Providing credit to customers

Payment terms

These outline how customers pay for your goods and services and the details of when you expect payment. Payment terms will vary from business to business and generally refer to the payment methods you will accept, whether you provide credit and the terms of credit, and your debt collection policies.

TIP: Payment terms are part of a sales contract in Australia and so operate under contract law. Failure to comply with the agreed payment terms is a breach of contract.

Payment methods typically used by small businesses include:

  • cash
  • cheque
  • credit and debit cards
  • BPAY or online payments
  • vouchers and gift cards
  • direct debit

TIP: Restrictions apply to the credit card fees you are allowed to charge a customer. Visit the ACCC website for more information.

Goods and services can be paid for upfront or on delivery, or are supplied on credit (where payment is deferred for a period of time after the goods or services have been supplied).

Offering credit increases your risk of being paid late, or not at all, so for customers you don’t know well consider upfront or on delivery payments, also in situations where you have outlaid large amounts of money to supply the goods or service.

Your approach will vary depending on your business needs and cash flow requirements. Some businesses only accept payment on delivery and do not provide credit, other businesses offer both.

Standard terms of credit are often seven, 21 or 28 days.

If you provide credit it is advisable to develop a credit application process to screen customers and avoid those with a poor credit history.

TIP: State your payment terms on all invoices. To maintain a healthy cash flow keep payment terms for customers shorter than those with your suppliers.

Credit application process

Before providing credit to a customer it is important to check their credit worthiness.

Create a credit application form that includes:

  • full contact details of the applicant
  • the ABN, business structure, details of the directors, partners or owners (if dealing with a business), and trustees
  • contact details for at least three supplier referees
  • a signature confirming that they have read and understood your terms and conditions and agree to abide by them
  • permission to conduct a credit check

TIP: If the business is a company, you may want to consider obtaining a directors’ guarantee (include this request in the application form). This means if the company gets into financial difficulties you can hold the directors’ liable for the debt.

The Australian Securities and Investments Commission (ASIC) website provides a list of credit information brokers offering a range of services, including credit check reports.

Decide whether to offer credit

Make a decision after:

  • checking the business’s registration using ABN Lookup
  • contacting the customer’s referees to review their payment history
  • completing a credit check
  • obtaining relevant guarantees (if applicable)
  • obtaining a history of cash sales.

Advise the customer of your decision

It is recommended to advise the customer in writing of your decision, even if you decline their application.

If you decide to provide credit let them know the:

  • credit limit
  • credit terms
  • penalty or default terms
  • any other terms and conditions

TIP: Ensure that you invoice regularly. Monitor your debtors closely so that you can follow up on overdue payments and do not allow customers to exceed their credit limit.

Register with the PPSR before you sell assets

If you’re unable to collect full payment up-front selling goods can be risky. If you register an interest in the goods you’re selling on the Personal Property and Securities Register (PPSR), you will have a better chance of recovering the debt if your customer doesn’t pay or goes broke. This is also recommended if you lease or hire goods, or sell goods with a retention of title clause.

Examples of property that you might want to consider registering include:

  • goods
  • plant and equipment
  • vehicles, including boats and planes
  • crops, cattle and other livestock

Learn more about the PPSR by downloading the book 'Are you in business?' from the ASIC website.