Are Your Credit Terms Enforceable?
According to the findings of the Inquiry into Payment Times and Practices in Australia, conducted by the Small Business Ombudsman and released in April 2017, over half of the nation’s small businesses are owed more than $20,000 from late payers, which can often severely affect cash flow. And with cash flow problems being the main reason for insolvency in Australia, it’s vital that small businesses are able to prevent the financial difficulties that are caused by unpaid invoices.
When you provide goods or services to your customers without payment in advance, they are effectively entering a credit relationship with you and owe your business a debt. While offering credit may boost sales, it involves a certain amount of risk and can make cash flow unpredictable. If you are offering credit to customers, it’s important to manage that credit relationship effectively and ensure credit terms are in place which operate in your favour, and can be legally enforced if necessary.
Remove uncertainty
To ensure there is no uncertainty regarding obligations, it’s necessary for you to articulate your payment terms at multiple touch points with your customers, including during initial telephone conversations with customers, as well as on written quotes and invoices.
Your payment terms define how you allow your customers to pay for your goods and services and contain the details of how you expect to receive payment. These terms express the methods of payment that you accept, whether you provide credit and what the credit terms are, and details of your debt collection policies.
Carefully consider credit terms
Financial experts advise that businesses should keep cash flow in mind when deciding the length of credit terms. Having a thorough understanding of your business’s cash flow cycle is essential to ensure you are able to continue to pay your own costs, such as suppliers and wages.
Because invoices are not always paid when due, it can be safer to set a short credit term, for example 7 or 14 days, rather than the standard 30 day terms. It can also make sense to match your customers’ credit terms as much as possible to that of your own suppliers, to avoid cash flow issues arising.
Whatever the credit terms your business chooses, these need to be clearly conveyed to your customers, and should be signed off and agreed before any credit is extended in the form of unpaid goods or services. This ensures that customers have entered the credit relationship in explicit agreement of your terms, and if needed, you have written evidence of the agreement for debt collection agencies or any legal action.
Provide detailed invoices
To make it as easy as possible for debtors to pay you, make sure you include all pertinent information on your invoice. As well as the amount outstanding, prominently displayed due dates, payment methods and terms, make sure to include all relevant contact information (business address, telephone, bank details, ABN). The recent Inquiry into Payment Times and Practices revealed that slow payers offered up a range of excuses for their behaviour, often as minor as “page four of the invoice has the incorrect code”, so ensure you don’t give anyone the opportunity to draw out the payment process by supplying them with incomplete invoices.
It’s also important to understand that penalty fees for late payment of debt are often not legally enforceable in Australia. A High Court case in 2012, Andrews v ANZ, established that a payment term that attempts to make customers pay a penalty if they are late paying a debt can be a penalty clause and therefore not be legally enforceable. However, late fees may still be legally enforceable if they cover the costs of debt recovery or represent a fee for a genuine service. In other words, if you engage the services of a debt collection agency to chase debt for you, their fees can be incorporated into your trading terms.
Ultimately, to avoid the threat of cash flow problems due to slow payers, you should consider your customer’s potential capacity to pay prior to deciding to extend them credit. Conduct credit checks (or outsource this task if necessary) to build credible credit profiles of customers to ensure they are able to pay. If not, don’t be afraid to require upfront payment. After all, the survival of your business may be at stake.