How to Determine a Credit Limit

Most distributors don't set credit limits. They inherit them. A new account gets whatever the last similar account got, or whatever the sales rep asked for, or whatever feels fine at the time. None of that is a number you could defend at renewal, and none of it holds up once the person who came up with it leaves.

There's a formula for this that doesn't depend on memory or gut feel. NACM recognizes a "by formula" method built on a customer's own financial strength, not on what a competitor granted or what an account happened to receive last time. The version worth using: tangible net worth times a risk-adjusted percentage.

The Formula

A credit limit is two numbers multiplied together: what the customer is actually worth, and how much of that worth you're comfortable being exposed to given their risk profile.

Take a company with $1 million in tangible net worth (total tangible assets minus total liabilities) and a strong, low-risk payment profile. If your risk scale puts a low-risk account at 15% of tangible net worth, the math is simple: $1,000,000 × 15% = $150,000. That's the ceiling this customer should receive, regardless of what they ask for.

Two things have to be right for this to work: an honest tangible net worth figure, and a risk percentage that actually reflects the account's risk. Most of the real work is getting those two inputs right.

Getting Tangible Net Worth When Nobody Hands You a Financial Statement

The formula assumes you know a customer's tangible net worth. In practice, most applicants won't hand one over, especially private companies with no obligation to disclose. There are two real options.

Buy it. Credit bureaus, and platforms like Thor, sell modeled revenue and net worth estimates built off filings, trade data, and public records. It's the fastest, most direct path when the data's available.

Build it. When it's not, you can estimate. Start with employee headcount, which is usually public or easy to find. Multiply it by that industry's typical revenue per employee to get an estimated revenue figure, then apply that industry's typical revenue-to-net-worth ratio to convert revenue into an estimated tangible net worth. Industry benchmarking data, like ProSight Statement Studies (formerly RMA's Annual Statement Studies, now covering more than 640 industries), is built for exactly this kind of estimate.

It's not exact. A useful next step is a qualitative gut check: look at the company's online reviews, website, and social presence for signs of customer size and scale, and see if the estimate holds up. None of this replaces an audited financial statement, but in its absence, it's the most directionally accurate substitute available.

Setting the Risk Percentage

Net worth alone doesn't tell you what to lend against it. A profitable, well-run company can absorb more exposure than a risky one with the same net worth, so the percentage has to move with the risk grade.

There isn't one official number here, but there's a well-established range. Credit Guru, a long-running independent credit management reference, puts the figure companies actually use at 5% to 15% of tangible net worth for accounts with a track record of profitability, and other credit risk sources cite similar ranges. What matters more than the exact ceiling is that the percentage scales down as risk goes up: something like 15% for your best-rated accounts, stepping down through 10%, 5%, and 2% as risk increases, with your highest-risk or unrated accounts limited to cash on delivery or a token amount.

Treat that scale as a starting point to calibrate against your own loss history and risk appetite, not a number to copy exactly.

A Worked Example

A prospective customer has an estimated tangible net worth of $1 million, and your internal scorecard grades them a B: low-to-moderate risk, worth 10% on your scale. $1,000,000 × 10% = $100,000. That's the recommended limit, the ceiling you'd want to defend without additional security.

If the customer is asking for more than that, the gap between what they want and what the formula supports is exactly where a personal guarantee earns its place: not a blanket requirement on every application, but a targeted response to a defined shortfall.

New Customers vs. Accounts You Already Have

For a brand-new applicant, the credit application does one extra piece of work the formula alone can't: trade references. NACM's own new-customer risk review checklist explicitly calls for pulling three trade references alongside the credit report and internal score, since a business with no payment history anywhere is a different risk than one with a track record, even at the same net worth. That checklist item disappears once a customer is established, because by then your own payment history has already answered the question trade references exist to answer.

What Should Trigger a Recalculation

A credit limit isn't a number you set once. NACM's guidance lists the events that should prompt a review: a new financial statement, a change in ownership or management, a shift in payment behavior, or a request that exceeds the current limit. Any of those changes one side of the formula, either the net worth estimate or the risk grade, and the limit should move with it.

Treat the formula as a live calculation, not a one-time approval. The moment either input changes, the number does too.