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.
Setting payment terms is also important because it affects your cash flow. Offering credit makes your cash flow less predictable.
Read our choosing payment methods to learn more about payment methods.
Offering credit means giving 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 occur as part of the process. You may also decide to restrict credit if you’re concerned that a customer might not be able to repay the credit. Again, note that ownership of the goods does not pass to the purchaser until they pay in full.
Debt collection policies
Debt collection policies describe what you will do if a customer doesn’t pay their debt. Examples 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.