Most businesses that trade on credit don’t set out to accumulate bad debts. But without a structured approach to credit management, that’s often what happens.
This is the first in a series covering the fundamentals of credit management, including what credit management is, what it costs when it goes wrong, and the practical steps you can take to reduce risk from your first transaction with a new customer.
Extending credit to customers is, in effect, lending them money. Done with proper controls, it builds commercial relationships and supports growth. Done without them, it creates cash flow pressure and, in some cases, direct financial losses that are difficult to recover.
Australia’s insolvency environment makes this worth paying attention to. According to ASIC data cited by the Reserve Bank of Australia, more than 7,400 companies entered external administration by December 2024 (a 47% increase on the prior year).
More importantly for creditors, RBA analysis of ASIC insolvency data shows that more than 80% of those insolvencies resulted in an estimated dividend payout of zero cents in the dollar to unsecured creditors. If a customer collapses owing you money and you’re not secured, recovery is unlikely.
This is the environment in which credit decisions are being made. It’s not cause for alarm, but a warning to have the right processes in place.
Credit management is the set of processes a business uses to assess, control and collect the money owed to it by customers who have been extended credit.
In practice, that means deciding who gets credit and how much, on what terms, and what happens when they don’t pay. It spans the full arc of the customer relationship – from the credit application before the first order through to, if necessary, formal debt recovery at the end.
Effective business credit management brings together several functions: credit assessment, credit documentation, collections, and, when needed, legal or enforcement action. Each plays a role. But they only work when they’re connected by a clear credit policy and consistent internal processes.
The goal isn’t to avoid extending credit. For most B2B businesses, trading on credit terms is simply how things work. The goal is to do it in a way that’s informed, documented and supported by a process that gives you options when something goes wrong.
|
Net Profit Margin |
Recover $1,000 |
Recover $5,000 |
Recover $10,000 |
Recover $25,000 |
5% |
$20,000 |
$100,000 |
$200,000 |
$500,000 |
10% |
$10,000 |
$50,000 |
$100,000 |
$250,000 |
15% |
$6,667 |
$33,333 |
$66,667 |
$166,667 |
20% |
$5,000 |
$25,000 |
$50,000 |
$125,000 |
25% |
$4,000 |
$20,000 |
$40,000 |
$100,000 |
If your business operates on a 10% net profit margin and you write off $10,000, you’ll need to generate $100,000 in new sales just to recover that loss – before accounting for the time and cost already spent pursuing the debt.
For businesses with tighter margins, common in construction, distribution and trade services, the picture is starker. At 5%, a $25,000 bad debt requires half a million dollars in additional revenue to offset it. This shows how bad debts pose a direct threat to business viability, and the numbers make the case for properly managing credit from the start.
A credit policy is a written set of rules that governs how your business extends, monitors and collects credit. It’s the framework your team uses to make consistent, defensible decisions – and without one, those decisions tend to get made ad hoc.
Sales teams approve credit to close a deal. Finance teams find out when the account goes overdue. Terms that were never properly communicated become disputed. A clear credit policy closes those gaps before they become problems.
What a credit policy should include:
A well-drafted credit policy doesn’t need to be long. It needs to be clear, followed consistently, and reviewed at least annually. The specifics of your credit application and terms and conditions – the documents that give your policy legal weight – are covered in credit application and T&C in Part 2 of this series.
Even with strong credit management processes, some accounts will run into difficulty. A customer might trade poorly, face industry headwinds, or simply stop responding. When internal collection efforts have stalled, engaging a collection agency is a practical next step, not a last resort.
The earlier a debt is referred to a specialist, the better the recovery prospects. A common misconception is that collection agencies are only relevant once an account is severely overdue. In practice, early-stage referrals at 60 or 90 days consistently produce stronger outcomes than those referred at six months or more.
A specialist agency can handle early and late-stage recoveries, formal demand and escalation, skip tracing and debtor location, field calls, and litigation and enforcement services where the debt warrants it.
Good credit documentation is central to what a collection agency can do for you. If your terms and conditions are unclear, if a personal guarantee wasn’t obtained, or if there are disputes over the debt itself, recovery becomes harder. Strong credit documentation doesn’t just protect you in litigation – it supports every stage of the collection process, from the first formal demand to court enforcement.
If you’re uncertain whether a debt warrants agency involvement or legal action, talking through the specifics with a specialist before the debt ages further is a reasonable starting point.
The best time to reduce credit risk is before credit is extended. A thorough onboarding process is one of the most practical investments in business credit management you can make.
A formal application captures the legal entity name, ABN, registered address, directors and authorised contacts. It’s the starting point for any subsequent recovery actions and establishes the documented basis for the credit relationship.
A commercial credit report shows payment defaults, court judgements and any adverse history on public record. For higher-value accounts, reviewing recent financial statements adds further context. Contact Equifax to learn more about their range of products that will support your business.
Call references rather than relying on written ones. Ask direct questions:
Confirm the ABN and entity structure through ASIC. Who you contract with matters, particularly when assessing whether to request a personal guarantee from a director.
Base the limit on what the credit assessment supports, not what the customer has asked for. Start conservative and review it as the relationship develops and payment history is established.
Trading terms should be agreed before supply begins, not sent with the first invoice. This includes payment terms, retention of title, and interest provisions for late payment.
None of this needs to significantly slow the sales process. Most can be completed within a few business days for standard accounts. Nowadays larger businesses have their credit applications and terms and conditions available, executable and stored online using online application processing technology
Good credit management doesn’t stop once an account is open. Monitoring existing customers for early indicators of financial stress is part of maintaining a healthy debtor book.
Acting on these signals early preserves your options. Reducing credit exposure, requesting security or escalating collection before a situation reaches crisis stage can make a material difference to your recovery outcome.
Credit management isn’t about being difficult to deal with. It’s about having the right information, documentation, and processes in place so you can trade confidently and respond effectively when things don’t go to plan.
Part 2 of this series covers credit applications and terms and conditions – the documents that give your credit policy its legal weight. You can read it here.
If you’d like to discuss your current credit management processes or talk through a specific recovery situation, AMPAC works with businesses across Australia to support the full credit cycle – from early-stage collections through to enforcement and international recovery.
The information in this article is general in nature and does not constitute legal advice. Seek independent legal advice for guidance specific to your business and circumstances.
Credit management is the process of assessing, approving and monitoring customer credit, and collecting amounts owed when they fall due. In a business context, it covers everything from credit applications and terms of trade through to formal debt recovery. Effective credit management protects cash flow, reduces bad debt losses, and supports sound commercial decision-making across the organisation.
The direct cost is the amount written off. The real cost is the additional revenue needed to recover that loss. A business operating on a 10% net profit margin needs to generate $10 in new sales to recover every $1 of bad debt. At a 5% margin, that figure is $20 for every $1 lost. For businesses with large debtors or thin margins, even a small number of significant bad debts can have a material impact on profitability.
A credit policy should document the criteria for extending credit, how limits are set and reviewed, standard payment terms, the required content of credit applications, the terms and conditions of trade, the collection escalation process, and the internal responsibilities at each stage of the credit cycle. It should be written, communicated to relevant staff, and reviewed at least annually.
At a minimum, verify the legal entity and ABN through ASIC, obtain a completed credit application, conduct a commercial credit check, call trade references directly, and ensure your terms and conditions are signed before the first order is placed. For higher-value accounts, reviewing recent financial statements and considering whether a personal guarantee is appropriate is also worth doing.
If you need help to recover your overdue business debts, call AMPAC on 1300 426 722 or email us at sales@4ampac.com.au
Do you have debt that needs recovering? Are you unsure on where to start? Contact AMPAC Debt Recovery for solutions today and speak to one of our qualified consultants to get you started.
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