Credit Terms — A Guide for Australian Businesses

What are credit terms?

Credit terms (also called terms and conditions of trade, or terms of sale) are the contractual rules that govern how and when a customer must pay you for goods or services supplied on credit. They typically specify:

• When payment is due (the payment period)
• What interest or fees apply if payment is late
• Who owns the goods until payment is made (retention of title)
• Who bears the risk of loss or damage in transit
• The supplier's right to suspend supply or demand payment in full
• Which state's law governs disputes

For B2B suppliers, written credit terms are essential. Without them, your ability to claim interest, late fees, and collection costs from a non-paying customer is severely limited.

Standard payment periods

The most common payment periods in Australian commercial practice:

• Net 7: Payment due within 7 days of invoice. Aggressive — common in construction and trades, and for businesses with strong market position.
• Net 14: Payment due within 14 days. Common for SMEs and businesses with reliable, repeat customers.
• Net 30: The most common B2B standard. Gives buyers time to reconcile and process invoices through their accounts payable cycle.
• Net 60 / Net 90: Common in sectors dominated by large buyers (retail, government, mining). These terms are often imposed on suppliers rather than negotiated.

As a general rule, the shorter your payment terms, the lower your debtor days and the better your cash flow. If your industry allows it, push for shorter terms than you think you can get.

Early payment discounts

An early payment discount is an incentive you offer customers to pay before the standard due date. The most common format is: 2/10 net 30 — a 2% discount if paid within 10 days, full amount due in 30 days.

For a cash-rich customer, the annualised return on taking a 2/10 discount is approximately 36.5% — a very attractive incentive. For a supplier, the discount effectively sells cash earlier in exchange for a 2% reduction in margin. Whether this is worthwhile depends on your cost of capital and the value of improving cash flow.

If you offer early payment discounts, document them clearly in your terms and on your invoices.

Interest and late fee clauses

An interest clause is the most important enforcement tool in your credit terms. It provides that if an invoice is not paid by the due date, interest accrues on the outstanding amount at a specified rate.

Key considerations:

• Rate: 10% per annum (simple interest) is the most common contractual rate in Australia. Higher rates are enforceable but may attract scrutiny if they are excessive relative to market rates.
• Compounding: Most terms use simple interest. Compound interest is enforceable but must be clearly stated.
• When interest starts: Specify whether interest starts accruing from the invoice date or the due date. Most terms use the due date.

A late fee clause specifies a fixed dollar amount charged per overdue invoice. This compensates for administration costs and creates a stronger incentive to pay on time. Typical fixed late fees range from $20 to $100 per invoice.

Use our late payment interest calculator and late fee calculator to quantify these amounts for specific invoices. Download our credit terms template which includes both clauses.

Right to recover collection costs

Include a clause stating that if you are required to engage a debt recovery agency or solicitor, the customer is liable for all reasonable collection costs. This clause is important — without it, you bear the cost of recovery even when you are clearly in the right.

Courts can award costs in addition to the debt where there is a contractual basis for them. Merion pursues recovery costs under this clause where applicable.

PPSR security interests

The Personal Property Securities Register (PPSR) is a national register that allows suppliers of goods to register a security interest in those goods. If a buyer becomes insolvent before paying, a properly registered security interest may allow you to:

• Repossess the goods if they are still identifiable and have not been sold on
• Claim priority over the insolvent buyer's other unsecured creditors

Registration is done online at ppsr.gov.au. The registration fee is modest. To be effective, registration must generally occur before or shortly after supply. To support registration, your credit terms should include a retention of title (Romalpa) clause.

PPSR is most relevant for businesses that supply goods (equipment, vehicles, materials) rather than services. If you supply high-value goods on credit, PPSR registration is strongly recommended.

Personal guarantees

For company customers, a personal guarantee from the director(s) is one of the most effective credit protections available. It means that if the company fails to pay and then enters liquidation, you can pursue the director personally for the debt.

Include a personal guarantee clause in your credit application (not just the credit terms) and ensure it is signed by the director(s) personally, witnessed, and dated. The guarantee should be unlimited, continuing, and independent of the company's primary obligation.

Merion pursues personal guarantees in appropriate cases as part of its recovery process.

Jurisdiction clause

Specify which state's law governs the contract and which courts have jurisdiction over any disputes. If your debtor is interstate, a jurisdiction clause in your favour means any court proceedings are conducted in your state — reducing the cost and inconvenience of litigation.

Making your terms effective

The best-drafted credit terms in the world are worthless unless:

• The customer has read them and agreed to them before the first supply
• A signed copy (with the customer's signature on the credit application) is on file
• The terms are referred to on every invoice

Use our commercial credit application template, which includes a sign-off block confirming the customer's acceptance of your credit terms.

This guide is provided for general information only and does not constitute legal advice. Credit terms involve legal rights and obligations that vary by jurisdiction and circumstance. Have your solicitor review your terms before use.