Published: March 2026 (updated from September 2025)
Credit control is the set of policies and processes a business uses to decide who gets credit, how much, on what terms, and what happens when they don't pay. Done well, it prevents bad debts before they happen and systematically recovers money when things go wrong. Done poorly, it creates cashflow crises out of what should have been profitable revenue.
For Australian SMEs, the stakes are high. Businesses frequently fail not because they weren't profitable but because they couldn't collect what they were owed fast enough to meet their own obligations. Credit control is where that risk is managed.
This guide covers the practical mechanics: how to assess customer creditworthiness, how to set credit limits, how to structure your terms and collection processes, how to account for bad debts, and the legal rules that govern debt collection in Australia.
For the invoicing and accounts receivable mechanics that sit alongside credit control, see our guide on accounts receivable and invoicing for Australian SMEs and our debtor management strategies.
Credit control encompasses everything from the initial decision to extend credit to a customer through to collection and write-off if a debt becomes uncollectable. It includes:
Most SMEs do some of these things informally. The difference between reactive debt management and effective credit control is having a deliberate system that operates consistently for every customer, not just the ones that cause problems.
Extending credit to a customer is an unsecured loan. You are delivering goods or services and trusting that payment will follow. The amount of due diligence you apply before doing that should be proportional to the amount of credit you're extending.
For low-value or one-off customers (under $2,000)
A basic verification is sufficient: confirm the business name and ABN using the ABN lookup at abn.business.gov.au, check that the entity you're invoicing matches the entity signing contracts, and verify that the business is actively trading on ASIC's company register if applicable.
For medium-value customers ($2,000 to $20,000)
In addition to the above, request trade references from two other suppliers, conduct a credit check through CreditorWatch or Equifax, and review any publicly available information about the business including court judgements or ASIC enforcement notices.
For high-value customers (above $20,000)
A more thorough assessment is warranted. Review financial statements if available, check CreditorWatch for payment defaults and court actions, request a signed credit application that includes personal guarantees from directors if the customer is a smaller company, and set a conservative credit limit initially with review after three to six months of trading.
What to look for in a credit check:
A credit check through CreditorWatch costs between $10 and $50 per entity. For a customer you're extending $30,000 in credit to, this is a trivial cost.
A credit limit is the maximum outstanding amount you will allow with any one customer at a given time. Without credit limits, a single large customer with payment problems can create a concentration of bad debt that threatens the whole business.
How to set a credit limit:
A common approach is to set the limit at two to three times the customer's typical monthly order value. For a customer ordering $10,000 per month, a credit limit of $20,000 to $30,000 means you're never carrying more than two to three months of exposure with that customer.
For new customers with no trading history with you, start conservatively - often one month's typical order value -- and review after six months.
Example calculation:
A Melbourne trade supplies business takes on a new customer. The customer's estimated monthly spend is $15,000. The business sets an initial credit limit of $20,000 (slightly above one month). After six months of on-time payments, the limit is reviewed and increased to $35,000.
Include credit limits in your terms of trade. Your standard credit application should state that you may vary, suspend, or cancel credit at any time. This gives you the flexibility to reduce a limit if a customer's financial position deteriorates without being contractually bound to maintain it.
Monitor for limit breaches. Xero and MYOB allow you to set credit limits per customer and will flag when an invoice would breach the limit. This is only useful if someone is checking -- most businesses set limits and then forget them until something goes wrong.
Verbal credit terms are unenforceable in any meaningful sense. Your credit terms should be in writing, agreed to by the customer before you start trading, and referenced on every invoice.
Your terms of trade should include:
The retention of title clause is particularly important for businesses supplying physical goods. Without it, if a customer goes into administration, your goods may be treated as the administrator's assets. With a valid retention of title clause (also called a Romalpa clause), properly registered on the Personal Property Securities Register (PPSR), you have a security interest in the goods.
Specific payment dates versus rolling terms: "Payment due 15 April 2026" is clearer and more enforceable than "net 30 days." Specific dates eliminate disputes about when the clock started and make automated reminders easier to set up accurately.
Credit control is not a set-and-forget function. It requires weekly review of who owes what and how long they've owed it.
The aging report is the primary tool. Run it in Xero weekly. It shows every outstanding invoice categorised by age: current, 1 to 30 days overdue, 31 to 60 days overdue, 61 to 90 days overdue, and over 90 days. The older a debt is, the less likely it is to be collected at full value.
Days Sales Outstanding (DSO) measures how long it takes on average to collect payment. The formula is:
DSO = (Total Accounts Receivable / Total Credit Sales) multiplied by the number of days in the period.
For a business with $180,000 outstanding and $1.5M in annual credit sales: ($180,000 / $1,500,000) multiplied by 365 = 43.8 days.
A DSO of 30 to 45 days is healthy for most Australian service businesses. Above 60 days indicates a systemic problem. Track DSO monthly - a rising trend is an early warning before the cashflow impact becomes visible in the bank balance.
Set a collection calendar and stick to it. For a 30-day invoice:
Our payment reminder email templates cover the specific language for each stage.
Not every debt will be collected. Good accounting practice requires provisioning for debts that are unlikely to be recovered, even before you formally write them off.
Bad debt provision (allowance for doubtful debts)
If your historical bad debt rate is around 3%, you should carry a provision of 3% of your total receivables as an allowance for doubtful debts. This provision is recognised as an expense when created, reducing your profit appropriately in the period where the risk arises rather than when the debt is eventually written off.
Example: A Sydney marketing agency has $250,000 in outstanding receivables. Based on historical experience, they provision 3% ($7,500).
Accounting entry:
When a specific debt of $5,000 is determined to be uncollectable and written off:
The write-off does not hit the P&L again at this point -- the expense was already recognised when the provision was created.
GST adjustment for bad debts
If you are on an accrual basis for GST (reporting GST when invoiced, not when paid), you may have already remitted GST to the ATO for an invoice that becomes a bad debt. The ATO allows you to claim back the GST component of a bad debt write-off as a decreasing adjustment on your BAS, provided the debt has been outstanding for 12 months or more and has been written off in your accounts.
This is a commonly missed adjustment. For a $5,500 invoice (including $500 GST) written off as a bad debt, you can claim the $500 GST back on your next BAS after meeting the eligibility criteria. See our guide on breakdown of BAS categories for how this adjustment is reported.
Aging-based provision rates
A more sophisticated approach applies different provision rates to different aging categories, reflecting the declining recoverability of older debts:
These rates should be adjusted based on your own historical collection data over time.
Australian debt collection is regulated primarily by the ACCC's debt collection guidelines, the Australian Consumer Law, and various state-based legislation. Violating these rules exposes your business to complaints, regulatory investigation, and potential fines.
What debt collectors must do:
What is prohibited:
The contact frequency rules are commonly breached by businesses with poor collection processes that generate multiple automated emails alongside phone calls from staff. Count all contact methods together when applying the frequency limits.
Disputed debts: If a customer disputes an invoice, you cannot continue pursuing it as if undisputed. You must investigate the dispute, provide evidence supporting your claim, and give the debtor a reasonable opportunity to respond. Continuing to treat a legitimately disputed invoice as overdue is a breach of the guidelines.
Payment Times Reporting Act: Large businesses (those with income over $100M per year) are required to report their payment terms and times to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). This creates accountability for large businesses that systematically pay small suppliers late. If a large business customer is paying you consistently late, you can check their reported payment times through the ASBFEO register.
The escalation decision -- moving from internal follow-up to formal debt recovery -- is one most SME owners delay too long. The data is clear: the longer a debt sits, the lower the recovery rate.
Debt collection agencies
Appropriate for debts that are 60 to 90 days overdue where internal follow-up has been exhausted and the amount is too small to justify legal action (typically under $20,000). Agencies work on contingency, charging 20% to 30% of amounts recovered. No recovery means no fee. CreditorWatch and other platforms offer integrated collection services.
Letter of demand
A formal letter of demand stating the amount owed, your right to charge interest and collection costs, and a deadline for payment before legal action is taken. Can be sent yourself or through a solicitor. Solicitor-issued letters of demand are taken more seriously by debtors and often resolve debts that internal follow-up has not.
State tribunals (VCAT, NCAT, QCAT, SAT, TASCAT)
For debts up to $10,000 to $25,000 (limits vary by state), small claims through state tribunals are cost-effective and can be handled without a lawyer. Filing fees are modest and orders can be enforced through the court system.
Magistrates court
For amounts above tribunal limits and where the debtor's financial position suggests they can pay, court proceedings are appropriate. Engage a solicitor.
Personal Property Securities Register (PPSR)
If you have a retention of title clause and have registered your security interest on the PPSR before the customer enters administration, you have priority over unsecured creditors for the goods you supplied. This is particularly relevant for businesses supplying equipment, stock, or other physical goods to customers in financial difficulty.
No written credit policy. Decisions about who gets credit, how much, and on what terms are made ad hoc. This leads to inconsistent treatment, credit extended to high-risk customers, and no defensible process if a debt is disputed.
Extending credit beyond the limit to keep a big client happy. The largest customers are often the riskiest credit exposures because the concentration of debt is higher. If one large client fails to pay, the impact on your cashflow can be severe. Enforcing credit limits with large clients is uncomfortable but necessary.
Not reviewing credit limits as customer circumstances change. A client who was creditworthy two years ago may not be today. Annual reviews of credit limits, particularly for customers whose payment behaviour has slowed, are good practice.
Failing to claim GST adjustments on bad debts. Many businesses write off bad debts and never claim back the GST component. This is money left on the table.
Delaying escalation. Waiting six months before referring a 90-day debt to a collection agency or solicitor significantly reduces the recovery rate. Move faster.
What contact frequency rules apply to debt collection in Australia?
The ACCC guidelines allow contact with debtors a maximum of three times per week and ten times per month without their consent, counting all methods of contact (calls, emails, letters). Contact is prohibited before 7:30am or after 9pm on weekdays and before 9am or after 9pm on weekends. Breaching these rules exposes you to ACCC complaints.
Can I charge interest on overdue invoices?
Yes, provided it is disclosed in your terms of trade before the transaction occurs. A reasonable commercial rate (typically 1.5% to 2% per month on overdue balances) is enforceable. Courts will not enforce rates that are unconscionable or punitive, but standard commercial rates are generally upheld.
How do I account for a bad debt for GST purposes?
If you are on accrual accounting for GST and have remitted GST on an invoice that later becomes a bad debt, you can claim a decreasing adjustment on your BAS equal to the GST component of the written-off amount. The debt must have been outstanding for 12 months or more and formally written off in your accounts. This adjustment is reported at label 1B on your BAS.
What is a retention of title clause and do I need one?
A retention of title (ROT) clause in your terms of trade means that goods remain your property until the customer pays in full. If the customer enters administration before paying, a valid ROT clause registered on the PPSR gives you the right to recover your goods ahead of unsecured creditors. It is essential for businesses supplying physical goods on credit. Register your interest on the PPSR at ppsr.gov.au.
When should I write off a debt as uncollectable?
There is no fixed timeframe, but most debts that remain unpaid after 12 months of active pursuit with no response are effectively uncollectable without legal action. Write-off is an accounting decision -- it recognises that the asset (the receivable) is no longer recoverable. It does not mean you have forgiven the debt legally, and you can still pursue it after write-off.
What is the Payment Times Reporting Act and how does it help SMEs?
The Payment Times Reporting Act requires businesses with annual income above $100M to report their small business payment terms and actual payment times to the ASBFEO. This data is publicly available and allows SMEs to see whether a large business customer has a history of paying suppliers late before agreeing to terms. It also creates reputational pressure on large businesses to pay within reasonable timeframes.
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We review and check articles periodically. At time of writing, all information is accurate to the best of our knowledge. Nothing in this article constitutes financial, legal, or tax advice. Please consult a qualified professional for advice specific to your circumstances.
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