how do credit limits work and what is their value?
The trade credit insurer issues a credit limit for every buyer with whom the policyholder trades. The level of the limit is set at the maximum amount that can be owed by the buyer at any time. Limits are granted at a lower level, if the underlying information justifies this. The granted credit limit is the maximum insured credit line for a specific buyer and the policyholders can trade on an insured basis within the approved credit limit throughout the policy period without further reference to the insurer. If a discretionary limit has been agreed, exposures up to that amount do not have to be agreed by the insurance company but are covered based on the payment experience of the policy holder.
The insurance company has the right to reduce or cancel a granted limit at any time, usually as a result of negative information. This allows the exposure to be brought down in a timely manner, as negative news (such as deterioration in payment behavior) is known immediately. A new limit will apply to all deliveries that are made by the policyholder to the buyer after the date of the trade credit insurer’s decision to reduce or cancel a limit.