Credit limit: MORE guarantees (for) your company
The credit limit is crucial to determinate how much credit can be granted to a customer. Unless the customer is the end consumer, the time gap between the sale of a product and its payment exposes the company to the customer insolvency risk. As a matter of fact, during this time the customer could potentially default, causing a loss to the company.
The credit limit refers to the amount of the maximum exposure recommended to ensure the payback.
Why then the amount of the credit limit differs from service to service?
How to calculate the credit limit
There is no standardized approach to calculate the credit limit. Different services can therefore give different outcomes. With a proper documentation on the client’s financial situation, any company could potentially develop an internal credit limit calculation model. Once implemented, the procedure should then be applied to any new client, and the commercial limit should be recalculated every year according to the financial statement. Since the process is expensive and time-consuming, most companies resort to external services.
The parameters considered to assess s-peek’s credit limit are as follows.
Company size: in broad terms, companies are classified by size according to their turnover and staff headcount. The large a company is, the more resources it has and the higher is the credit limit.
Years in business: enterprise with a long-lasting business history are likely to be more resilient to financial shocks than newborn companies.
Average number of suppliers: the more the suppliers, the lower the credit limit.
Total costs of suppliers: a large enterprise is likely to spend more on supplies than a small or medium-sized company. The credit limit is therefore proportional to the suppliers’ total costs (compared with the sector’s average amount).
Company’s liquidity: liquidity is the amount of cash or liquid assets easily available a company has.
MORE Rating and solvency rating: the MORE Rating assess a company creditworthiness, while the solvency rating assess the company’s ability to meets its long-terms debts.
s-peek evaluations are based only companies’ public data and information disclosed in the financial statement, which doesn’t mention the number of suppliers.
Nevertheless, the average number of suppliers can be guesstimated according to the Pareto principle, which states that 80% of the consequences come from 20% of the causes. Applied to the specific case, it means that 80% of the total costs are given by only 20% of suppliers. Once the costs of the major suppliers have been determined, it is also possible to estimate the average number of suppliers through a sector analysis.
Credit limit not available: why sometimes s-peek’s credit limit amount to 0 €?
Companies with a credit rating lower than CCC (like CC, C or D) are vulnerable companies, particularly exposed to the default risk. In such a risky situation, would you ever advise a company to grant a credit to its client?
Now you know how it works: just download s-peek and try it yourself. You can find the credit limit within the reports FLASH or Extended12M.