What Is a Credit Limit on a Trade Account?
A credit limit is the maximum total your business can owe a supplier on its trade account at any one time. It's separate from your payment terms: the terms say when each invoice is due, the limit caps how much can be unpaid at once. Go over it and new orders are usually held until you pay the balance down.
Credit Limit vs Payment Terms
| Credit limit | Payment terms | |
|---|---|---|
| Answers | How much can be owing at once? | When is each invoice due? |
| Example | $15,000 | 20th of the month following |
| If you breach it | New orders held until the balance comes down | Invoice is overdue; interest or a credit hold may follow |
| Set by | The supplier, when the trade account is approved, and reviewed over time | |
Why You Need More Than a Month's Spend
This catches out a lot of NZ businesses. On 20th-of-the-month-following terms, nothing from this month is due until the 20th of next month, so just before you pay, you're carrying all of last month's purchases plus most of this month's.
Example: a Hamilton landscaping business spends about $9,000 a month with a garden supplies wholesaler and has a $10,000 limit. By 18 March it owes all of February ($9,000) plus the first part of March ($5,400). That's $14,400: well over the limit, and its next order is held even though nothing is overdue.
| Monthly spend | Peak balance on 20th-of-month-following terms | Limit to ask for |
|---|---|---|
| $5,000 | About $8,300 | $10,000 |
| $9,000 | About $15,000 | $17,500 |
| $20,000 | About $33,300 | $40,000 |
A rule of thumb: peak balance is roughly 1.7 times your monthly spend on these terms, so ask for a limit about twice your typical month to leave room for a busy one.
How Suppliers Decide Your Limit
Suppliers look at how long you've been trading, your trade references, a business credit check, the monthly spend you put on the application, and whether a director has signed a personal guarantee. New businesses often start with a small limit that goes up after a few months of on time payments.
How to Get Your Limit Increased
- Ask the credit team, not the sales rep, and put the request in writing
- Show your payment history with them: three to six months of on time payments is the strongest case
- Give a reason, such as a new contract, a seasonal peak or a larger job, and the amount you need
- Ask for a temporary increase for a one off order if a permanent one isn't approved
If a single large order is what pushes you over, splitting that invoice into instalments can be simpler than a limit review. When the supplier is paid upfront, that invoice no longer sits on your account balance with them.
Frequently Asked Questions
What happens if I go over my credit limit?
Most suppliers hold new orders on account until the balance is back under the limit, even if nothing is overdue. Some will release an order if you pay part of the balance first. See what an account on stop means.
Does the credit limit include GST?
Yes. The limit is measured against the total you owe, and invoices are owed including GST.
Can a supplier reduce my credit limit?
Yes, most terms of trade let the supplier review or reduce a limit at any time, usually after late payments or a change in your business's credit profile.
Does asking for a higher credit limit affect my credit score?
It can lead to a new business credit check, which is recorded as an enquiry on the business's credit file. A single enquiry for an existing supplier rarely matters.
How much credit limit should a supplier give a new customer?
Many NZ suppliers start new accounts at one to two months of expected spend and review after three to six months of payment history, or ask for a personal guarantee to support a larger limit.
