Credit maximum

When credit or loans are granted in general, it is often subject to a set of conditions(credit terms) and frameworks between the borrower and lender (debtor and creditor).

These conditions can include, for example, how much the credit is for, how long the credit extends for and when the credit must be repaid.

When talking about the credit limit, the term "credit maximum" is used.

In other words, the credit limit is the maximum amount of credit that a lender (creditor) wants to give to a borrower (debtor).

Credit maximum is often also referred to as credit max, credit limit or credit line - but is basically the same thing.

Why have a credit limit?

All credit and debt involves risk for the lender/creditor.

The risk is that the lender/creditor does not recover all or part of its outstanding debt from the borrower/debtor. This may be due to death, bankruptcy or other financial circumstances that have affected the debtor's ability to pay since the loan/credit was taken out.

Therefore, the lender/creditor should always try to limit their risk of loss - and one way to do this is by introducing a credit limit.

With a customized credit limit, you help minimize your risk of loss in the unfortunate event that your borrower goes bankrupt, dies or experiences other circumstances that affect their ability to pay.

This means that the credit limit is not there to avoid a possible loss, but to limit it.

What should a credit limit be?

We get this question a lot, but the simple answer is that no two customers are the same - and therefore their credit limit shouldn't be either.

That said, however, there are many companies that, for example, provide 25,000 or 50,000 kroner in credit to all new customers without performing major credit assessments, KYC or similar.

If the customer wants more credit than that, it will often require a manual credit check, KYC or similar actions.

There is no right or wrong way to provide credit - some customers should have no credit at all, while other customers can have millions in credit.

Just be aware that the more credit you extend, the higher your risk.

We always recommend that you spend the necessary time researching who your customers are; pulling recent financial statements, doing a credit check, querying a debt register and the like.

Based on this, you can set a credit limit.