BUSINESS INFORMATION
Providing credit to customers
Clearly outlining how customers should pay for your products or services and specifying payment timelines is crucial to maintaining healthy cash flow for your business.
Payment terms
Payment terms define the methods and timelines for customer payments. These terms vary between businesses and typically include accepted payment options, credit conditions, and debt recovery procedures.
In Australia, payment terms are legally binding as part of a sales contract under contract law. Failing to adhere to these terms is considered a breach of contract.
Small businesses commonly use the following payment methods:
- cash
- cheque
- EFTPOS
- Credit and debit cards
- Online payments or BPAY
- Vouchers and gift cards
- Direct debit
Payments can be made in advance, at the time of delivery, or on credit (where payment is deferred for an agreed period after delivery).
Offering credit introduces the risk of late or non-payment. For new or unfamiliar customers, it’s wise to request payment upfront or upon delivery, especially if the goods or services involve significant upfront costs.
Your payment strategy should reflect your business’s cash flow needs. Some businesses prefer payment on delivery and avoid extending credit, while others offer both options.
Standard credit terms often range from seven to 28 days. Ensure these terms are clearly stated on all invoices.
If you decide to provide credit, implementing a credit application process is advisable. This helps assess customers and reduces the likelihood of dealing with those who have a poor credit history.
- To ensure a healthy cash flow, it is advisable to set customer payment terms that are shorter than those agreed upon with your suppliers.
- There are limitations on the fees you can charge customers for credit card transactions. Visit the ACCC website for more information.
Credit application process
Before extending credit to a customer, it is crucial to assess their creditworthiness. Develop a credit application form that includes the following details:
- Full contact information of the applicant
- ABN, business structure, and details of directors, partners, owners (if applicable), or trustees
- Contact information for at least three supplier references
- A signed acknowledgment that the applicant has read, understood, and agreed to your terms and conditions
- Authorization to perform a credit check
If the applicant is a company, consider requesting a directors’ guarantee (include this in the application form). This ensures that if the company faces financial difficulties, the directors can be held accountable for the debt. The Australian Securities and Investments Commission (ASIC) website provides a list of credit information brokers offering services such as credit check reports.
Decide whether to offer credit
- Verifying the business’s registration using ABN Lookup
- Contacting the customer’s references to assess their payment history
- Conducting a credit check
- Securing relevant guarantees (if applicable)
- Reviewing their history of cash sales
Communicating Your Decision
Notify the customer of your decision in writing, even if you decline their application. If you approve credit, inform them of:
- credit limit
- credit terms
- penalty or default terms
- any other terms and conditions
When offering credit, ensure you issue invoices promptly. Monitor your debtors closely to follow up on overdue payments and prevent customers from exceeding their credit limits.
Terms and conditions for providing goods and/or services
If you extend credit to customers, it is vital to document your terms and conditions in writing. This helps minimize payment disputes and ensures effective financial management. Seek legal advice to ensure your terms protect your interests and are enforceable.
Your terms and conditions should:
- Specify payment methods and due dates
- Outline penalties for late payments, including interest rates and fees
- Disclose any additional fees, such as credit card charges
- Be clearly stated on all quotes, estimates, contracts, and related documents
- Align with your business requirements
- Exclude any illegal or unfair terms
It is advisable to have customers sign an acknowledgment of your terms and conditions before providing goods or services. To reduce risk, establish a credit application process or explore alternatives to offering credit. Learn more about how to prepare standard terms and conditions.
Invoicing and payments
Maintaining consistent invoicing practices is crucial for ensuring a steady cash flow. Invoices should clearly outline the details of the goods or services provided, the total amount due, the payment deadline, and the accepted payment methods.
It is essential to differentiate between a standard invoice and a tax invoice. If your business is not registered for GST, your invoice should not include a taxable component and should simply be labeled as an ‘invoice’. On the other hand, if your business is GST-registered, the invoice must specify the GST amount for each item and include the term ‘tax invoice’.
The Australian Taxation Office (ATO) has established voluntary guidelines for the format of tax invoices and standard invoices, along with practical advice on issuing tax invoices. Keeping a close eye on debtors (individuals or entities that owe you money) is important, and prompt action should be taken if payments are delayed.
For businesses offering extended payment terms, sending a reminder to customers before the due date can help ensure payments are made on time.
Read our article on how to prepare an invoice for more information on the difference between an invoice and a tax invoice and what to include in each.
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