This guide shows how to set a credit limit, what a credit policy should say, the collections steps by days overdue, a worked example from an ageing report, and the weekly checklist that keeps it running.
How do you set a customer credit limit?
Start from what the customer will buy and how long you give them to pay. A simple formula:
Credit limit = expected monthly purchases × (payment terms in days + 15) ÷ 30
The extra 15 days covers normal delays and the next delivery. A customer buying AED 60,000 a month on 60-day terms gets 60,000 × 75 ÷ 30 = AED 150,000.
Then adjust for risk:
- Trading history. New customers start lower, often cash or a small limit for the first three to six months.
- Credit bureau report. In the UAE, the Al Etihad Credit Bureau provides company credit reports; in Saudi Arabia, SIMAH does.
- Financial statements and trade references for larger limits.
- Security. A bank guarantee or post-dated cheques can support a higher limit.
Review every limit at least once a year, and straight away when a customer starts paying late or asks for a big increase.
What should a customer credit limit policy include?
One or two pages that sales, finance and management have all signed. It should cover:
The most important line is who can release a blocked order. If any salesperson can, the policy will not hold at month-end. Releases should be limited to the finance manager, with a reason recorded each time.
What collections steps should you take as invoices become overdue?
The same steps every time, getting firmer at fixed points. Predictability matters more than toughness: customers pay first the suppliers who always follow up.
| Days overdue | Action | Who |
|---|---|---|
| 3 days before due | Friendly reminder with a statement | Credit controller, sent automatically |
| 1 to 7 | Reminder email and call to the customer's accounts team | Credit controller |
| 8 to 15 | Second call; agree a payment date in writing | Credit controller |
| 16 to 30 | Salesperson visits or calls the owner; new orders need finance approval | Sales and credit controller |
| 31 to 60 | Account on hold: no new deliveries until paid down | Finance manager |
| 61 to 90 | Final written demand; any security is called | Finance manager |
| Over 90 | Legal action or collection agency; review the expected-loss provision for the account | Finance manager and management |
The sales team should be part of collections, not shielded from it. A salesperson who knows commission is paid on collected sales, not invoiced sales, takes payment terms seriously.
What does the routine look like on an ageing report? A worked example
A Dubai food distributor runs its receivables ageing every Monday. Here are five of its customers this week, in AED, with the action the routine sets for each.
| Customer | Limit | Balance | Current | 1–30 days | 31–60 days | 61–90 days | Over 90 days | Action |
|---|---|---|---|---|---|---|---|---|
| Supermarket | 300,000 | 280,000 | 220,000 | 60,000 | Second call; payment date agreed | |||
| Restaurant group | 150,000 | 172,000 | 90,000 | 50,000 | 32,000 | Over limit and over 30 days: on hold until the AED 32,000 over 30 days is paid | ||
| Grocery | 40,000 | 38,500 | 38,500 | Final demand; post-dated cheque presented | ||||
| Hotel | 200,000 | 120,000 | 120,000 | None | ||||
| Café chain | 60,000 | 45,000 | 45,000 | Legal advice; provision reviewed |
Across the five, AED 225,500 of AED 655,500 is overdue, about a third, and AED 83,500 is more than 60 days late. Without the routine, the restaurant group would still be receiving deliveries: its sales team saw a good customer, not one that had passed both its limit and 30 days.
On hold does not mean lost. The restaurant group paid the AED 32,000 two days later, which also brought its balance back within its limit, and deliveries resumed.
What should the credit controller check each week and month?
Every week
Every month
Days sales outstanding is the one number to watch: receivables divided by credit sales, times the days in the period. If it rises two months running, look at the customers driving it before it shows up in the bank balance.
How much should you provide for bad debts?
Under IFRS 9, the provision covers expected credit losses on all receivables from the day they are invoiced, not only debts more than 90 days overdue. Most distributors use a provision matrix: a loss rate for each age band, based on their own history of losses and adjusted for current conditions. Applied to the five customers in the example, with illustrative rates:
| Age band | Balance (AED) | Illustrative loss rate | Provision (AED) |
|---|---|---|---|
| Current | 430,000 | 1% | 4,300 |
| 1–30 days | 110,000 | 3% | 3,300 |
| 31–60 days | 32,000 | 10% | 3,200 |
| 61–90 days | 38,500 | 25% | 9,625 |
| Over 90 days | 45,000 | 50% | 22,500 |
| Total | 655,500 | 42,925 |
Set the rates from your own write-off history and review them at least once a year. Where you know more about one customer, such as an account in legal action, assess it on its own instead of using the band rate.
What does HYP see at distributors with overdue problems?
The limits usually exist; the block does not. Credit limits are recorded on the customer card, but orders are still entered and delivered because the check happens later, in finance, after the goods have left. By then the only tool left is a phone call.
The distributors with the lowest overdue balances check credit at the moment the order is entered, including for van sales on a handheld device, and let only finance release a blocked order. They also pay sales commission on collected sales. Those three changes do more than any collections script.
Collections feed straight into cash planning. Our guide to the 13-week cash flow forecast shows how to turn this ageing report into expected receipts. HYP checks credit limits when the order is entered. See how HYP handles credit control, statements and receivables on our Accounts Receivable & Payable page.