Credit Limit Calculator
Set a sensible credit limit for a business customer. Enter what they expect to buy and a few numbers from their balance sheet, and see the limit each standard method suggests, adjusted for risk.
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How to calculate a credit limit
Start with how much the customer needs, then check it against what they can afford. The sales-based figure tells you the exposure your terms create. The balance sheet methods tell you how much of that exposure the customer can carry. Take the lowest and scale it by risk.
What the customer expects to buy from you on credit each month. Use their order forecast, or last year's billing from your sales register divided by 12.
Example: ₹4.8 crore billed last year = ₹40 lakh a monthThe credit days on your contract or invoice. Take it from the customer master in your ERP.
Example: net 45A buffer for normal slippage between due date and cash in the bank. Base it on how late this customer usually pays, from your AR ageing history.
Example: usually pays 10 to 15 days late = 15 daysShareholders' funds minus goodwill and other intangibles. Take it from the customer's audited balance sheet or a credit report.
Example: equity ₹13 crore less ₹1 crore goodwill = ₹12 croreCash, receivables, inventory and other assets that turn into cash within a year. Find it on the balance sheet or the MCA filing.
Example: ₹18 crore at 31 MarchPayables, short-term borrowings and other dues within a year. Same source as current assets.
Example: ₹13 crore, giving working capital of ₹5 crore| Sales-based: 40 L × 60 ÷ 30 | ₹80,00,000 |
| Net worth: 10% of ₹12 Cr | ₹1,20,00,000 |
| Working capital: 20% of ₹5 Cr | ₹1,00,00,000 |
| Lowest method | ₹80,00,000 |
| Recommended (grade B, 75%) | ₹60,00,000 |
- Work out the exposure your terms create: 40 lakh a month for 45 + 15 days = ₹80 lakh
- Check what the balance sheet supports: ₹1.2 crore on net worth, ₹1 crore on working capital
- Take the lowest of the three, ₹80 lakh, and apply the risk factor: 80 × 75% = ₹60 lakh
- ₹60 lakh covers 45 days of purchases, so the customer can stay on net 45 without hitting the limit if they pay on time
Credit limit rules of thumb by risk grade
Most credit teams use a simple grading scale and scale the limit down as risk goes up. These are starting points. Your own loss history should shape the factors over time.
| Grade | Limit factor | Typical profile |
|---|---|---|
| A, strong | 100% | Listed or large group company, clean credit report, pays on terms for over a year |
| B, good | 75% | Profitable, healthy current ratio, occasional delays of a week or two |
| C, watch | 50% | Thin margins, high leverage, or regular payments 30 days past due |
| D, weak | 25% | Losses, negative working capital, disputes or legal cases. Consider security or advance payment |
| Net worth method | 10% of TNW | A common conservative benchmark used by trade credit insurers |
| Working capital method | 5% to 20% of WC | Lower end if the customer has many large suppliers sharing that working capital |
Indicative factors drawn from published credit management guides. Set your own in your credit policy.
Get a one-page summary with every method, the recommended limit and the exposure in days.
How credit teams set and review limits
A number from a formula is only the start. Good credit teams back it with evidence and revisit it before it goes stale.
Use a bureau report (CRIF, CIBIL Rank, D&B) and the latest MCA filings to check net worth, charges on assets and any legal cases.
Your own AR ledger is the best predictor. Average days late over the last 12 months says more than any ratio.
Bank guarantees, letters of credit, post-dated cheques or a security deposit let you sell to grade C and D customers safely.
Trade credit insurance covers non-payment on named buyers. The insurer's own limit is a useful second opinion.
Review A and B customers yearly and C and D quarterly, plus any time a payment slips past 30 days or an order would breach the limit.
Open orders plus unpaid invoices is the real exposure. Teams that monitor it daily in receivables catch breaches before goods ship.
Frequently asked questions
Multiply expected monthly purchases by your payment terms plus a few grace days, divided by 30. Then check it against 10% of the customer's tangible net worth and around 20% of their working capital. Take the lowest figure and reduce it for risk grade.
It is a common benchmark that caps trade credit at 10% of the customer's net worth, meaning assets minus liabilities. Using tangible net worth, which strips out goodwill, makes it more conservative.
Usually a little. If the limit only covers exactly 45 days of purchases on net 45, one slow payment blocks the next order. A grace buffer of 10 to 15 days keeps good customers trading without letting exposure run away.
The working capital method gives zero, which is a warning sign. Many large retailers and platforms run negative working capital by design, so look at net worth and payment history, and consider security before you extend open credit.
At least once a year for low-risk customers and every quarter for higher-risk ones. Review immediately when a payment goes more than 30 days late, a new set of accounts comes out, or an order would push exposure over the limit.
Unpaid invoices, including those not yet due, plus orders accepted but not yet invoiced. Some teams also include unbilled deliveries and disputed amounts, since both can turn into receivables.
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