Plain definition
A customer credit limit is the maximum unpaid exposure a seller permits for one customer under its credit policy. It controls how much delivery or service can occur before payment, using the customer’s creditworthiness, payment history, concentration risk, and the seller’s ability to absorb a loss.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A distributor sets a limit for a contractor. The contractor already owes and requests another delivery on credit. Sales sees a valuable order; credit control sees that the delivery would take exposure to . It can obtain a partial payment, require cash on delivery, approve a documented temporary exception, or decline the credit portion.
Why it matters
A limit is useful only if orders actually stop or escalate when it is breached. Ignoring it after the sale turns a policy into a report about losses already taken.
Practical consequence
Set limits using current evidence, review them after missed payments or major contract changes, and include all related accounts where one customer operates through several entities. Record who can approve exceptions, their expiry date, and the cash-collection plan that justifies them.