What is the best criteria to set credit limit & period

1-Conduct Survey and analyse the report to find the strength of company.(Eg.No.of staff,year of establishment,Banks,Projects in hand,Year neede to compleet the project and project cost etc...)

2-Must take a reference company details,who currently supply materilas on credit basis.Call those companies and ask the details.

3-Never give full credit limit asked by the customer,but half of that,until2-3 payments is cleared.

I thing it depends on the nature of facility that you are offering. for example, if company/customer need working capital facility, than limit should be decided upon their cash conversion cycle and if you are talking about limit it should be renewable every year.

Credit Limits. Are threshold that a company (creditor) will allow its customers to owe at any one time without having to go back and review their credit file.Credit Limit is the maximum amount that a firm is willing to risk in an account.

Credit Limits helps the creditor in the following ways:

1.It frees up valuable time for other credit management tasks

2.It speeds up the sales process

3.It reduces risk and improves collection activity and efforts.

4.It is an account monitoring tool

Credit limits have also known to upset customers. Thus, the decision to communicate credit limits to your customers rests upon you. It has its advantages and disadvantages.

One important approach that credit management should take with customers who are near their limits; asking for more or with overdue amounts is that of a counselor. This is the time to collect more information on your customer or cajole them into paying overdue amounts.Credit Limits need not be Sales Limits and should be used as a guide to enhancing profitable sales. They can be flexible and revised often.

Issues to consider when setting Limits

The first thing that the company needs to consider is its own exposure.What is the kind of exposure that a company can take with its customer base? Will it be a Liberal or a ‘Conservative’?

Important factors influencing these elements will be

·The strength or weakness of ‘Product or Service’ that is being sold;

·The degree of ‘Competition’ or ‘Opportunities’ in the marketplace; the nature of the industry that you are in or deal with- Is the industry growing or going? Your role as a supplier, especially if you are the key supplier to your customer.

·Whether you are a ‘Secured’ or ‘Unsecured’ creditor. If there is any lien rights that you can exercise.

·The financial strength of your customer; the information that you have or can obtain from your customer or other sources. The number of years that the customer has successfully run that particular business and the reputation carried in the marketplace, both of the business and its management. The customer’s businesses plan or blueprint to operating the business in the future.

·The overall ‘Margin’ that the product or service contributes to the bottom line;

·The confidence that you have in your in-house ‘Collection’ process;

·The length of your terms to your customer because risk is directly proportional to the length of your terms

Another vital question that senior management in the company need to answer is: How much of their working capital are they willing to employ in their customers? Often companies forget to first evaluate these questions and get themselves into a cash crunch situation.

As indicated earlier setting credit limits is not a science. Although, by incorporating the process into their scoring models some companies have made it into a near science.The starting point to setting most credit limits is the needs and requirements of the customer. What is the customer asking for and subsequently what will be the requirement periodically? If the customer is creditworthy then would you as a customer want to set the a credit limit for the customer higher than what is being sought in order to save time in the future i.e. if credit limits are to be increased later due to increased sales volume?

The following are some common techniques applied in setting Credit Limits:

Trade References: After obtaining the trade references you can compare the amounts of the High Credits awarded to your customer.(applicant) You can choose the ‘Highest’ from the ‘High Credits’ or take an ‘Average’ or pick the ‘Lowest’.

Bank References: In doing a bank reference on your applicant find out the amount of line of Credit that was established by the applicant with the bank. If this line is unsecured then perhaps it can give you a little more comfort in setting a relatively higher credit limit for the applicant. The use of this information is rather sketchy since the banks generally are secured creditors with stiff remedies upon default.

Agency Credit Reports: Credit Agencies generally give two pieces of information that are quite popular among credit professionals that aid in the setting of credit limits.

1.Payment Performance: This section lists the paying habits of the applicant. The information is collected from different suppliers to the applicant. You can treat this section almost like doing a trade reference. It will give you High Credits and the customer’s (applicant) payment habit in different dollar ranges. It is quite possible that the customer might be a good paymaster in the dollar range that is being sought from you as a credit limit. Thus, increasing your confidence level.

2.The Rating: Based on certain credit and financial information obtained on the customer (your applicant), the Agencies assign ratings. These ratings can assist you in setting your own credit limits. You can map your own limit amounts against individual ratings that a credit agency assigns.

The best criteria to set credit limit period for Factoring is the biggest advantages of factoring are the immidiate conversion of receivable . Factoring helps a company having liquidity without creating net liability on its financial condition. So factoring is flexible financial tool providing timely fund , eiificient record keepingand effective management of the collection process. So factoring allows the firm to use cash for the growth needs of business.

Before Setting up the limit & time period, evaluate the opportunity through:

- Analysis of Financials (Ability to extend Credit)

- Potential Business Volume with the customer

- Analysis of Customer's Financial Statement (For Credit Worthiness)

required working capital for short trem

As I observed as a credit controller, we have analyses..

For New Customer

Analysis audited financial of customer

Count Z Score of Financial statement

Analysis of Project where the customer working

Analysis Weekly, Monthly, Quarterly & Yearly requirement

Age of Project

Market share of customer

Market Trend

For Existing customer

Analysis past payment Trend of customer

Analysis Order trend in last two year

Highest Order of two month in year

Age of Project

Market Trend