Running a business means facing daily decisions that can influence its financial stability.

One such decision is determining how much risk you are willing to take with your customers, especially when granting payment extensions.

 In this situation, calculating the commercial credit limit is essential, as it helps you set the maximum level of financial exposure to protect your business.

What is a commercial credit limit and why is it important?

The commercial credit limit is the maximum amount of credit you can extend to a customer, considering the risk of non-payment. This information is essential because it helps prevent significant losses if a client becomes insolvent. 

When granting payment terms, it is important to pay close attention to credit risk. Understanding the appropriate amount of credit to offer helps you strike a balance between attracting customers and ensuring the financial security of your company.

How is the credit limit calculated?

The calculation of the commercial credit limit can follow different procedures, depending on the data available. Some advanced and customized methods require access to private information, such as:

• Invoice analysis;
• Customer's payment history;
• The customer’s contribute to business revenue

The credit limit calculation available in s-peek takes a different approach, relying exclusively on publicly available company data. This methodology allows you to access a transparent and immediate evaluation without the need to gather confidential information.

Calculating the credit limit on s-peek

S-peek calculates the credit limit you can extend to a company by gathering financial and corporate data directly from the Chambers of Commerce. 

These data are analyzed to generate an economic-financial score, known as the MORE Score (named after the proprietary MORE methodology developed by the rating agency modefinance), which serves as the foundation for determining the credit limit.

You can find the annual commercial credit limit in s-peek’s Flash or Extended12M reports, under “MORE Credit Limit.” This value provides a clear and reliable indication of the recommended maximum exposure to a customer.

Parameters used by s-peek for credit limit calculation

Even without access to private data, s-peek assesses various fundamental aspects to determine the commercial credit limit, including:

The MORE Score

This is a key indicator that measures the company’s financial stability. A higher score indicates a lower probability of default. In particular, s-peek also considers the sub-score related to solvency, which assesses whether the company has sufficient resources to cover its financial and commercial debts.

Company's liquidity

Liquidity is the amount of readily available funds to meet short-term debts. The greater the liquidity, the lower the risk that the company will miss its payment deadlines.

Company size

Larger companies, measured by revenue and number of employees, tend to have a higher commercial credit limit. This is because they generally have more resources to handle their debts.

Business longevity

The business longevity indicate the company ability to withstand market fluctuations. Companies with a long history are often more stable and resilient to market changes, making them less risky as customers.

Number of suppliers

An interesting aspect analyzed by s-peek is the average number of suppliers a company has. Generally, the more suppliers a company engages with, the lower the commercial indebtedness toward each one.

According to the Pareto principle, often referred to as the 80/20 rule, 20% of suppliers typically account for 80% of a company’s total supplies. By applying this rule, s-peek can estimate the significance of each supplier and evaluate the associated exposure risk.

When the credit limit is not available

Sometimes, you may encounter companies with a commercial credit limit of zero. Why does this occur?

The answer is straightforward: companies that receive a MORE Score lower than CCC (such as CC, C, or D) are considered particularly vulnerable and have a high risk of default. In such a high-risk situation, it is wise to refrain from granting any credit, regardless of its amount.

Why choose s-peek for calculating your credit limit?

s-peek’s methodology provides a simple, reliable, and accessible tool for calculating commercial credit limits. By utilizing only public data and applying advanced algorithms, you can receive an immediate and transparent estimate of the recommended maximum credit exposure to a customer.

Choosing s-peek means safeguarding your company with accurate and easy-to-understand evaluations. 

You don't need to be a finance expert to make informed decisions; with s-peek, you have all the necessary tools to effectively manage risk and grow your business.