A credit limit is the maximum outstanding balance a supplier allows a buyer, combined with a credit period that says how long each invoice may remain unpaid. New orders that would take the balance above the limit are held until the buyer pays down, or are supplied against advance payment. It caps the loss if the buyer stops paying.
How it works in India
Most Indian SMEs grant credit informally, by relationship. A structured approach is simple: start new buyers with a small limit, review it every quarter, and raise it only when the buyer pays within terms. Before extending a large limit, verify the buyer's GSTIN, its MCA master data if it is a company, and ask for a signed ledger confirmation each year. Accounting software such as Tally can block or warn on invoices that breach a set limit.
Security such as a bank guarantee, a security deposit or post-dated cheques can support a higher limit for dealers and distributors.
Why it matters for getting paid
The cheapest recovery is the one you never need. Suppliers who keep shipping to a buyer that is already late turn a small overdue into a large one, often just before the buyer fails. A firm limit also strengthens your position later: the record of a hold on supplies shows the buyer knew the dues were pending. See should I keep supplying when unpaid.
How FundRaksha uses it
FundRaksha Collect combines reminders with NACH or UPI Autopay mandates, so buyers within their limit pay on schedule, for a 1% fee on collections. Where a buyer has already breached the limit and stopped paying, FundRaksha Legal sends a notice within 24 hours, with a 30% fee only on recovery. A free consultation can review your credit policy.
Worked example (hypothetical)
A Jaipur tile manufacturer gives a dealer a credit limit of ₹15,00,000 with 30-day terms. The dealer already owes ₹13,00,000, of which ₹4,00,000 is overdue. The dealer places a new order for ₹4,00,000. Supplying it would take the balance to ₹17,00,000, which is ₹2,00,000 over the limit, while invoices are already late. The manufacturer offers two options: clear the ₹4,00,000 overdue first, or pay ₹2,00,000 in advance. The dealer pays the overdue amount the same week and the order ships.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.