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Home Cashflow Business Blog Are your credit terms up to scratch?

Australians love their credit. 2016 research from Atradius shows that on average, 49 per cent of B2B transactions occurred on credit - above average for the Asia-Pacific region.

This was weighted slightly toward doing business locally - 50.3 per cent of domestic B2B transactions were done on credit terms compared to 42.3 per cent of overseas deals. Nonetheless, Australian businesses welcome credit with open arms. This is a great thing - it lets businesses maintain steady growth, and can carry significant financial benefits for both parties.

Are unpaid invoices holding up your business?
Are unpaid invoices holding up your business?

However, dealing with credit terms is inherently risky - especially when invoices remain unpaid. To protect your company's interests, it's time to ask yourself: Are your credit terms up to scratch?

What makes good credit terms?

Strong, clear credit terms communicate to your customers exactly how and when you expect to be paid, as well as the consequences of unpaid invoices. These terms are the foundation of a good business relationship and if they are not top-notch, you can leave your business open to serious financial risk.

Good credit terms could include:

  • The payment time period (for example 14, 21 or 28 working days)
  • Accepted currencies and payment methods (cash, cheques, bank deposits)
  • Available prompt payment discounts
  • Any credit restrictions (often imposed after conducting background checks on customers)
  • Late payment fees
  • The steps you will take to recover unpaid invoices (which can include the use of debtor finance, letters of demand or debt collection)

70-80 per cent of businesses give two weeks or less for invoice payment.

Credit terms will typically be different for every business relationship, as parties will have different histories and transactions to complete. There should not be a one size fits all set of credit terms you apply to every single customer - tailor them to the situation at hand.

However, there are some trends worth remembering. Xero reports that 70-80 per cent of businesses give two weeks or less for invoice payment, and a further 50 per cent of these demand payment within a week.

Ground your credit terms with background checks

Just as banks don't lend money without performing a credit check, you may wish to conduct some background research before offering credit terms. Companies like Equifax and Dun & Bradstreet offer credit check services, which can tell you if a potential customer has a history of paying on time.

Good credit terms can ensure steady cashflow for your business.
Good credit terms can ensure steady cashflow for your business.

This can influence the restrictions you place on a line of credit, and even indicate using solutions like debtor finance may be necessary to ensure smooth cashflow on your end. Xero's research shows about 60 per cent of invoices are paid late - to avoid being part of this cycle of debt, stop poor business relationships with strong credit terms.

The consequences of poor credit terms

Without strong credit terms, your business can struggle. Late payments can increase your risk of insolvency - even the most profitable business has run aground on poor cashflow. In fact, the Australian Securities and Investments Commission's 2015-16 data shows that 46 per cent of corporate insolvencies were primarily due to bad cashflow or "high cash use".

In turn, this affects your own debtors. When one customer doesn't pay their invoices, it restricts your ability to pay suppliers or clients, creating a chain reaction of debt. Even if this does not lead to insolvency, it creates significant financial stress for everyone involved.

Once your credit terms are up to scratch, it's time to make sure your business structure ensures consistent positive cashflow. When you're ready to take that into your own hands, talk to the Cashflow Finance team about our debtor finance solutions.

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