A commercial credit limit is the maximum amount a business customer is allowed to owe at once. Sellers set credit limits for their customers, and factors set their own limits on how much they will buy from each account debtor.
How it works in factoring
A factor's credit limit on a customer is separate from the seller's own limit. When a factor approves a customer, it decides how much of that customer's outstanding invoices it will hold. Invoices that would push the total above that cap may be:
- Declined
- Funded only after the customer pays down older invoices
- Accepted on recourse terms even under a non-recourse agreement
Factors base limits on the customer's payment history, financial strength, credit bureau information and their own experience. Limits are revisited periodically and can rise or fall over time.
Illustrative example: A factor approves a customer with an assumed $50,000 limit. The seller has $42,000 in open factored invoices for that customer and submits a new $15,000 invoice. Only $8,000 fits within the limit, so the rest waits until the customer pays.
What to check
- Ask for credit limits on your major customers before signing
- Understand how limits are communicated and how quickly they can change
- Align your own sales commitments with what the factor will fund
The factor's credit work can also serve as an early warning. If a factor lowers a customer's limit, it may be a sign to tighten your own terms with that customer.