Knowing how credit limits are set for your new or growing businesses gives you a competitive advantage. This article explains methods used to set and raise a business credit limit.
Setting a Credit Limit for Newer Businesses With Net 30 Terms
Newer businesses increase their chances of establishing good credit by purchasing from Net 30 vendors. Their first step is to complete online NET 30 account applications. When a business receives vendor approval for a NET 30 account, its initial business credit limit is set. Businesses with approved net 30 accounts can begin purchasing goods or services through the online seller’s website. For their net 30 business accounts, the net 30 vendor reports positive payment history (or negative payment experiences) to credit bureaus.
Net 30 Meaning (Net 30 Terms)
Net 30 is an invoice payment term, meaning the business customer receives interest-free credit for 30 days to pay their supplier or vendor by the due date. After 30 days, late payment fees may apply to unpaid balances.
Net 30 Account Applications with Net 30 Vendors
A NET 30 account application is an online form available on a NET 30 vendor’s website. An authorized officer must complete and submit the trade credit application. Companies with derogatory reports or delinquencies generally won’t be approved. The NET 30 vendor will quickly approve or disapprove a potential customer’s NET 30 credit application. Some net 30 vendors charge application fees.
Business Credit Approval Considerations
Standard factors for business credit approval by vendors and lenders include:
- Positive vs. negative credit payment history of a business
- Acceptable credit bureau score
- Timeliness of payments made to other suppliers and lenders
- Financial statement evaluation
- Revenue
- Cash flow, current assets, debt obligations, and liquidity ratios, indicating an ability to repay
The 5 Cs of credit used to grant credit are:
- Character
- Capacity
- Collateral
- Capital
- Conditions
Setting an Initial Credit Limit for New Business Customers
Suppliers may be challenged to set an initial credit limit for new business customers with a short operating history. To lessen their risk in providing credit terms to a near startup or customer with a short operating history (fewer than three years), the vendor may consider additional factors for credit approval and credit limits.
Additional credit approval factors for a newer business are:
- Personal credit score of the business owner
- Business plan review
- Industry evaluation
- Venture capital or other funding received, such as SBA loans
- Founding team’s business reputation and prior success record
- Personal guarantee by the customer’s business owner or collateral
For purchases of small amounts (such as office supplies) made by new business customers, collateral isn’t required. But for the purchase of expensive factory equipment, collateral may apply. An initial credit limit amount may be $100, first order total, or a vendor policy amount. As the new business purchases more products from the vendor, their positive credit history is reported to business credit bureaus. When customers pay promptly, their initial credit limit is raised over time. Credit limit increases are based on the supplier’s company policy for granting credit and the higher dollar amount of a customer’s purchases.
Setting a Credit Limit for More Established Growing Businesses
Once your company becomes more established with growing revenues and an operating and credit history, the credit limit-setting process becomes more reliable. Suppliers continue to use human reasoning and company policy guidelines to set credit limits. Tech-savvy companies apply machine learning models to predict credit risk. Business credit managers and financial executives belong to NACM, the National Association of Credit Management for education, trade credit and economic reports, certification, and best practices.
5 methods used to set growing business credit limits are:
- Creditworthiness Evaluation
- Revenue-based Credit Limit
- Collateral
- Industry Benchmark Comparison
- Machine Learning Model
Creditworthiness Evaluation
Most credit managers set a credit limit by evaluating creditworthiness. Creditworthiness includes past payments history and the business customer’s credit score from Dun & Bradstreet, Experian, Equifax, Creditsafe, or another credit reporting and scoring company.
Revenue-based Credit Limit
Some credit managers set and raise business credit limits at an amount that’s a percentage of revenue. The credit limit increases as businesses grow.
Collateral
The amount of collateral needed to secure the purchase of goods or services or loan sets the credit limit.
Industry Benchmark Comparison Credit Limit
Another method for setting a credit limit is to use a research source and set the credit limit to a typical credit limit amount for a customer’s industry and the customer size.
Machine Learning Model
Data scientists and financial analysts use computer models to predict credit repayment and the risk of business failure based on several dependent variables. For example, Creditsafe uses a proprietary Scoring Model determining the likelihood of company failure within the next 12 months.
Factors included in the Creditsafe Scoring Model are:
- Key commercial information
- Financial data
- Demographics
This information consists of:
- Trade payment information
- Key financial ratios
- Public information
- Industry sector analysis
- Performance indicators
Conclusion
Knowing how credit limits are set for your business gives you needed insight. To start receiving trade credit as your company grows, apply for an Office Garner NET 30 account. You’ll receive a prompt credit decision from this NET 30 vendor.
