When a commercial debt goes bad, the first document an experienced recovery professional reaches for is not the invoice — it is the terms of trade. The invoice tells you the amount. The terms tell you whether you can recover interest, add recovery costs, enforce a retention of title, or call on a personal guarantee. Good terms do not guarantee payment, but they dramatically improve what can be done when payment does not come.
Payment terms
State the due date with precision: "payment is due 14 days from the date of invoice." Vague terms — "payment within a reasonable time" — invite dispute and complicate any calculation of when default occurred. The due date anchors the limitation period clock, the interest calculation and the timeline for formal demand.
Late payment interest
A clause specifying the rate and basis for interest on overdue accounts is one of the most commercially significant provisions in any set of terms. Without it, interest is difficult to claim. With it, a six-month overdue account at 15 per cent per annum has a measurably larger recoverable amount — and a debtor who knows interest is accruing has an additional incentive to pay sooner.
Recovery costs
A clause stating that the debtor is responsible for the reasonable costs of recovery — including collection agency fees and legal costs on a solicitor-client basis — changes the commercial arithmetic for the creditor. It also signals to the debtor that delay is expensive. Whether a particular clause is enforceable depends on its drafting and the contract type, so professional advice is worthwhile.
Retention of title
For businesses supplying goods, a retention of title (Romalpa) clause — which provides that title in goods does not pass until payment is received — preserves the option to recover the goods if the buyer becomes insolvent before paying. This clause should be registered on the PPSR to be effective against a liquidator or administrator.
Personal guarantee
A term requiring a personal guarantee from the directors of the purchasing entity as a condition of credit is one of the most powerful provisions a trade creditor can include. It pierces the corporate veil if the company cannot pay. Like all guarantees, it needs to be properly executed to be enforceable.
Dispute resolution
A clause specifying that disputes are to be resolved under the law of a particular state, and that the creditor's home jurisdiction is the agreed forum, prevents a debtor from forcing the creditor to litigate in an inconvenient venue.
If you are unsure whether your current terms of trade are fit for purpose, have them reviewed before the next bad account — not after. Talk to Merion about how terms and recovery interact in practice.