How to Set Customer Credit Limits Before You Offer Terms

Many bad debts are decided on the day you open a customer's account, not the day the invoice goes overdue. A clear credit limit, set before you offer terms and reviewed on a schedule, is the cheapest protection a growing business has.

Yet many SMEs in the GCC and India still give credit on a handshake and a good first order. This guide shows how to set limits with simple rules, check new customers properly and review exposure before it becomes a problem.

Why credit limits matter more than collections

A strong collections routine helps you get paid. A credit limit decides how much you can lose if you don't. Without one, a single large customer can quietly build up a balance that is bigger than a month of your profit.

Limits also protect your own cash flow. Every riyal, dirham or rupee sitting in receivables is money you have already spent on stock, staff and suppliers. Credit terms are a loan you give your customer, and they should be approved like one.

Step 1: Check the customer before the first credit sale

Ask every new credit customer for the same basic pack: trade licence or registration, names of owners and signatories, bank details, trade references and, for larger accounts, their latest financial statements. Make it a standard form so nobody feels singled out.

Then use the official credit bureaus where you can:

• Qatar: Qatar Credit Bureau's commercial credit report covers a company's registration details, open and closed credit facilities, 24 months of facility history and records of bounced cheques. The bureau issues it to corporations and its member institutions on request.
• UAE: Al Etihad Credit Bureau issues credit reports for both companies and individuals. Commercial reports are subject to approval by the bureau's legal department, so allow time.
• India: ask for a recent commercial credit report and the customer's GST registration details.

If you can't get a bureau report, a simple request works well: ask the customer to share their own report with you. A business that refuses to share anything is giving you useful information too.

Step 2: Set the limit with a simple formula

You don't need a complex scoring model. Start with what the customer is likely to buy and how long you are willing to wait.

A practical starting point is: expected monthly purchases × (credit days ÷ 30), plus a small buffer for timing. Then cap it based on risk.

For example, a hypothetical Doha building materials supplier expects a new contractor to buy QAR 80,000 a month on 60-day terms. The working limit is about QAR 160,000. If the bureau report shows bounced cheques or the contractor has traded for under two years, the supplier might start at half that and raise it after six months of on-time payment.

Write down three or four risk bands, each with a maximum limit and maximum terms. That way the sales team knows the answer before they promise anything.

Step 3: Agree who can approve what

Credit limits fail when anyone can override them. Set a short approval matrix and stick to it:

• Sales can request a limit but cannot approve it.
• The finance manager approves limits up to an agreed amount.
• The CFO or owner approves anything above that, and any exception to the risk bands.
• Every approval is recorded with the date, the amount and the reason.

Your system should block or flag new orders when a customer goes over their limit or has invoices beyond a set number of days overdue. A blocked order is a conversation, not a lost sale.

What this means for your business in the GCC and India

In the GCC, post-dated cheques and personal guarantees from owners are familiar forms of comfort. They help, but they are not a replacement for a limit. The Qatar bureau report includes bounced cheque records for a reason. Check the report before you rely on the cheque.

In India, credit terms have a legal edge when the seller is a registered micro or small enterprise. Under the MSMED Act, buyers must pay within 45 days of accepting the goods or services, and late payers face compound interest at three times the bank rate notified by the RBI. If you sell to Indian buyers as a micro or small enterprise, keep your registration current and show it on your invoices. If your group buys from Indian micro or small suppliers, the same rule applies to you as the buyer. For how these rules apply to your own contracts, check with your adviser.

For groups with entities in more than one country, set limits at group level as well. A customer that owes your Dubai company and your Mumbai company should be seen as one exposure.

Your credit limit checklist

• Create one standard credit application form for all new customers.
• Pull a bureau report for every account above a set size.
• Set three or four risk bands with maximum limits and terms.
• Write an approval matrix and make sure sales cannot approve limits.
• Block or flag orders when a customer goes over limit or overdue.
• Review your top 20 customers' limits every quarter, and any customer who pays late twice in a row.
• Track total exposure by customer across all group companies.

If you want this to run without spreadsheets, NexCFO's AR collections module tracks balances, overdue invoices and follow-ups across your customers, so problems are easier to spot early.

Set the limit first, and collections become a routine rather than a rescue.