Setting payment terms
Payment terms are the way you let your customers pay for your goods and services and the details for when you expect to receive payment.
Payments terms are part of a sales contract in Australia and so operate under contract law. Read our understanding contracts topic to learn more about contracts.
Your payment terms usually say:
- what payments methods you accept
- whether you provide credit and the terms of credit
- debt collection policies.
Why are payment terms important?
Payment terms are important because they affect achieving your goals by influencing your business’ income, costs and risk of insolvency.
To decrease your risk of insolvency, you need to:
- minimise your costs
- maximise your income.
To decrease your risk of insolvency, you need to offer the right payment methods, debt collection policies and credit terms for your customers. For example, for some customers, setting clear payment terms gives your customers a clear understanding of the payments you accept and when payment is due.
Setting payment terms is also important because it affects your cash flow. Offering credit makes your cash flow less predictable. To stay solvent, you need enough cash flow to pay your bills as they become due.
Read our choosing payment methods to learn more about payment methods.
Offering credit refers to when you give your customers goods or services upfront without payment in advance. If a customer buys on credit, they owe your business a debt. Standard terms of credit include:
- no credit
- seven days to pay
- 21 days to pay
- 28 days to pay.
Offering credit increases your sales, but sometimes it can be risky if your customers don’t or can’t pay their debts. Credit checks may be completed as part of the process and you may decide to restrict credit to a customer if you’re concerned that a customer might not be able to repay the credit.
Debt collection policies
Debt collection policies describe what you will do if a customer doesn’t pay their debt. Example of debt collection activities include:
- phoning or emailing customers to request payment
- sending a letter of demand
- getting the help of debt collection services.
Debt collection activities are not free. They cost money and time. It’s a good idea not to spend too much time and money on collecting debts if it’s not worth it.
Penalty fees for late payment of debt are often not legally enforceable in Australia.
In Andrews v ANZ 2012, the High Court ruled that a payment term that tries to make customers pay a penalty if they are late paying a debt can be a penalty clause and so not legally enforceable.
Late fees are sometimes legally enforceable if:
- they cover the actual costs of recovering a debt
- they are a fee for a genuine service.
What to do...
- Visit our what to do when you haven't been paid and preventing unpaid debt pages to learn about managing your debts.
- Read customer service to learn more about attracting and keeping customers.
- Check out finance & accounting to learn more about managing your finances.
- Find out more about preventing and managing disputes.