Credit limit (credit insurer approval)
The maximum amount of receivables on a buyer that the credit insurer agrees to cover, which it can reduce or cancel for future deliveries, and whose mass withdrawals in a recession can dry up trade credit.
In a credit insurance policy, cover does not apply to just any receivable: it is limited, for each buyer, to the amount the insurer has approved after analyzing its creditworthiness. This credit limit is the central tool of the business. It can be revised at any time, up or down, and a reduction or cancellation applies only to deliveries made after notice, receivables already arising remaining covered. The insurer thus manages its exposure in real time, buyer by buyer and sector by sector, as few other lines allow. For the insured, the limit is both protection and information: a refused or reduced limit signals doubt about the customer, and the supplier must then choose between selling without cover, requiring cash payment or forgoing the sale. This responsiveness has a feared macroeconomic effect. In a crisis, insurers cut limits simultaneously on fragile sectors, depriving companies of supplier credit precisely when they need it most, and possibly hastening the failures one wanted to avoid. Hence public limit top-up schemes.
In spring 2020, anticipating a rise in insolvencies, credit insurers cut their limits on hotels, restaurants and the auto sector. To avoid a collapse of trade credit, several European states set up public reinsurance or limit top-up schemes, while companies whose limits were cut had to demand faster payment from their customers.
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