A credit limit is set where the customer’s capacity to carry risk meets the company’s risk policy. It is not the numerical answer to a sales request but a conscious management decision. Yet in commercial life, situations that call for temporarily exceeding the limit are inevitable: seasonal peaks, a large project order, sudden changes in the supply chain or a customer’s temporary cash need.
The problem lies less in the overrun itself than in the overrun becoming permanent. In this article we look at when a limit overrun remains a manageable exception, at what point it effectively becomes a second limit, and what makes up a healthy overrun discipline.
CONTENTS
01What does a credit limit represent?
A credit limit represents the total credit risk a company considers appropriate to carry with a given customer. The decision is made by assessing together the customer’s financial structure, ability to pay and payment behaviour, indebtedness, trading volume, management quality, the quality of its growth and its sector.
The core question behind a limit is not “How much can we sell?” but “How much risk can we soundly carry with this customer?” That is why the limit is not an obstacle in front of the sales team, but the safe operating space for healthy trade.
A limit should also look not at the current balance but at the total risk that could arise. Alongside existing receivables, approved orders, uninvoiced shipments and seasonal peaks are also factored into the potential peak-risk calculation. This view makes it possible to anticipate an overrun before it happens.
Setting the limit with this holistic view also makes it easier to assess overrun requests. If the customer’s risk-bearing capacity is known, it can quickly be seen whether a request falls within or outside that capacity. A temporary overrun within capacity can be handled with a limited approval process. A request that strains capacity requires a more thorough assessment.
02Why are overruns inevitable?
No limit can anticipate every fluctuation of commercial life. Certain situations can make a temporary overrun reasonable, even necessary:
- Seasonality: order volume rising above normal levels during the sector’s peak season.
- Project-based orders: a one-off, high-volume job creating risk above the limit.
- Campaign periods: the customer increasing purchases because of the company’s own sales campaigns.
- Temporary cash squeeze: a customer with a sound financial structure experiencing a short collection delay.
What these situations have in common is that they are temporary. An overrun is an allowance granted to meet a specific need and expected to end after a set period. Recognising that flexibility is part of protecting the commercial relationship and taking advantage of sales opportunities.
Many of these temporary needs can be foreseen. Seasonal peaks recur at similar times each year; large project orders are usually known weeks in advance. This predictability allows overruns to be assessed in a planned way rather than at the last minute and under pressure. When the sales team flags likely overrun needs in advance, the credit team can be prepared.
03When does an overrun become a second limit?
Repeated overruns that never reverse effectively create an undefined second limit. On paper the customer’s limit hasn’t changed; in practice the company is constantly carrying risk above it. And this second limit has never been through any credit assessment.
The shift usually happens unnoticed. The first overrun rests on a valid reason and is approved. Later overruns are accepted more easily with reference to the earlier approval. Over time the overrun stops being an exception and becomes a normal part of the customer relationship.
The most important consequence is that the company’s real risk level no longer appears in management reports. Reports show defined limits, but the risk actually carried is above them. Across the portfolio, repeated overruns can add up to exposure far beyond the company’s risk appetite. The gap is usually noticed only when a problem arises with a customer.
- Overruns recurring with the same customer in consecutive periods.
- The balance not returning to the limit after an overrun ends.
- Overrun approvals given out of habit rather than for a reason.
- Overrun duration left undefined or repeatedly extended.
“An overrun is not a way of changing the limit.”
04Five elements of healthy overrun discipline
In a healthy structure, every overrun is recorded together with certain elements. These are defined not to forbid overruns, but to make them traceable and reversible:
- Amount: how large the overrun is and its effect on total risk.
- Reason: the commercial or financial grounds for the overrun.
- Duration: how long the overrun will remain valid.
- Authority: the level at which the overrun is approved; the larger the amount, the higher the authority.
- Return to limit: under what condition and by when the balance will return to the limit.
Once these five elements are defined, an overrun stops being a personal choice and becomes an institutional decision. Whether it has ended can be tracked, and repeated overruns become visible as a matter for separate assessment.
Applying these elements doesn’t require a complex system. A simple overrun log, defined approval levels and automatic review of overruns when they expire form the basis of the discipline. What matters is applying the structure without exception and regularly sharing overrun data with management. Over time, this data also becomes a valuable source for improving limit policy.
05A permanent need: reassessing the limit
If a customer has an ongoing need above its limit, it should be addressed not through the overrun mechanism but by reassessing underlying credit capacity. The customer’s trading volume may genuinely have grown and its financial structure strengthened. In that case a limit increase may be the right decision.
But that decision must be made with the same rigour as the original limit decision. The customer’s current financial structure, payment behaviour, indebtedness and place in the company’s portfolio are reviewed again. Where needed, the collateral structure is included in the assessment.
Inflation or nominal sales growth alone is not grounds for an automatic limit increase. Growth in nominal volume does not mean the customer’s capacity to carry risk has grown at the same rate.
A limit reassessment can mean a decrease as well as an increase. If the customer’s financial structure has weakened, its payment behaviour deteriorated or its sector is contracting, the current limit may no longer reflect its risk-bearing capacity. A limit being a living decision means it is open to change in both directions. This view ensures the limit system reflects real risk.
06Balancing flexibility and control
Overrun discipline is often seen by sales teams as a restriction. In fact, a well-built structure doesn’t restrict sales; it allows commercial flexibility to be used in a controlled, traceable way.
The sales team knows what information an overrun request needs and to which level it goes. The credit team makes its decision on consistent criteria. Management can see how much overrun risk is carried across the portfolio. This transparency makes both fast decisions and risk control possible.
Discipline is not never making exceptions; it is being able to manage them. Limit overruns are one of the most concrete applications of this principle.
Ultimately, a limit overrun is not something to be avoided in credit management, but a reality to be managed. An overrun stays a temporary exception only with defined rules and consistent application. Once these rules are in place, the company can take up commercial opportunities while staying within its risk policy. And the difference between an overrun and a limit is preserved.
Managing limit overruns really starts with taking the credit limit itself seriously. If the limit rests on a real risk assessment, an overrun means stepping outside that assessment and therefore requires a separate decision. When limits become numbers stretched to fit sales requests, managing overruns loses its meaning. That is why overrun discipline should be addressed together with the soundness of the limit-setting process. A limit system that starts from the customer’s risk-bearing capacity, sees total potential risk, is reassessed periodically and runs on defined authorities naturally keeps overruns as a limited, controlled exception. In such a system the sales team knows where it can move, the credit team sees which requests need further assessment, and management can track the true scale of total risk.
Frequently asked questions
Is exceeding a limit always wrong?
No. Seasonality or temporary commercial needs may require an overrun. What matters is that the amount, reason, duration, authority and conditions for returning within the limit are defined.
What should be done about repeated overruns?
Repeated overruns may indicate that the customer’s need is permanent. In that case, rather than approving another overrun, the customer’s underlying credit capacity should be reassessed.
Should the limit rise automatically as sales grow?
No. Nominal sales growth or inflation alone is not grounds for a limit increase. The limit is reassessed according to the customer’s current risk-bearing capacity.
