Payment terms are a fundamental component of business transactions and cash flow. Payment terms outline how and when payment should be made. In Australia, these terms are shaped by a combination of contractual agreements and legislation.
This article will help businesses understand the legal requirements and industry practices related to payment terms. Our contract lawyers explain how businesses can use payment terms to maintain a healthy cash flow and encourage prompt payment.
Key Takeaways
- Commonly, payments are due within 30 days of the invoice date (“net 30”). However, terms can vary based on industry norms and negotiation
- The Competition and Consumer Act 2010 and various Security of Payment laws regulate payment terms in different industries
- The adoption of electronic invoicing and payment systems is reshaping traditional payment practices
- Offering payment terms is also known as providing credit and allows the buyer to have goods or services before paying for them
Understanding Standard Payment Terms
What Are Standard Payment Terms?
Standard payment terms specify the period within which an invoice should be paid after goods or services have been delivered. In Australia:
- not all businesses offer payment terms
- for businesses that do offer payment terms, 30 days from the invoice date is a common payment term
- larger companies often require extended payment terms
Factors Influencing Payment Terms
There are various factors that can influence payment terms in Australia. These incude:
- varying industry practices and trading expectations
- larger companies typically have greater bargaining power and may negotiate extended terms with suppliers
- long-standing partnerships might agree on more flexible terms
Pay-when-paid clauses
A pay-when-paid clause means that a supplier is only paid when their client receives payment. In many industries, pay-when-paid clauses are unlawful and expressly prohibited by law. For example, pay-when-paid clauses are prohibited in the building and construction industry.
Some businesses in the building and construction industry are wrongly advised by their clients that they can only be paid once their client receives payment.
In these circumstances, not only is the pay-when-paid payment term invalid and unenforceable, but the client may also be engaging in misleading and deceptive conduct under the Competition and Consumer Act 2010.
In Queensland for example, s 16 of the Building and Construction Industry Payments Act 2004 provides that:
a pay when paid provision of a construction contract has no effect in relation to any payment for construction work carried out or undertaken to be carried out, or related goods and services supplied or undertaken to be supplied, under the construction contract
Early Payment Discounts and Late Payment Fees
Early Payment Discounts
Businesses may offer discounts as an incentive for early payments. For example, a business may choose to offer a 2% discount if the invoice is paid within 10 days. Otherwise, the full amount is due in 30 days.
Late Payment Fees
Imposing fees on overdue payments can compensate for delayed cash flow. Late payment fees may take the form of interest charges or a fixed late fee.
Failing to Honour Payment Terms
If your business has managed to negotiate favourable payment terms – great! However, if your client fails to pay on time and in full, or the client is new, you need to ensure that your business maintains some leverage. This can be done throughout the product/service delivery process.
This can be as simple as:
- for sale of goods, ensuring that title does not pass until payment is received in full, and registering those goods on the personal properties security register (commonly referred to as the “PPSR”)
- for services, ensuring that the client has no intellectual property rights unless and until payment is received in full and keeping draft watermarks on deliverables until payment is received
If your business is part way through supply, and it becomes clear that your client is not going to pay, it’s important that you do not refuse to continue with your agreement unless you have an express contractual entitlement to do so.
If your business does not have the right to stop supply, and you refuse to fulfil your contract, you might be ‘repudiating’ your agreement. Repudiation occurs when a party demonstrates, by words or conduct, that they do not intend to be bound by their agreement. There are significant consequences for repudiation and it’s therefore important to consult with a contract lawyer before your business takes action.
Frequently Asked Questions
1. What are typical payment terms for businesses in Australia?
Standard payment terms are usually “net 30,” requiring payment within 30 days of the invoice date. However, terms can be negotiated and may vary by industry or agreement.
2. Is it legal to charge interest on late payments?
Yes, provided that the terms are specified in the contract and the interest charged is reasonable and not excessive.
3. How does the Competition and Consumer Act 2010 protect businesses?
The Act prohibits unconscionable conduct and unfair contract terms. The Act encourages businesses to ensure that payment terms are fair and reasonable.
4. What are progress payments in the construction industry?
Progress payments are partial payments made at agreed stages of a construction project.
5. How are digital payment methods changing payment terms?
Digital methods like e-invoicing and automated payments are speeding up transactions, reducing the need for longer payment terms, and improving cash flow management.
