Erick Oluoch, Co-Founder, VALR Capital. Twenty years in institutional credit risk and recovery.
How much credit should you give a customer? A simple three-cap method
Give the lowest of three numbers: what the customer usually buys from you, what their sales can repay, and what your policy allows. Then round down.
Cap 1: What they buy from you.
Take the average monthly purchases over the last six months. A strong payer can go a little above it. A weaker one should stay below it.
Cap 2: What their sales can repay.
Estimate the customer's total monthly sales, cash included. Allow about a third of it for your credit, less what they already repay to other lenders. If you can confirm only a small part of their sales, cut this number further.
Cap 3: What your policy allows.
The most you allow for their tier, and never more than the room left in your total credit budget.
Worked example
A shop buys KES 420,000 a month from you, sells about KES 1.5 million a month, and repays KES 20,000 a month on a mobile loan.
| Cap | Working | Result |
|---|---|---|
| What they buy | 420,000 × 1.2 (good payer) | KES 504,000 |
| What sales can repay | 1,500,000 × 35% less 20,000 | KES 505,000 |
| Your policy | Tier maximum | KES 750,000 |
| Limit | Lowest cap, rounded down | KES 500,000 |
Tenure. Match it to how the customer earns and to their record. A proven payer might get 30 days. A new customer starts at 7.
Review monthly. Raise the limit after three on-time cycles, by no more than a quarter at a time. Cut it the moment an invoice runs 15 days late.
Questions
- What if a customer has no history with me?
- Start with a small starter limit, or cash for the first few orders, and let them earn a proper limit.
- How do I estimate cash sales?
- Look at cash deposited to M-Pesa or the bank at the end of the day, less loans and transfers between their own accounts.
- Should every customer get the same terms?
- No. A school, a farmer and a duka get paid on different clocks. Set terms by how they earn.