The survival and prosperity of any business depends upon the receipt of payment from customers in respect of goods or services for which they have been invoiced. It is not sufficient to make sale and supply the goods or services if the sale cannot be converted into cash. Cash is the lifeblood of business and unpaid invoices can spell disaster.

Good credit management is vital to your cash flow.
Credit management is the process of controlling and collecting payments from your customers. A good credit management system will help reduce the amount of capital tied up with debtors and minimize your exposure to bad debts.

Offering Credit

It is sometimes possible to increase your sales by offering credit to selected clients. If you choose to extend credit you must ensure that you have a sound credit application process, as allowing clients to purchase on credit is like offering them and interest free loan. Allowing clients to defer payment increases the risk of bad debt occurring and draining your cash flow, so it is important that you identify good customers.

Develop a credit application form and have it reviewed by your lawyer.

The credit application and approval process should include:

  • The completion of a credit application form which requests full business and personal contact details, trading name, guarantors, referees, ABN and years in business.
  • Always confirm the exact trading name e.g. ABC Limited: ABC Pty Ltd,

Mr A AND Mr B trading as ABC, or Mr A trading as ABC. Also determine if the business trades under a trust structure. This becomes very important should you need to take legal action.

  • Make sure that you have all of the customers contact details: addresses, phone numbers, faxes, email addresses etc and the contact details of the directors, owners or key players in the business e.g. accountant. These can be extremely helpful if you need to contact your customer regarding an unpaid debt.
  • Offer the minimum credit period that would be competitively acceptable. The longer the credit period the more chance there is that a customer’s financial circumstances may change.
  • Trade references can be useful, but most businesses will have a couple of suppliers that will speak well of them, so don’t rely on them to be unbiased.
  • Credit information can be purchased from a variety of providers. This may give you information from which you can rate your risk.
  • Check the ABN with ASIC
  • Ask the client to sign Directors’ guarantees, which makes the directors personally liable for debts incurred
  • If the applicant has asked for a considerable amount of credit, it is worth visiting the customer’s premises to confirm the address. A great deal of information can be gathered by visiting the premises e.g. are they busy, is it slow, are the premises run down or under stocked etc.
  • Ensure that you understand the process for submitting your invoices and receiving payment from the customer e.g. to whom do you send the invoice, when is the cheque run or do they pay by other means.

Terms and Conditions

  • Clearly state your terms and conditions of trade in writing.
  • They should reflect the need of your business. Seek legal advice to ensure it covers all key issues. Terms and Conditions are often relied on in the event that court action is necessary to recover a debt.
  • Some terms and conditions that you might include are:
    • Penalties for late payment – specify the fees or rate of interest
    • “Retention of title” clause
    • Returns and refund policy
    • Policy on refund of deposit
    • Incentives for early payment
    • If you charge a fee for credit card payment you must disclose the percentage.
  • Include your terms and conditions with all quotes, contracts, agreements and related documentation and in the case of an account customer they should retain a copy of the terms and condition of trade when they sign an application for credit. ie ensure that the customer has read, understood and has accepted the credit terms that you have agreed to offer.
  • Clearly specify what will be supplied, when the work will be done and when and how payment will be made. Obtain written acceptance of the agreement along with written approval of any variations to the original agreement.

Alternative to providing credit

At times you may find it necessary to reject a credit application, rather than lose a prospective client you may suggest alternative payment methods while they establish a trading history with you. Review the client’s situation after a specified time, volume of trade or number of orders.

  • COD for new clients until they establish a acceptable trading history
  • Take a deposit before supplying to cover cost of materials and overheads
  • Progress payments in line with achieving major milestones. This option is common within the building industry.
  • Lay-by. Pay it off before taking delivery.


  • Invoice promptly
  • It is necessary to include accurate details of the goods sold or services supplied along with the amount and date due and preferred payment method. Endeavour to resolve any invoice queries or disputes quickly.
  • Keep you records up to date so that you can quickly identify outstanding accounts.
  • Take a pro- active approach to credit management
    • Understand the customer’s payment process and procedure e.g. know when their cheque run is
    • Call the customer a few days before payment is due to confirm that they have received the invoice and that there is no reason for non-payment
    • Have systems in place for issuing statements, sending reminder letters and calling customers
    • Keep a record of any correspondence including, mail, email or telephone conversations.
    • Any agreement to pay or payment plan by installments should be in writing.
    • Try not to leave voice mail messages. It is better to call back and speak to the person concerned.
    • Consider contacting the debtor via email, text and fax
    • Remain calm but firm on the telephone
    • Follow up promptly on broken promises to pay
    • Use fax and email instead of post for documents to save time
    • If necessary stop supply until the account is paid
  • Implement your debt collection procedures as soon as the debt becomes overdue.


  • Contact your client the day after the account is due to be paid. This lets them know that you keep track of your accounts receivable. Sometimes invoices get lost or overlooked, so maintain a positive relationship with your client.
  • Ask if there is a valid reason for not making payment or whether they are experiencing a short term problem.
  • Decide how valuable the client is as this will determine whether you temporarily extend their credit terms or cancel the client’s credit agreement if late payment becomes a recurring problem.

Letter of Demand

  • If communication and consultation does not result in the payment of debt, you may choose to send a letter of demand
  • The letter should:
    • State the details of the debt
    • Include copies of relevant quotes and invoices
    • Request that payment be made by a certain date
    • Warn that debt will be referred for further action if payment is not received by the nominated date

Debt Recovery Option

  • When considering debt recovery options take into account the following:
    • the real chances of recovery
    • the time, money and stress involved
    • the time taken away from your business in chasing the debt
    • debt collection agency costs
    • legal and court costs (especially in the case of a defended action)
    • whether costs are recoverable from the debtor
    • the need to seek legal advice

Debt collection agency

A debt collection agency recovers payment on your behalf. Demand for payment can be made in writing, verbally over the phone or in person. Debt collection agencies charge a fee or a percentage of the amount collected or both, depending on the circumstances.

Legal Proceedings

You may choose to take legal action. Be prepared to follow through with any warning about legal action in your letters of demand. Some legal proceedings may become complex and expensive, so ensure you consider carefully before making the threat or commencing action.



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Blacktown NSW 2148
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