Outlining how customers pay for your goods and services and when you expect payment is important to protect your business cash flow.
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.
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:
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. Your payment terms should be stated on all invoices.
If you provide credit it is advisable to develop a credit application process to screen customers and avoid those with a poor credit history.
Before providing credit to a customer it is important to check their credit worthiness. Create a credit application form that includes:
If the business seeking credit 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.
Make a decision after:
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:
When providing credit, 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.
If you provide credit to customers it is essential to put the terms and conditions in writing. This will help to minimise payment disputes and ensure you can effectively manage your finances. Seek legal advice to ensure that your terms and conditions protect your interests and are enforceable.
Terms and conditions should:
It is good practice to have customers sign acceptance of your terms and conditions before providing any goods and/or services. You can minimise your risk, by developing a credit application process or considering alternatives to offering credit.
Invoicing on a regular basis will help you maintain a healthy cash flow. Invoices should clearly state details of the goods and/or services, the amount owing, the due date for payment and available payment methods.
It is important to know the difference between an invoice and a tax invoice. If your business is not registered for GST, your invoice should not include a taxable component and should be referred to as an ‘invoice’. However, if your business is registered for GST, the invoice should state the GST against each item and have the words ‘tax invoice’ included.
The Australian Tax Office has developed voluntary standards relating to the layout of tax invoices and invoices, as well as practical information for issuing tax invoices. Monitor debtors (those who owe you money) closely and act quickly when payments are late.
If you have extended payment terms, consider providing a reminder to your customers before the payment due date to ensure they remember to pay on time.
