How to calculate a customer's commercial credit line: practical formulas

In short: there is no legal formula for calculating how much credit to extend to a customer. It is a risk management decision, not a regulatory obligation. There are, however, prudential criteria widely used in practice, which combine the customer's strength with your own capacity to sustain the exposure.

Why there is no single formula valid for everyone

The right credit line for a customer depends on too many specific variables (sector, margin on the product, frequency of orders, your own overall exposure) for a single formula to work everywhere. Beware of anyone who presents one calculation as "the right one": the criteria below are starting points to be adapted, not rigid rules.

Three prudential criteria used in practice

• Percentage of the customer's net equity: a credit line that does not exceed a limited share (often indicated between 10% and 20%, depending on the sector and risk appetite) of the customer's net equity reduces the risk that a single unpaid invoice is significant relative to their overall financial capacity.
• Estimated operational credit line from an external report: an indicator calculated by cross-referencing several signals (financial statements, rating, payment behaviour towards other suppliers) offers a less subjective benchmark than the commercial relationship alone. This is exactly what the Veryfy report calculates and shows as the recommended exposure limit.
• Percentage of your own sustainable exposure: how much you can afford to lose on that single customer without the impact being significant for your company. This criterion concerns you, not the customer, and is often overlooked.

How to combine the criteria, not use just one

The prudent credit line is generally the lowest of what the customer's net equity justifies and what your own sustainable exposure allows, not the average of the two and not the most generous criterion. A customer who is financially solid but on whom you already have a high concentration of turnover remains a risk to be limited, regardless of how much their solidity alone would justify.

A practical example of calculating a commercial credit line

A numerical example, with invented data, to see the three criteria applied together. It is not a real case, but the reasoning pattern to reuse with your customer's actual figures.

A customer has net equity of €250,000 according to the filed financial statements. Applying the prudential criterion of 10-20% of net equity, the credit line that could be granted on this basis alone would be between €25,000 and €50,000. The estimated operational credit line calculated by an external report on that same customer, which cross-references financial statements, rating and payment behaviour towards other suppliers, indicates, as an assumption for this example, €30,000: a figure consistent with the low end of the net-equity criterion, and therefore to be considered a reliable reference.

At this point the third criterion, the one concerning you, comes into play. If your company has turnover of €400,000 a year and this customer would already represent 15% of your turnover today, an exposure of €30,000 (7.5% of turnover) is sustainable; an exposure of €50,000 (12.5%) begins to concentrate risk on a single customer in such a way that, in case of insolvency, it would have a significant impact on your company. The prudent credit line in this example is therefore €30,000, not the average or the highest value among the criteria, consistent with the principle explained above: take the lower of what the customer justifies and what you can sustain.

A credit line is not a final decision

A credit line calculated at the first supply should be reviewed periodically: when a new customer financial statement arrives, when warning signals emerge (see the guide on signs of insolvency), or simply annually for the most significant customers. A credit line that was correct a year ago is not automatically correct today.