How to Write a Business Credit Policy in Australia (2026 Guide)

Most Australian small businesses extend credit to their clients every day without ever consciously deciding to do so. When you deliver a service and send an invoice, you have just lent your client the value of that work interest-free. The question is not whether you extend credit — it is whether you do it with rules or without them.

A business credit policy is an internal document that defines exactly how your business manages the risk of extending credit: who qualifies, how much they can owe at any time, what your payment terms are, and what happens when those terms are not met. It is not just for large corporations. Any Australian SME turning over more than $500K per year with more than a handful of active clients will benefit directly from having one.

This guide walks through what a credit policy needs to cover, how to write one that actually works, and how to enforce it consistently using Xero.

What Is a Business Credit Policy and Why Do You Need One?

A credit policy is a written set of rules governing how your business decides to extend payment terms to clients, how you assess their creditworthiness, what limits you apply, and how you respond when accounts go overdue.

Without a policy, credit decisions are made ad hoc — usually in the moment of signing a new client, when enthusiasm runs high and risk assessment runs low. The result is inconsistency: some clients get 14-day terms, others get 60 days, and nobody remembers why. When accounts go overdue, there is no clear escalation path, and staff are uncertain how hard to push.

With a policy, those decisions are made once, calmly, based on business logic — and then applied consistently by everyone in your team. Studies by the Australian Institute of Credit Management (AICM) consistently show that businesses with written credit policies collect faster and write off less bad debt than those without.

The Seven Core Elements of a Business Credit Policy

1. Credit Approval Criteria

Define who qualifies for credit terms (i.e., the ability to pay after delivery) and who must pay upfront or in advance. Common criteria include:

• Registered Australian Business Number (ABN) — individuals without an ABN are typically treated as consumer accounts with different risk profiles.
• Minimum trading history (e.g., operating for more than 12 months).
• Completion of a signed credit application form (including personal guarantee clause for small private companies).
• Satisfactory credit check via a service such as illion, Equifax, or Creditor Watch.
• No prior payment disputes with your business or, where known, with other suppliers.

New clients who do not yet meet your criteria are not necessarily declined — they may simply be required to pay upfront or on a COD (cash on delivery) basis until they establish a track record with you.

2. Credit Limits

A credit limit caps the total outstanding amount you are willing to have with any single client at any one time. Without limits, a single slow-paying client can accumulate a debt that genuinely threatens your solvency.

Setting credit limits based on client risk level is a practical approach:

• New clients (under 6 months): Start at 50–75% of one month’s expected billing.
• Established clients (6–24 months, good payment history): Up to two months’ expected billing.
• Long-term clients (2+ years, consistent on-time payment): Negotiate case-by-case, reviewed annually.

In Xero, you cannot enforce hard credit limits natively, but you can use the Contact Groups feature to tag clients by their limit tier and set up manual approval processes before invoices are issued to high-exposure contacts.

3. Standard Payment Terms

Your policy should clearly state your default payment terms and any approved variations. For Australian SMEs, common defaults are:

• Net 14: Common in professional services, consulting, and where services are delivered and consumed quickly.
• Net 30: Standard in B2B services, trades, and product supply.
• End of month + 14 days (EOM+14): Common in wholesale and manufacturing, where batch invoicing is standard.

Important: your policy should also specify whether interest or late payment fees apply to overdue accounts, and the rate (e.g., 2% per month). Under Australian contract law, late payment fees are enforceable provided they are clearly disclosed in your terms at the time of the agreement. State them in your credit policy, your credit application form, and your invoices.

4. Onboarding and Documentation Requirements

Before extending credit to any new client, your policy should specify the documents you require:

• Completed credit application form (including ABN, trading name, contact details, and trade references).
• Signed acceptance of your standard Terms and Conditions of Trade.
• Personal guarantee from director(s) for private companies with limited assets or short trading history.
• Evidence of identity for sole traders or individuals.

Having signed documentation is not just good risk management — it dramatically strengthens your position if you ever need to pursue debt recovery through the state tribunal system or engage a debt collection agency.

5. Invoice and Statement Procedures

Your credit policy should specify how and when invoices are issued, what they must include (GST compliance, tax invoice requirements, due date), and when statements are sent. Best practice for Australian SMEs:

• Issue invoices on the same day work is completed or goods are delivered — not at end of month.
• Ensure every invoice includes: your ABN, the client’s ABN, a clear due date, GST breakdown, and payment methods.
• Send a monthly statement to all contacts with outstanding balances regardless of whether they are overdue.

6. Overdue Account Escalation Process

This is the section most small business credit policies are missing — and it is the most valuable. Define clearly what happens at each stage of a delinquent account:

• 1–7 days overdue: Automated payment reminder (email). Friendly, assumes oversight.
• 8–14 days overdue: Second automated reminder, more direct. Offer to discuss if there is an issue.
• 15–21 days overdue: Personal phone call from account owner or finance contact. Note the conversation in the client record.
• 22–30 days overdue: Formal letter of demand. Suspend any new credit (stop future work on account) until balance is resolved.
• 31–60 days overdue: Refer to external debt collection agency or state consumer tribunal, depending on the amount and relationship value.
• 60+ days overdue: Consider PPSR registration (where security interest exists), legal action, or write-off decision.

Having this written down means staff know exactly what to do at each stage without needing to escalate every decision to ownership. It also makes your collections process more consistent, which in turn makes it more effective.

7. Credit Policy Review Schedule

A credit policy is not a set-and-forget document. Economic conditions change, your client base evolves, and your own cash flow needs shift. Review your policy at minimum annually, and promptly after any significant bad debt event. Key questions for each review:

• Are our standard payment terms still competitive in our industry?
• Have we had any bad debts in the past 12 months, and what could have prevented them?
• Are our credit limits appropriately calibrated to our current revenue mix?
• Are all staff who interact with clients aware of and following the current policy?

Connecting Your Credit Policy to Xero

A credit policy only works if it is reflected in your accounting systems. In Xero, you can operationalise your policy in several practical ways:

• Set contact-specific payment terms. Under each contact’s Financial Details, assign their approved payment terms (e.g., Net 14 or Net 30) based on their credit tier. This ensures Xero calculates due dates correctly and triggers reminders at the right time.
• Use Contact Notes to record credit decisions. Document when a credit limit was set, when a check was conducted, and any special conditions. This creates an audit trail.
• Configure invoice reminders. Xero’s built-in invoice reminders (Settings → Invoice Reminders) allow you to set automated emails at specific intervals. Align these exactly with your escalation schedule in the policy.
• Run the Aged Receivables report weekly. Your policy should specify who reviews this report, when, and what action they take at each overdue threshold.
• Flag high-risk contacts. Use Xero’s Account Number field or a Contact Group called “Credit Hold” to flag accounts that have been suspended from new credit. Anyone raising an invoice to a contact in this group should check before proceeding.

Common Mistakes in Australian SME Credit Policies

After reviewing credit management practices across Australian small businesses, these are the most common failure points:

• No policy in writing. “We handle it case by case” is not a credit policy. It is a recipe for inconsistency and avoidable losses.
• Terms not communicated at the start of a relationship. Clients who are surprised by payment terms after they receive their first invoice will push back. State your terms clearly in proposals, contracts, and onboarding documents.
• Extending credit without documentation. A handshake agreement means nothing when a client disputes an invoice 90 days later. Require signed terms before credit is extended.
• Escalation that never escalates. Having a 5-step overdue process where step 3 is “call the client” but step 3 never actually happens because it feels uncomfortable. Build the process around automated triggers where possible, so human judgment only enters at the high-stakes decisions.
• Never reviewing credit limits. A client whose turnover has doubled is likely a lower risk than when you first set their limit. A client who has started taking longer to pay each month may be trending toward insolvency. Review regularly.

Automating the Collections Side of Your Credit Policy

Writing a credit policy is the intellectual work. Enforcing it consistently is the operational challenge. For most small business owners, the honest truth is that chasing invoices manually feels uncomfortable, takes time, and often falls behind when the business is busy.

This is exactly where automated payment reminder tools earn their value. When your overdue escalation process runs automatically — polite reminder at 7 days, firmer reminder at 14 days, with the right tone for each stage — you enforce your credit policy without the friction of doing it manually every week.

PaidMate integrates directly with Xero to automate this process. You define the escalation schedule once, and PaidMate sends professionally written, personalised reminders at exactly the right time. Your credit policy gets enforced consistently, your average debtor days fall, and you preserve client relationships because the follow-up never feels like you personally are chasing them.

Get paid without burning bridges.

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Key takeaways:

• A written credit policy reduces bad debt and speeds up collections for Australian SMEs.
• Cover seven core elements: approval criteria, credit limits, payment terms, documentation, invoice procedures, escalation process, and review schedule.
• Require signed terms and conditions before extending credit to any client.
• Connect your policy directly to Xero: contact-level terms, reminders, and aged receivables reviews.
• Automate your escalation process so your policy is enforced consistently, not just when you remember.

PaidMate connects to Xero and automates your payment reminder escalation process, so your credit policy actually runs. Learn more at paidmate.com.au.