If your business allows customers to pay for goods and services after delivery, you need clear credit terms and conditions.
Credit terms explain how and when customers should pay and outline your debt collection policies. This document has legal and financial implications. Your credit terms should include:
- how you will supply credit only on certain terms;
- how the customer will pay when the payments become due;
- other costs associated with purchasing the goods, and when these payments will become due and payable;
- interest payable on unpaid amounts; and
- actions you can take if they do not make the payments and further action is required to seek payment for the goods.
This article will explain what should be included in your credit terms.
Payment Terms
As part of the terms by which you provide credit, you should specify the available payment methods. These vary from business to business but typically include:
- cash;
- cheque;
- EFTPOS;
- credit or debit cards (restrictions may apply to credit card fees you are allowed to charge a customer);
- BPAY or online payments;
- direct debit; and
- buy-now-pay-later arrangements (e.g. Afterpay).
If the customer is a company, you may also require that the company’s director, principals, or partners enter into a deed of guarantee to pay for the goods. This means you can hold them liable for payments if the company cannot pay for the goods or services.
For customers with ongoing accounts who order regularly from your business, you may want to include that you can change the prices of your products and services as you see fit. Any invoices sent after the change will reflect the new prices.
The credit terms should also include a clause allowing you to refuse to provide goods ordered by the customer, terminate the customer’s account, or terminate your contract with the customer.
Credit Limit
In addition to the payment terms, include a provision setting out the maximum credit limit you are willing to provide to the customer. This action helps you limit the total outstanding balance on the customer’s account and manage your credit risk effectively.
You can determine the credit limit based on factors such as the expected order volume, the customer’s payment history, and your assessment of the customer’s creditworthiness. By having a clear and enforceable credit limit provision, you can manage credit risk exposures more proactively.
Continue reading this article below the formTitle and Delivery
If you supply or wholesale goods, you need a detailed retention of title clause. This clause states that the title of the goods will not pass to the customer until they receive the goods or complete the payment.
It is important to include this clause to retain title to the goods during the period before payment is made. You can reclaim the goods after delivery if payment is not made. If you provide goods on credit, clarify that you retain ownership until all payments are made.
In this clause, reserve the right to keep or sell the goods until payments are completed. Specify that liability for loss and damage to the goods passes to the customer upon delivery.
Default Events
Your credit terms should explain situations that count as a customer’s default. These events should allow you to stop extending credit, cancel unfulfilled orders, and demand immediate payment of outstanding amounts.
A default could also occur if the customer fails to meet other obligations in the terms, such as providing information for PPSR registration.
Personal Properties Securities Act (PPSA)
If you offer goods on credit, you should consider including a clause under the Personal Property Securities Act 2009 (Cth). This clause specifies that the customer must provide you with the necessary information for registering your security interest in the goods on the Personal Property Securities Register (PPSR). It should also mandate the customer to supply details such as their ABN/ACN, business name, and other required information to facilitate registration of a Purchase Money Security Interest (PMSI) on the goods. By doing this, you can improve your chances of recovering any outstanding payments for the goods if the customer cannot or refuses to pay.
General Clauses
Your credit terms should also include several general clauses to protect your business. These will allow for the proper administration of the terms. Such clauses may include:
- privacy;
- GST;
- relationship of parties;
- assignment;
- severance;
- waiver;
- variation of rights;
- force majeure;
- notice;
- jurisdiction; and
- applicable laws.
Credit Information Policy
If you provide credit to customers (payment terms of over 7 days), you need to have a credit information policy in place to comply with the Privacy Act 1988 and the Privacy (Credit Reporting) Code. The credit information policy outlines how you handle and protect the personal and credit-related information of individuals you deal with. It covers areas like the types of credit information you collect, how you use and disclose this information, how individuals can access and correct their information, and your procedures for handling complaints. Having a comprehensive credit information policy ensures transparency and demonstrates your commitment to protecting the privacy rights of consumers while conducting credit-related activities.
Whether you’re a small business owner or the Chief Financial Officer of an ASX-listed company, one fact remains: your customers need to pay you.
This manual aims to help business owners, financial controllers and credit managers best manage and recover their debt.
Key Takeaways
It is important to draft thorough credit terms and a credit information policy to comply with the ACL and other laws and your obligations as a supplier or wholesaler. Your credit terms should set out how and when your customers are to pay you back for the goods or services you provide. Furthermore, they should detail any debt recovery policies your business has. Finally, if you are selling goods, it is important to register your interest in the goods on the Personal Property and Securities Register (PPSR) and include a retention of title clause in the credit terms.
If you require assistance with drafting your credit terms, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
If you allow your customer to pay for your goods and services after you provide them, the Credit Terms and Conditions set out how and when the customer should pay you back. It will also detail what steps you will take if the customer does not pay you back on time.
Yes. Provision of credit should be conditional on the customer ‘passing’ your credit application process. This can also be made a requirement in your credit terms and conditions.
You should register your interest if you are selling, hiring or leasing goods.
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