what is a credit limit?
The credit limit gives you an indication of a company’s capability to settle potential credit transactions. It uses the credit capacity and risk score of a company to help create a guide to the level of credit that this company should be able to settle.

The credit limit is worked out differently for limited and non-limited companies.

how do you work out the credit limit for limited companies?
To work out the credit limit for a limited company, these three values are taken into consideration:

cash flow - this is calculated as the company’s pre-tax profit plus depreciation charged against that profit. In the absence of any net cash flow from operations figures.

working capital - this is calculated as the difference between the total current assets and total current liabilities.

net worth - this is calculated as the total assets minus the total liabilities, where the former does not include any intangible assets.

The average of these 3 values is taken as the guide to the company’s credit capacity. The credit limit also takes into account a company’s risk score, so that high risk companies are less likely to be extended the same level of credit as low risk companies. This helps to protect creditors from extending high levels of credit to companies which are likely to become insolvent.

The final value is taken as a percentage of the credit capacity, where the percentage is directly proportional to risk score, i.e. the greater the score the higher the percentage, which can be from 2.5 to 25%.

There are exceptions to this formula, which is industry specific.

There are some companies that will not have a credit limit attached. These companies will have scored below 15 or alternatively all elements from the balance sheet and cash flow will be negative.

newly incorporated companies - the credit limit for newly incorporated companies, depending on the legal status of the company, is set a credit limit between £500 and £5,000. The limit will then increase over time unless adverse data is filed. Once a set of accounts has been filed the normal methodology for the calculation applies.

contract limit
Contract limits give you an indication of the value of contract that this company would be able to provide. Contract limits are calculated as a percentage of turnover.

The latest disclosed turnover reflects the level of successful contracts completed, hence gives an indication of future capacity. Where turnover is not disclosed (abridged accounts), an estimated figure is used based on asset values and appropriate industry data.

As with credit limits, the higher the score the greater the percentage to apply (range = 2.5% to 35%). This measurement views the applicant as a supplier of goods and services, whereas a credit limit assesses the applicant as a purchaser. The maximum value is capped at £500 million and the minimum value is now £500.

The resulting limit should be regarded as a yardstick for maximum contract capacity on a single contract over a 12 month period.

A contract limit combines relative risk and absolute measurement of contract capacity.

how do you work out the credit limit for non-limited companies?
The credit limit for non-limited companies is worked out according to the standard industrial classification (SIC) of that company, the number of employees and the company’s U score.

Some non-limited companies will not have a U score or a credit limit. This can occur in one of the following situations:

• when there is insufficient information on a business
• when the business has more than 4 outstanding County Court Judgments in the last 6 months and fewer than 25 employees
• when the value of CCJs is greater than £2,000 in the last 24 months
• when there have been more than 3 CCJs in the last 12 months
• when there are more than 10 CCJs in total
• when there is not enough information to estimate financial strength where the business is engaged in certain financial activities, making an estimate of financial strength inappropriate
  

which reports include a credit limit section?
All these reports include a section on credit limits

• Express report
• Financial report
• Business report
• Insight Plus (non-limited companies)