relationship. Hearing "your next order is on hold" is awkward when a rep has already promised a delivery date. A visible limit lets the rep raise it early.

How a credit limit works

1. Request: a new customer asks for payment terms, often with trade references or financial statements.
2. Assessment: finance reviews the information, perhaps with a credit report, and sets a limit and terms.
3. Monitoring: the exposure is the unpaid invoices plus orders accepted but not yet invoiced. It is compared to the limit.
4. Review: the limit goes up with a good payment record, or down if payments slip.

Some sellers also keep a "credit hold" status. New orders wait until an overdue balance is cleared.

What goes into the decision

• The customer's payment history with you.
• Trade references and financial information the customer shares.
• The size and frequency of the orders you expect.
• The payment terms you offer.
• Whether the sale is covered by credit insurance, a letter of credit or a deposit.

Where the risk is high, sellers often ask for prepayment or a letter of credit rather than extending open credit.

An example from product sales

Say a plastics distributor gives a customer a limit of $20,000 on 30-day terms. The customer has $12,000 of unpaid invoices. A new order comes in for $10,000. The total would be $22,000, which is $2,000 over the limit.

The rep does not just refuse. They ask finance whether the customer can pay one invoice first, or whether the limit can be raised. The order goes ahead once that is settled. The check took a minute because the limit was written on the account and the rep asked before promising a date.

Related terms

• Letter of credit: a bank's promise to pay against set documents, which lowers credit risk.
• Purchase order: the buyer's order, which you check against the limit.
• Pro forma invoice: used when a buyer pays before shipping.
• Sales order: the confirmed order that adds to the customer's exposure.

How PromptLab handles it

The credit decision stays with finance and the systems it uses. PromptLab keeps the sales context in front of the rep: the account with its sales orders, invoices created from them, notes and email thread. You can add a custom field to the account for the agreed limit and terms, so the rep sees them when quoting.

Frequently asked questions

How do you set a credit limit for a customer?

Most sellers start from the customer's trade references, payment history and financial information, then pick a limit that matches the expected order size and terms. Finance should own that decision, and review it regularly.

What happens when a customer goes over their credit limit?

The usual step is to hold new orders until the customer pays down the balance or the limit is raised. Some sellers ask for a deposit on the excess instead.

Is a credit limit the same as payment terms?

No. Payment terms say how long the customer has to pay each invoice. The credit limit says how much they may owe in total at any time.

Who should approve a credit limit increase?

Normally finance or a credit manager, not the rep alone. The rep supplies the sales case, such as expected volume, and finance weighs the risk.

Can I record a credit limit in PromptLab?

Yes. Add a custom field to your accounts and enter the agreed limit and terms there, or keep them in a note. Reps see them when they quote, and finance still makes the call on any change.