Payment terms

These outline how customers pay for your goods and services and the details of when you expect payment. Payment terms will vary from business to business and generally refer to the payment methods you will accept, whether you provide credit and the terms of credit, and your debt collection policies.

Payment terms are part of a sales contract in Australia and so operate under contract law. Failure to comply with the agreed payment terms is a breach of contract.

Payment methods typically used by small businesses include:

• cash
• cheque
• EFTPOS
• credit and debit cards
• BPAY or online payments
• vouchers and gift cards
• direct debit

Goods and services can be paid for upfront or on delivery, or are supplied on credit (where payment is deferred for a period of time after the goods or services have been supplied).

Offering credit increases your risk of being paid late, or not at all, so for customers you don’t know well consider upfront or on delivery payments, also in situations where you have outlaid large amounts of money to supply the goods or service.

Your approach will vary depending on your business needs and cash flow requirements. Some businesses only accept payment on delivery and do not provide credit, other businesses offer both.

Standard terms of credit are often seven, 21 or 28 days. Your payment terms should be stated on all invoices.

If you provide credit it is advisable to develop a credit application process to screen customers and avoid those with a poor credit history.

Credit application process

Before providing credit to a customer it is important to check their credit worthiness. Create a credit application form that includes:

• full contact details of the applicant
• the ABN, business structure, details of the directors, partners or owners (if dealing with a business), and trustees
• contact details for at least three supplier referees
• a signature confirming that they have read and understood your terms and conditions and agree to abide by them
• permission to conduct a credit check

If the business seeking credit is a company, you may want to consider obtaining a directors’ guarantee (include this request in the application form). This means if the company gets into financial difficulties you can hold the directors’ liable for the debt. The Australian Securities and Investments Commission (ASIC) website provides a list of credit information brokers offering a range of services, including credit check reports.

Decide whether to offer credit

Make a decision after:

• checking the business’s registration using ABN Lookup
• contacting the customer’s referees to review their payment history
• completing a credit check
• obtaining relevant guarantees (if applicable)
• obtaining a history of cash sales.

Advise the customer of your decision

It is recommended to advise the customer in writing of your decision, even if you decline their application. If you decide to provide credit let them know the:

• credit limit
• credit terms
• penalty or default terms
• any other terms and conditions

When providing credit, ensure that you invoice regularly. Monitor your debtors closely so that you can follow up on overdue payments and do not allow customers to exceed their credit limit.

Terms and conditions for providing goods and/or services

If you provide credit to customers it is essential to put the terms and conditions in writing. This will help to minimise payment disputes and ensure you can effectively manage your finances. Seek legal advice to ensure that your terms and conditions protect your interests and are enforceable.

Terms and conditions should:

• specify how and when payments are made
• outline any penalties for late payments, including the rate of interest and fees
• disclose any additional fees that may apply to payments, such as credit card fees
• be clearly included on all quotes, estimates, contracts and related documentation
• meet your business needs
• include no illegal or unfair terms

It is good practice to have customers sign acceptance of your terms and conditions before providing any goods and/or services. You can minimise your risk, by developing a credit application process or considering alternatives to offering credit.

Learn more about how to prepare standard terms and conditions.

Invoicing and payments

Invoicing on a regular basis will help you maintain a healthy cash flow. Invoices should clearly state details of the goods and/or services, the amount owing, the due date for payment and available payment methods.

It is important to know the difference between an invoice and a tax invoice. If your business is not registered for GST, your invoice should not include a taxable component and should be referred to as an ‘invoice’. However, if your business is registered for GST, the invoice should state the GST against each item and have the words ‘tax invoice’ included.

The Australian Tax Office has developed voluntary standards relating to the layout of tax invoices and invoices, as well as practical information for issuing tax invoices. Monitor debtors (those who owe you money) closely and act quickly when payments are late.

If you have extended payment terms, consider providing a reminder to your customers before the payment due date to ensure they remember to pay on time.

If you’re starting or expanding your business you may need to obtain finance.

Before sourcing finance:

• determine how much finance you will need
• develop a sound business plan
• consider the timeframe you will need to repay the loan
• determine your ability to repay the loan

We recommend seeking professional advice from your accountant or business adviser to help you make sound financial decisions.

Types of finance

Two of the main types of finance include:

• Debt finance – money borrowed from external lenders, such as a bank.
• Equity finance – investing your own money, or funds from other stakeholders, in exchange for partial ownership. It is possible to have both types of finance in your business.

It is possible to have both types of finance in your business. 

You are recommended to review the relationship with your lender on an annual basis to ensure that you are getting the best finance terms.

Debt finance

Advantages of debt finance

• You retain full control of your business.
• The interest on the loan is tax deductible.
• The loan can be short or long term.

Disadvantages of debt finance

• The loan must be paid back within a fixed time period.
• Loan repayments will commence shortly after the loan is approved.
• The loan is often secured against collateral which may include assets of the business or the owner’s property.
• It can be difficult to grow the business because of the cash drain of repaying the loan.

Sources of debt finance

The main sources of debt finance are:

• Financial institutions — banks, credit unions and building societies. Finance can be provided as loans, overdrafts and lines of credit.
• Retailers — purchasing goods for your business through store credit via a finance company. Store cards can attract high interest rates; however some retailers offer an interest free period.
• Finance companies — most finance companies offer finance products via a retailer. Financial companies must be registered with the Australian Securities and Investments Commission (ASIC).
• Suppliers — trade credit allows you to delay payment for goods.
• Factor companies — also referred to as debtor's finance. Factoring is when a business sells its accounts receivable (invoices) to a third party (called a factor) so that it can receive cash without waiting the 30 or 60 days for customer payment. Customers pay their invoice directly to the factor company. The cost for providing this service will vary between companies and it is important for you to research these costs before entering into any agreement.
• Invoice finance — essentially the same as factoring, however invoices are paid to your business and customers are not aware of your arrangements with the financier.
• Peer-to-peer lenders — matches people who have money to invest with people looking for a loan. Loans may need to be repaid within a certain time period and interest rates may vary according to the level of risk.
• Family or friends — may offer you money as a loan. To avoid misunderstanding it is important to have a formal written agreement specifying the terms of the loan, repayment requirements and terms of interest. Seek legal advice to draw up the loan agreement.

Equity finance

Advantages

• Less risky than a loan as the investment does not need to be paid back immediately.
• You’ll have more cash on hand as profits do not have to be used to repay loan.
• The investor(s) can provide additional credibility and skill sets to your business.

Disadvantages

• The investor(s) will want some ownership or controlling interest of your business and will have a say in business decisions.
• It takes time and effort to find the right investor for your business.

Sources of equity finance

• Personal finances — self funding your business from personal savings or sale of personal assets.
• Venture capitalists — professional investors that invest large funds into businesses (as equity) with potential for high growth and profit.
• Family or friends — may provide funds in return for a share in your business or as a partnership. Carefully consider this option as a breakdown in business relationships may affect your personal relationships. Read our guide: Starting a business partnership for more information.
• Private investors — also known as ‘business angels’ are generally wealthy individuals who invest large sums of money in a business in return for equity and a share of the profits.
• Crowd funding — raising capital through the collective efforts of a large pool of individuals, primarily online via social media or crowd funding platforms. It allows investors to provide large sums of money in exchange for equity, or small amounts in return for a first-run product or other reward.
• Crowd-sourced equity funding — a way for start-ups and small businesses to raise finance from the public. They usually rely on raising small amounts from a large number of investors. Each investor can invest up to $10,000 a year in a business, receiving shares in exchange.
• Government — most government assistance for small business is in the form of free or low cost advisory services, information or guidance. However, you may be eligible for a grant in certain circumstances, such as business expansion, research and development, innovation or exporting.

More information

• The Australian Government provides a free online tool to find available grants and assistance. (Companies offering to find grants in return for a fee are usually using accessing information using this tool.)
• Learn more about managing and borrowing money from MoneySmart.
• Conduct a search for registered finance companies at the ASIC website.
• Compare financial products at the Canstar website.
• The Australian Private Equity and Venture Capital Association Limited can provide details for venture capital investors.

An important part of running a business is establishing good financial procedures and systems to monitor the financial health of your business and ensure you meet your tax obligations.

You might want to seek help from an accountant, financial professional or business adviser.

Setting up a business bank account

You are advised to set up a bank account for your business, keeping it separate from your personal finances. This will enable you to monitor your income and expenses, and allow you to easily extract business records for taxation purposes.

If you’re operating a company, partnership or a trust you must have a separate bank account for tax purposes. Sole traders don’t have to open a business account, but it is a good idea. If you are trading under a business name and want to open an account in that name, you will need to provide evidence of your registration to the bank.

Creating a budget

Set a realistic budget for your business to help you meet financial goals. A budget allows you to understand your current situation and make projections. Compare forecasts to actual financial results to determine if you are over-spending or have created additional income.

Find out more information about budgets and forecasts.

Establishing an accounting system

Accounting (or bookkeeping) is a process of recording the financial transactions of a business. Keeping good records for your business can assist you to apply for finance, review your business activities, manage effectively and comply with tax requirements.

For tax purposes you are legally required to keep records related to your income, GST, payments to employees, superannuation, fringe benefits tax, fuel tax credits and business payments.

There are two types of accounting methods; cash and accrual. A cash-based system records a transaction at the time the cash was paid or received, regardless of when the sale transaction occurred. This system suits businesses that mainly rely on cash transactions. An accrual-based system records transactions when they occur, regardless of whether payment is received at the time or at a later stage. An accrual system is the one most commonly used.

You can record your transactions using either a manual or digital system.

A manual system involves entering your records into a ledger or notebook, available from a stationery shop, newsagent or office supplier.

Electronic systems use software or web-based applications and generally have other functions allowing you to issue invoices, receipts, track stock, etc. You can also use spreadsheets to record your transactions.

Reviewing your accounts

There are two basic financial statements of relevance to small businesses:

• profit and loss
• balance sheet

Profit and loss reports on income, expenses, and profit.

A balance sheet reports on the assets, liabilities and net equity of a business at a given point in time.

It is good practice to review your financial statements at least once a month. This will enable you to identify problems and put strategies in place to fix them.

Learn more about reviewing your finances.

You can also seek assistance from your accountant or financial/business adviser to understand your accounts and consider attending our financial management workshops.

Procedures for providing credit and collecting outstanding debts

Ensuring your business has good cash flow and minimal exposure to debt is good financial practice. To manage your credit effectively it is advisable to create policies and procedures relating to:

• terms and conditions for providing goods and/or services
• invoicing and payments.

Find out more about providing credit to customers.

More information

• Learn more about setting up payment terms with suppliers
• Read the ATO's summary of when to complete record keeping and reporting tasks
• Visit the ATO's online learning platform essentials to strengthen your small business to access free short courses in record keeping and more.

At some stage you will decide to leave your business; perhaps you have decided to sell, retire or do something else.

Regardless of the reason, having a succession (or exit) plan in place will help you to smoothly transition out of your business.

You can start succession planning years ahead of time; having a plan can be useful if there is an unexpected event, such as illness or death. Without a plan the future of your business can be at stake. Early planning also helps you to maximise the value of your business.

Developing a plan

Make sure your succession plan is realistic and achievable. You may want to discuss it with your business adviser, accountant or lawyer. There are no set rules about what to include in a succession plan, however you may want to include details of:

• the successor; family member, business partner, other
• succession type; partial or full succession
• timeframe
• key personnel changes and skill retention strategies
• restrictions
• legal considerations; buy-sell agreement, reference to a will
• risk management
• communication strategy
• financial considerations; retirement income, sale price, tax implications.

You can download a succession plan template from Business.gov.au.

Keeping the business in the family

If you decide to leave your business to a family member consider the legal obligations, as well as the impact on family relationships.

Consider involving a lawyer or business adviser in discussions with family members to avoid disputes relating to inheritance, ownership or management.

Family Business Australia provides advice for family-run businesses.

Buy-sell agreement

A buy-sell agreement is a legally binding agreement between partners or co-owners outlining what will happen if an owner dies, is forced or chooses to leave.

The agreement will determine:

• who can buy the departing owner’s share of the business
• the circumstances that allow the share of the business to be sold, such as retirement, death, disability or leaving the business
• the price that will be paid for the share of the business.

Other options

You may also consider other exit options such as:

• selling the business
• closing the business
• hiring outside management to run the business.

Your accountant can advise on the best option.

Review your plan

Once you have created a succession plan make sure you regularly review it especially when circumstances change.

Selling a franchise is different to selling a ‘standard’ business.

Your franchisor will have an established process for selling a business within the franchise. This should be in your franchise agreement and operations manual.

Although it will restrict what you can do, the process will also make the sale easier by providing clear steps to follow.

It is a good idea to discuss the sale of your business with the franchisor and other franchisees as they could have useful advice or want to buy it themselves.

Franchise agreement obligations

The obligations for the sale will vary by franchise. Check with your franchisor for specific requirements, these could include:

• the franchisor having first right to purchase the business
• the franchisor interviewing the potential buyer
• the potential buyer having to be approved by the franchisor
• an assignment fee
• the cost of training the new buyer
• transfer of business registrations to the new owner or back to the franchisor
• returning operations manuals and documentation to the franchisor
• surrendering client lists, domain names, email addresses, and business phone numbers
• restrictions preventing you from trading as a competitor or using the franchisor’s intellectual property after you have sold the business.

Visit the Australian Competition and Consumer Commission website for more information on ending a franchise agreement.

Complying with the Franchise Code of Conduct

Under the franchise code the franchisor is required to provide a disclosure document to the potential buyer. As a gesture of goodwill it is a good idea for you to provide a copy to the potential buyer.

Selling a business will require planning to make sure you receive the best possible price.

Determining whether selling is the right option

Before deciding to sell check whether you:

• really want to sell or if you just need a break from your business
• have considered options such as bringing in outside management
• have the support of family and friends
• have considered if the market conditions are right for selling
• will make enough money from the sale to support yourself until a new income source is secured
• will be restricted from trading in a similar business once you have sold
• fully understand the implications of selling, by consulting your financial adviser, accountant or lawyer.

Preparing your business for sale

Ideally, you will begin preparing for sale well before you put your business on the market.

This could include:

• Making sure you document processes and policies, making it easier for the new buyer to operate the business.
• Ensuring employees have documented job descriptions.
• Obtaining written agreements from suppliers and review contracts to make sure they don’t expire during the sale.
• Selling obsolete or slow moving stock.
• Reviewing plant and equipment and selling anything not required.
• Making sure premises are well presented.
• Reviewing your lease agreement to ensure it doesn’t expire during the sale and includes provision to transfer the lease to a new owner.
• Collecting outstanding debts and paying your creditors.
• Obtaining audited financial statements for at least the previous three financial years.
• Reducing employee leave liabilities by encouraging them to take leave, if possible.

Potential buyers will want to undertake their own due diligence into your business.

However, it is a good idea to prepare a buyer’s information pack outlining key information about the business and what is included in the sale.

As a general guide the pack should include:

• confidentiality agreement
• description of your business
• customer or client profile
• industry information including how your business performs against industry benchmarks
• detailed list of business assets and their value – these may include documented procedures and systems, plant and equipment, stock, intellectual property, client list, lease information, employees’ skills and qualifications, key business relationships and contracts.
• testimonials from suppliers and customers
• audited financial statements for at least the previous three financial years
• offer and acceptance form
• contract of sale.

Setting the right sale price

Determining the value of your business can be very difficult. You may want to obtain advice from your financial adviser, accountant or a registered business broker with experience in selling similar businesses.

Return on investment (ROI)

This is the most common method for valuing a business. The following formula is used to calculate the selling price:

Sale price = (net annual profit before tax x 100) ÷ ROI percentage

To find the ROI percentage for your industry, talk to your accountant or business broker.

Asset value

This method adds all the assets of the business together to determine its value. Assets may include stock, plant and equipment, property, vehicles, furniture, intellectual property, established client list and goodwill. The following formula is used to determine the asset value:

Sale price = assets of the business + goodwill

Valuing goodwill can be difficult, seek advice from your financial adviser or accountant.

Market value

This is most commonly used to value professional practices such as legal, veterinarian or insurance brokers. It is rarely used to value retail businesses. The following formula is used to determine the market value:

Sale price = turnover x industry multiple

Make sure you have a good understanding of the current market and are aware of industry standards. Research the market for businesses similar to yours, compare prices and set a price that is competitive.

Making the sale

Selling your own business requires specific skills and resources; a licensed business broker or commercial real estate agent can assist you.

If you decide to sell your own business, here are a few matters to consider:

Marketing

Use your immediate networks of competitors, clients, employees, friends and family to promote the sale of your business; you never know who could be interested. Your accountant may have clients looking to buy an established business. Advertise the sale of your business using:

• websites dedicated to the sale of businesses
• local, state or national newspapers
• industry publications, trade journals, or specialist publications.

Use general terms to advertise your business and don’t disclose the business name.

Ensure potential buyers sign a confidentiality agreement

When selling a business it is common to receive applications from non genuine buyers. They could be competitors, suppliers, employees or clients trying to find out who is selling. Before giving your business information pack to potential buyers make sure they sign a confidentiality agreement first.

Negotiate the sale

Once a potential buyer has conducted due diligence, they may want to discuss terms before making a formal written offer. Prepare yourself for negotiation by considering:

• What conditions do you want from the sale?
• What are you prepared to compromise on?
• At what point would you stop negotiating and walk away from the sale?

Finalise the sale

It is a good idea to involve a professional business broker, settlement agent or lawyer in the sale of your business. This will prevent problems and make sure the sale is valid.

A contract for sale of a business as a going concern should include all the details, and terms and conditions, negotiated and agreed with the buyer.

More information

Watch the ATO's selling your business video to help you understand your regulatory obligations when selling or closing your business.

Closing a business can be a complex process, depending on your business structure and size.

Generally businesses close because the owners:

• are not making enough money to keep operating, or
• no longer want to run it.

There are some key tasks to consider including:

• cancelling your business registrations
• meeting your tax requirements
• notifying employees and ensuring they receive their entitlements
• ending or assigning lease agreements

Find out more about essential exiting tasks when closing a business.

You will also need to consider the points below.

Business structure

The structure of your business will determine the closing process. 

Bankruptcy and liquidation

If your business has debt it cannot repay it may decide to go into bankruptcy or liquidation.

Bankruptcy applies to sole traders or partnerships. Declaring bankruptcy means you acknowledge by law that you are unable to pay your debts.

Bankruptcy usually last for three years, however, it will also be included on your credit report for up to five years, or longer in some circumstances. While you are bankrupt you will not be able to run another business or work in some professions.

Liquidation applies only to companies and occurs when they cannot pay their debts. Once the company has gone into liquidation assets may be sold to pay the debts. Liquidation, along with voluntary administration and receivership, are the most common forms of insolvency.

Visit the ASIC website for useful information on insolvency for company directors.

More information

• Watch the ATO's closing a business video.
• Access free short courses from ATO about exiting your business.
• Visit the MoneySmart website for useful tips on managing debt.

Deciding whether to sell or close your business is a key decision.

There are many reasons to stop operating a business including:

• lack of turnover or profit
• you don’t want to run it anymore
• it no longer fits your lifestyle or personal circumstances
• wanting to do something different.

The size, profitability and structure of your business can also influence your decision whether to close or sell it.

Cancelling business registrations, including business name and tax registrations

When selling or closing your business you must contact the Australian Tax Office (ATO) to:

• Lodge final returns: Lodge all activity statements, PAYG withholding reports, repay refunds of GST credits and pay outstanding tax debts.
• Cancel your GST: This must be done within 21 days of ceasing business.
• Cancel your ABN: This must be done within 28 days of ceasing business. Cancelling your ABN will also cancel your AUSkey and GST registrations so it is important to make sure that you have met all other reporting and payment conditions.
• Record keeping obligations: Under tax law you must keep records for five years. This includes records of sales (including the sale of your business), payments to employees and payments to other businesses.

Visit the ATO website for more information, including tax return instructions for a company, partnership or trust.

If you need to transfer or cancel your business name, contact the Australian Securities and Investments Commission (ASIC). 

Employees and their entitlements

You will have obligations towards your employees if you decide to sell or close your business.

The exact obligations will depend on the industrial relations system you belong to and may include:

• notifying employees that the business is to be sold or closed
• paying accrued annual or long service leave
• making redundancy payments.

You are required to keep employment records for at least seven years.

To find out more visit Fair Work (national system) or the Department of Energy, Mines, Industry Regulation and Safety (state system).

Lease agreements

When you decide to sell or close you have obligations if you lease business premises.

If you close before the end of the lease period you must still meet the terms of your lease, including paying rent. If you sell the business, check if you need your landlord’s consent before transferring the lease.

Check your lease agreement carefully and seek professional advice if you are unsure of anything.

Find out more about leasing commercial premises or contact one of our commercial tenancy advisers.