Credit line vs credit limit: What’s the difference?

Credit limits are the maximum amount that can be borrowed. However, in today’s competitive business climate, credit limits can be just that: limiting. Some credit professionals believe that if you want to make a sale, being flexible is key.

Why it matters: Credit limits control exposure, while credit lines offer flexible financing options. Understanding the difference is key for credit managers.

By the numbers: According to a recent NACM eNews poll:

• 78% of credit professionals believe there is a difference between a credit limit and a credit line.
• Most credit and collections professionals prefer to review existing customer credit limits annually.
• 64% of creditors like to have a full year to assess a customer’s payment history before raising their credit limit.

Credit limits may seem like the smartest route to take to ensure payment because of its hard stop. However, in today’s competitive business climate, credit limits can be just that: limiting. Some credit professionals believe that if you want to make a sale, being flexible is key.

Lines of credit offer various ways to access cash instead of providing a lump sum. It allows the borrower to withdraw funds up to a specific limit and repay them as agreed upon with the lender. Credit lines can be used to borrow in increments, repay and borrow again if the line remains open. This is typically a good option for bridging short-term gaps or for ongoing, larger expenses.

A credit line in B2B trade usually refers to the total amount of credit available to a customer, often within a broader financing arrangement like a revolving credit facility. It can be a more formalized and flexible arrangement than a simple credit limit. A credit limit is the maximum amount of credit that a supplier is willing to extend to a particular customer at any given time. It sets a ceiling on how much the customer can owe the supplier for goods or services without making additional payments.

What they’re saying: “Credit limits are usually used to set a maximum risk that we’re willing to take on at a given time for a customer, based on underwriting guidelines,” said Sheila Oates, MBA , manager of credit operations at Alcivia (Madison, WI). “It indicates the maximum amount allowed to be charged to a line of credit. Some may refer to this as ‘maxing out my card’ in terms of credit card usage but the same rules would apply to a limit on an AR account or other line of credit.”

In the B2B space, the credit limit also represents the maximum amount a customer can use on their account. The amount can be assessed by the vendor’s credit department, based on experience or some form of financial statements analysis. “Anytime the customer pays down on their account, the credit limit that was paid becomes available to them for more orders,” said Annette Hagemann, CICP, CCP, CPC, ICCE , director, global credit at APL Logistics (Scottsdale, AZ). “A credit line would not be something credit managers use in my opinion as this is typically for banking on a revolving loan agreement.”

Some credit professionals will use credit guides or guidelines that allow flexibility leaning toward either a line or limit. D'Ann Johnson, CCE , corporate credit & contracts manager with A-Core Concrete (Murray, UT), said trying to set a hard fast credit limit or credit line for multimillion dollar projects is tedious. “We would be constantly going in and changing those credit lines all the time depending on what was needed for that month,” Johnson said. “We don’t provide a product of any kind, so that allows us a little bit more flexibility in how we manage. Our thought process around how we justify a credit guide is based on first and foremost the customer themselves. What we do is so competitive that we have to be flexible which is why we use a credit guide.”

The bottom line: Credit limits and credit lines, while often used interchangeably, have distinct differences and understanding these is crucial for credit managers, as it allows for flexibility in competitive business environments.