Bad debts do not typically appear without warning. In most cases, the conditions that produce an unrecoverable account are established at the moment credit is first extended — before a single invoice has been issued. The five mistakes below account for the majority of preventable bad debt losses in Australian commercial credit.
1. No credit application
The credit application is the document that captures a customer's legal entity, directors, agreed terms and — critically — signatures on the personal guarantee and terms of trade. A business that opens credit accounts on the basis of a phone call, an email, or a handshake has no documentation, no guarantee and no enforceable terms. When the account goes bad, there is nothing to enforce.
Fix: implement a credit application process for every new credit account, regardless of the customer's apparent size or reputation. The form should capture legal entity name, ACN/ABN, trading name, principal address, directors' details, proposed credit limit, and authorised signatories.
2. No retention of title clause
A supplier of goods who does not have a retention of title (ROT) clause in their terms of trade transfers ownership of the goods to the buyer immediately on delivery. If the buyer becomes insolvent before paying, the goods are part of the buyer's asset pool — the supplier ranks as an unsecured creditor. A ROT clause, properly drafted and registered on the PPSR, may allow the supplier to recover the goods ahead of the general creditor pool.
Fix: have your terms reviewed by a commercial solicitor to include a PPSA-compliant ROT clause. Register a purchase money security interest on the PPSR for significant supply relationships.
3. No personal guarantee
A debt owed by a company is only as good as the company's solvency. A personal guarantee from the directors pierces the corporate veil if the company cannot pay. Many businesses omit the personal guarantee because they do not want to make the credit application process uncomfortable — and then lose the recovery entirely when the company is wound up with no assets.
Fix: require a personal guarantee from at least one director as a condition of credit above a defined threshold. The guarantee should be part of the credit application and signed in a personal, not representative, capacity.
4. Not chasing early
An invoice that is five days overdue is far easier to collect than one that is 45 days overdue. The debtor remembers the supply, has not yet found alternative suppliers, and has not yet established a pattern of non-payment. Early contact — a polite but firm reminder at day one of arrears — sets the expectation and catches problems before they compound.
Fix: set up an automated contact workflow that triggers at day one of arrears, day seven and day 14. Make the first contact by phone, not email — a conversation establishes tone and intent in a way that a reminder email does not.
5. Not escalating
Many businesses spend months sending reminders and having polite conversations with a debtor who is not going to pay. Every week of inaction is a week of accruing limitation period, a week of the debtor moving assets, and a week of lost opportunity to recover. The internal staff who manage receivables are often reluctant to escalate because they have a relationship with the customer — which is exactly why external escalation matters.
Fix: set a defined escalation threshold — for example, any account unresolved at 45 days overdue is referred externally. Apply it consistently. Refer accounts to Merion rather than letting them age.