Credit management

Credit management is implementing and maintaining a set of policies and procedures to minimise the amount of capital tied up in debtors and to minimise the exposure of the business to bad debts.

You can minimise the outstanding accounts of your debtors (people who owe you money) and the likelihood of bad debts by implementing some standard credit management policies. Some of the following commonly used policies and procedures may be appropriate for your business.

Written quote

Prepare a written quote for clients, specifying what will be supplied, when the work will be done, and when and how payment is to be made. Obtain a written acceptance of the quote. Revise quotes and get written acceptances for any variations to the original contract.


Ask customers for a deposit to cover your costs and overheads, and as an indication of their ability and intention to pay.

Terms and conditions

Include your terms and conditions of trade in your quote and any related documentation. If you intend to impose a penalty for late payment, this should be included in your terms of trade.

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Ask clients how they heard about you. Avoid giving credit to unknown and new clients. Encourage cash on delivery (COD) sales. This will also reduce administration costs.

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Credit application

If credit is given, ask the client to complete a credit application form. Full names, street and postal addresses should be obtained. If the client is a business, the application should ask for their business name, their business structure, and their Australian Business Number (ABN). Their ABN can be checked on the Australian Business Register website.

  • The credit application form should ask for business references and these should always be checked.
  • Have the wording of your credit application form checked.
  • Obtain a credit report. This is an important step in assessing your client's ability to pay. A range of credit reports can be obtained from information service providers, listed on the website of the Australian Securities and Investments Commission (ASIC), or the Yellow Pages under information services, or under credit reporting services. Discuss the reports available and the costs involved with the service provider.

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Debtors' liability

If your business client is a sole trader or a partnership, the individuals are personally liable for the debt.

If the client is a company, it is good commercial practice to ask the directors of the company to guarantee the debt, as directors are not generally liable for the debts of their company.

This may be important if the company gets into financial difficulties. The requirement for the directors' guarantee should be included in the application for credit.

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Supplying goods

If supplying goods you should:

  • Obtain a written order (purchase order) from your customer before supplying.
  • Obtain a signature for goods delivered.
  • Invoice promptly.
  • Include your policy on returns in your terms of trade.

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Keep records

Establish an accounting system that includes debtors' records. Some debtors work on the principle that if no one asks for payment they do not pay. Constantly review your debtors and follow up promptly any that do not pay by the due date.

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Credit limits

Monitor exposure to individual debtors and watch that debtors do not exceed current credit limits. Computerised systems of debtor control are ideal if there are many debtors.

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Recovering a debt

Design a standard letter that can be sent to a debtor who has not paid by the due date. Request that the account be promptly paid and that the debtor contacts you, if there is a problem.

If the account is still not paid, you may wish to contact the customer personally to ask for payment. Otherwise, a formal letter of demand should be sent. This should include:

  • the amount(s) due, enclosing copies of invoices
  • the number of days overdue
  • the date by which payment is required
  • advice of the action that will be taken if the debt is not paid by the nominated date.

If the account is still not settled by the date nominated, and you do not take the action indicated in your letter of demand, the debtor may not take you seriously. You may get a reputation as someone who will allow debtors to get away with not paying.

In looking at alternatives available for recovery of debts, consider:

  • the real chances of recovery
  • the time taken away from your business
  • the costs associated with the various options and whether these costs will be recoverable from the debtor.

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What's next......

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Related Information

Top Tips

  1. This is an SBDC small business brief – a summary of essential information about a popular business topic.

    There is a series of small business briefs and also step-by-step business guides that make it easier to deal with the complexity of running a small business.

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