Credit limit

A credit limit is the maximum amount of credit offered to a customer. A credit limit is used to limit the amount of loss that a business will sustain if a customer does not pay. The amount of a credit limit is established by the credit department. The amount of the credit limit is based on a number of factors, such as:

The credit department may find itself under pressure from senior management or the sales manager when a customer wants to place an unusually large order, where they want the credit limit to be increased in order to record a large sale. While doing so can enhance reported revenues, it also increases the risk of incurring a large bad debt loss.