What is a credit limit?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A credit limit is the maximum amount a borrower is allowed to owe on a credit card, line of credit or overdraft, or the most a lender will offer under a loan. Businesses also set credit limits for their own customers, capping how much each one can owe on account before further sales on credit stop.
A limit is not money the business owns or an amount it already owes. The liability is the outstanding balance, which can include unpaid interest and fees as well as money drawn, rather than the whole approved limit. Your accountant can confirm the amounts to record at a reporting date. The unused part of the limit is not a cash balance in the books, though it may be relevant when planning cash flow.
On the customer side, a credit limit works alongside payment terms. The accounts receivable records show each customer's balance, so comparing that balance with the customer's limit before accepting a new order on credit shows whether the order would take them over it.
In Australia
business.gov.au's glossary defines a credit limit as an amount that cannot be exceeded on a credit card, or the largest amount offered for a loan. It calls an account overdrawn when a credit account has gone past its limit, or when more than the balance has been taken out of a bank account.
Its guide to business loans says a line of credit charges interest only on what has been drawn, not on the whole limit.
When a business sells on credit, its guidance on payment terms suggests setting limits on how much credit you offer customers, as one way to reduce the risk of late or missed payments.
Worked example
| Item | Amount (AUD) |
|---|---|
| Credit limit | 15,000.00 |
| Balance owing on the statement | 4,320.00 |
| Unused part of the limit | 10,680.00 |
| Amount recorded as a liability in the books | 4,320.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Counting the unused part of a credit limit as cash available to the business.
- Recording the full limit of a line of credit or overdraft as a debt instead of the outstanding balance.
- Setting customer credit limits and never comparing them with what each customer actually owes.
Related terms
Related service
Accounts payable and receivable
Bills and invoices tracked, with you approving every payment.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Payment terms
business.gov.au, Australian Government. Current at 16 October 2026, released 18 December 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.