Credit Limit Sizing
Run the four limit-setting methods side by side — requirement-based, capacity-based, insurer-led and portfolio concentration — and take the lowest, as you should. A limit is a ceiling, not a target: the binding constraint is the one that matters. Companion to B2B Credit, Part I.
Inputs
Start from a preset, then adjust. Each block feeds one method.
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The four methods
Bars are scaled to the highest method. The amber bar binds.
How this is calculated
Requirement-based is Monthly purchases × (Terms ÷ 30) × Buffer. It answers a different question from the others — not how much the customer can owe, but how much they need to at any moment to keep buying. Set a limit below this and you throttle good business; there is no prize for a limit the trade constantly bumps against.
Capacity-based is Counterparty net worth × Share. It caps your unsecured exposure at a prudent fraction of the customer's own equity — the cushion that absorbs a loss before you do. A thinly capitalised buyer earns a small limit no matter how much they want to buy.
Insurer-led is Approved cover × (1 + Co-insurance). A credit insurer or bureau has underwritten this name independently; their approved cover is a market signal you paid for. The top-up is the uninsured slice you consciously choose to run above it — zero if you want to stay fully covered.
Portfolio concentration is Total receivables × Max single-name share. Even a creditworthy customer becomes a portfolio risk if they grow too large a share of your book. This method has nothing to do with the customer and everything to do with your own resilience.
The recommended limit is the minimum of the four. Each method is a separate ceiling for a separate reason; the real limit is the lowest one, because the tightest constraint is the one that would actually be breached first. Taking an average, or the method you like best, quietly defeats the other three.
Illustrative model for educational use. A production limit framework would layer tenor, security and guarantees, group exposure, country risk, and a formal review cadence. Not lending, credit or investment advice.