Questions & Answers
Creditors’ Rights 23
A: Most companies use one of two policies in determining credit lines. One approach hinges on an in-depth investigation that involves obtaining business and bank references, reviewing credit
applications for consistency with other information sources, and retrieving financial statements or credit bureau reports. The more you can learn about the customer, the better educated you’ll be on whether the customer is creditworthy. The other approach is to conduct a cursory review, grant a small credit line and review the decision after a few months of experience. In either case, the credit pot can be sweetened with negotiations regarding credit limits. When it comes to actually “doing the math,” there are two 10 percent rules that coexist and that should be considered in credit limit calculations. First, the upper limit on credit should be no higher than 10 percent of the customer’s net worth. When a customer is a large business, the first rule can create an uncomfortably high ceiling. That’s why the second rule tempers the first: no one customer should account for more than 10 percent of the credit-granting company’s annual business. Crunch the numbers and use your best judgment…keeping in mind that new businesses can often obtain $50,000 credit limits from some credit card issuers.
