When should you stop extending customer credit to a slow payer?
Updated: 1 day ago
A customer credit review should ask whether supplying more on account increases a risk the business can no longer afford, while respecting its existing contractual obligations.
A slow payer may be an important customer with a history worth preserving. Continuing to supply without reviewing the position can also tie up more cash and increase the amount exposed if payment never arrives.
This Australian guide develops the cash flow improvement discussion. It is a commercial decision framework, not legal authority to stop work, change agreed terms or recover goods. Obtain advice on the actual contract and circumstances.
The short answer
Establish why payment is late and whether the debt is disputed.
Measure total exposure, including uninvoiced work and committed supply.
Check contractual rights before restricting delivery or changing terms.
Compare feasible future arrangements such as approved deposits or payment before new supply.
Give the decision an owner, limit and review date, then update the cash forecast.
When customer credit deserves a fresh review
Repeated late payments, broken promises, growing overdue balances or requests for more supply while old invoices remain unpaid are reasons to investigate. They do not, on their own, prove insolvency or dishonesty.
First check your own records. An incorrect invoice, missing purchase order, unprocessed credit or disputed delivery can explain an apparent delay and require a different response from financial distress.
The government’s payment terms guidance supports setting and communicating clear expectations. Compare the agreed terms with actual behaviour rather than relying on a sales team’s general impression of the account.
Keep factual notes of contacts, promises and unresolved issues. Avoid unsupported allegations about the customer. A clear record supports the commercial review and any professional advice needed later.
Measure the exposure beyond overdue invoices
Add outstanding invoices, completed work not yet billed and goods or services already committed under the contract. Identify deposits, credits or other amounts that reduce the exposure only where their treatment is confirmed.
Also consider the cost of completing current work. Stopping a project may have contractual consequences, while continuing can require additional labour or materials before any payment is received.
The working capital needs guide helps connect the customer account to operating cash. The relevant question is not just how much the customer owes, but which business obligations depend on that receipt.
For related customer entities, confirm which legal party owes each amount. A familiar brand or shared owner does not automatically make every company responsible for the others’ debts.
Distinguish a collection issue from a future credit decision
Recovering the existing debt and agreeing terms for new work are connected but separate tasks. A future payment-before-supply arrangement does not itself recover overdue invoices.
Similarly, a repayment plan for old debt does not necessarily justify extending unlimited additional credit. Model whether new supply causes exposure to grow faster than the agreed repayments reduce it.
The ACCC’s contracts guidance provides general context for business agreements. Have your solicitor explain any right to suspend, terminate, demand security or change terms before acting.
Where a customer disputes the quality or amount, address that issue through the appropriate process. Simply repeating a payment demand may not resolve the basis on which payment is being withheld.
A worked example: More sales can increase the cash at risk
Consider an original hypothetical account with $40,000 overdue. The customer requests another $25,000 order, requiring $16,000 of new supplier and labour cash before collection.
If the business supplies on account without receiving payment, the invoiced exposure could rise to $65,000, while the new order also consumes the assumed $16,000 of cash. Any existing commitments or uninvoiced work add further considerations.
Suppose the customer offers to repay $5,000 a month but requests continuing monthly credit sales of $25,000. Those promises do not by themselves show exposure is reducing. The business needs a complete schedule of new invoices and actual payments.
These figures illustrate the distinction between revenue, cash cost and credit exposure. They do not establish whether the business can lawfully refuse supply or what recovery action is appropriate.
Use a 13-week forecast to test the current arrangement and feasible agreed alternatives. The government’s cash flow statement guidance supports using realistic receipt dates rather than treating every promised instalment as certain.
Consider practical future terms
Depending on the contract, law and customer agreement, options may include a reduced credit limit, staged supply, an appropriate deposit, shorter agreed terms or payment before new supply. Each changes the commercial relationship differently.
Check whether the business can operationally enforce the arrangement. Sales, dispatch and accounts staff need a consistent process so new orders are not released against terms the owner intended to restrict.
Do not assume adding a clause to an invoice changes an existing contract. Obtain advice on how new terms must be agreed and documented, including any consumer or industry-specific requirements.
If guarantees, retention-of-title or security arrangements are being considered, use a solicitor. The PPSR security interest explanation provides background, but registration, priority and enforcement require transaction-specific advice.
Protect the wider business relationship
Communicate the concern factually and identify the proposed future arrangement. A clear explanation of overdue amounts and required steps can be more productive than an emotional response to repeated delays.
Nominate who can approve an exception and record the reason. A credit limit that is routinely overridden without review does little to control the actual exposure.
Consider the customer’s contribution margin and replacement workload as well as revenue. Losing an account can reduce cash receipts, while continuing an uneconomic or unreliable account can consume capacity needed for better work.
The profit versus cash guide explains why sales volume alone is insufficient. Your accountant can help compare the effect of reduced supply, changed terms or an orderly exit under the relevant contract.
Check any invoice-finance obligations
If invoices are financed, follow the agreement’s notification, collection and settlement requirements. Do not agree a discount, payment redirection or compromise without any consent the documents require.
The invoice finance guide explains the broader funding structure. A customer dispute or overdue balance can affect availability or recourse under the actual agreement, so include those consequences in the forecast.
Do not assume a financed invoice has transferred all risk away from the business. Obtain an explanation of the treatment before extending further credit to the same customer.
Keep the facility records, customer ledger and recovery correspondence consistent. Different teams working from different balances can make a difficult account harder to manage.
Escalate when the position exceeds ordinary credit control
For significant disputes, suspected insolvency or threatened legal action, obtain prompt professional advice. Recovery and insolvency processes can involve deadlines and restrictions that a general credit-control policy does not resolve.
If the missing receipt leaves your own company unable to meet obligations, assess that position separately. The guide to cash problems borrowing may not solve considers why additional debt is not automatically the answer to an uncollectible account.
Update expected receipts and identify the next decision date. A documented review should lead to an action on future exposure, not merely another month of carrying the same assumption.
Frequently asked questions
Can I immediately stop work when an invoice is overdue?
Not automatically. Check the contract, applicable law and any notice requirements with a qualified adviser before restricting existing obligations.
Does a repayment promise justify more credit?
It is only one factor. Compare actual payments with new supply and total exposure, then decide whether the arrangement is workable.
Can I add new terms to the next invoice?
Do not assume that changes an existing agreement. Obtain advice on properly agreeing and documenting future terms.
Does invoice finance remove this decision?
No. Eligibility, recourse and collection obligations depend on the facility, and the business still needs to manage the customer relationship and future exposure.
Decide how much further exposure the business can carry
Review the facts, contract and cash effect before supplying more on account. Clear limits and agreed actions help protect both the business’s cash and a professional customer relationship.
Planning Your Business Cash Flow?
Fairlane Finance can help you assess possible funding structures against your business’s cash-flow timing.
General information only. This article does not constitute financial, credit, legal, tax, accounting, compliance or valuation advice. Finance is subject to lender approval, eligibility criteria, terms, fees and conditions. Consider obtaining independent professional advice for your circumstances before acting.
