When you offer a customer 30-day payment terms, you are quietly lending them money interest-free. Most Australian SMEs have never calculated how much, and when they do the number is usually much larger than expected. With the RBA cash rate at 4.10% and most SME overdraft rates sitting between 9% and 12%, the cost of carrying receivables in 2026 is real money, not theoretical accounting.
Published: April 2026
Consider a business doing $2M in revenue, with all customers on 30-day terms, paying on average at 30 days exactly.
Average debtors at any point in time = ($2,000,000 / 12) × (30/30) = $166,667 permanently lent to customers.
At a 9% overdraft rate (a typical Australian small business overdraft in 2026), the financing cost of that lending is approximately $15,000 a year. At an 11% rate, it is around $18,300 a year.
That assumes customers pay exactly on the due date. They do not. Across Australian SMEs, average debtor days are 45-65, with the typical business sitting around 50. Recalculating:
Average debtors at 50 days = ($2,000,000 / 12) × (50/30) = $277,778 permanently lent to customers.
At a 9% overdraft rate, that costs $25,000 a year in pure financing. At 11%, $30,500 a year. None of which is recoverable from customers, none of which is visible on the P&L, and most of which is invisible to the owner until they look for it.
For a $5M business at the same 50-day debtor days, the carry cost is $63,000-$76,000 a year. For a $10M business, $125,000-$153,000 a year. These are not abstract numbers. They are real costs absorbing real margin.
For a sense of how working capital tied up in receivables compares to other levers in the business, our client concentration risk calculator and cash flow forecast calculator put the figures in operational context.
The most common explanation for offering 30-day or 60-day terms is "everyone does." Industry standard is a description of average behaviour, not a recommendation. The businesses making the highest margins in any sector typically have terms tighter than the industry average, not looser.
Industry standard exists for two reasons. The first is genuine: in some sectors, customers genuinely operate on longer payment cycles (large corporates, government, anyone running monthly AP runs) and shorter terms are not negotiable. The second is inertia: most businesses adopted whatever terms their first customer asked for and never revisited them.
If your terms are 30 days and you have never asked whether they could be 14, you are likely paying for the convenience of every customer who has ever asked.
The interest cost is the most visible component, but it is not the only one.
Interest cost (working capital tied up). Calculated above. The pure financing cost of lending to your customers.
Bad debt risk. Some receivables never become cash. Even at a low 1-2% bad debt rate, this adds another 1-2% to the effective cost of every dollar of credit extended.
Admin cost. Chasing, reminders, statements, occasional disputes, and the team time involved. Most SMEs underestimate this until they see what their AR function actually costs to run. For a typical $3M business, the loaded admin cost of AR management is often $15,000-$25,000 a year.
Opportunity cost. Cash tied up in debtors cannot be deployed for hiring, marketing, equipment, or growth. The opportunity cost is harder to calculate but often the largest component. For a business that could deploy capital at a 25-40% return on incremental investment, every $100,000 tied up in debtors costs $25,000-$40,000 in foregone growth.
Total all-in cost of carrying receivables in 2026 for a typical Australian SME is usually 2-4% of revenue, depending on business model and capital efficiency.
The maths most owners have never run is what gross margin you need to break even on extending payment terms.
For a business with a 35% gross margin offering 30-day terms at a 9% cost of capital, the financing cost is roughly 0.75% of revenue, which absorbs about 2.1% of gross margin. Manageable.
The same business offering 60-day terms doubles the financing cost to 1.5% of revenue, absorbing about 4.3% of gross margin. Painful.
At 90-day terms the financing cost is 2.25% of revenue, absorbing 6.4% of gross margin. For a business with a 30% margin, this is approaching the territory where unprofitable customers can hide inside profitable-looking revenue.
The breakeven point depends on margin and cost of capital. A business with a 50% gross margin can absorb longer terms more easily than a business with a 20% margin. A business funded by retained earnings absorbs the cost differently from one funded by overdraft. The point is that someone in the business should be running the numbers.
The biggest psychological barrier to tightening terms is the assumption that customers will leave. The data does not support this for most B2B businesses.
Customers fall into three groups when terms tighten:
Group 1: agree without resistance (~70-80%). Most customers accept the new terms because the difference between 14 days and 30 days is not material to their cash management. They were paying on whatever cycle their AP system ran on, regardless of your terms.
Group 2: push back but agree (~15-25%). A subset will negotiate. Often they accept shorter terms in exchange for a small concession (1-2% volume discount, slightly more flexibility on a specific invoice, or simply a longer transition period).
Group 3: refuse and threaten to leave (~5-10%). A small minority. Of these, only a fraction actually leave. The ones who do are usually customers who were already costing you working capital, and the loss is rarely net negative on profit.
The risk most owners worry about (mass customer loss from tighter terms) is largely a phantom. The risk that materialises is the opposite: years of carrying receivables that did not need to be carried.
A common alternative to tighter terms is offering early payment discounts. The maths is more nuanced than it looks.
A 2% discount for payment within 7 days versus standard 30 days is mathematically equivalent to charging the customer roughly 36% annualised interest for the 23-day delay. From a financing perspective, this is expensive.
The decision depends on what cash is worth to the business. If the alternative is overdraft funding at 10%, paying 36% annualised to bring cash forward is bad maths. If the alternative is a missed payroll, it can make sense. For most businesses in normal operations, early payment discounts are a poor substitute for tighter terms upfront.
Where they do work: customers genuinely structured around early payment (some retail and wholesale chains have AP systems built to capture early payment discounts), or as a tactical lever during a tight cash period.
For most B2B SMEs the right starting position is:
7-day terms or upfront deposit for new customers. Until a customer has paid three invoices on time, they are unproven. A deposit or 7-day term protects against the customer who places a large first order and never pays.
14-day terms for repeat B2B customers in stable industries. The default for established relationships in services, professional, and small B2B product businesses. Shorter than industry standard, accepted by most customers, materially better for working capital.
30-day terms only for established large or slow-paying corporates with offsetting volume. Reserve 30-day terms for customers where the volume justifies the financing cost, and where shorter terms are genuinely not achievable.
Net 60+ only with explicit pricing premium. If a customer mandates 60- or 90-day terms (common with large retailers, government, and some construction prime contractors), the terms become a pricing input. Build the financing cost into the unit price, or factor the receivable through invoice finance and bake the cost in.
Most owners assume tighter terms only apply to new customers. They do not have to.
The renegotiation script for an existing 30-day customer:
"As we head into 2026 we are reviewing our terms across the customer base. Our standard is moving to 14 days for new business, and we would like to bring existing customers in line over the next quarter. We have the option of a slightly extended transition or a small price adjustment for customers who prefer to keep 30-day terms. Which would work better for you?"
Most customers choose the transition. A few choose the price adjustment. The few who refuse both reveal themselves as customers worth re-evaluating.
For customers where you cannot move terms (typically large corporates, government), the conversation shifts to pricing: "We can keep 30-day terms, but the next pricing review will need to reflect the financing cost. Approximately 1.5-2% adjustment over the next renewal."
Government contracts in Australia often have legislated maximum payment terms (20 days for federal contracts under $1M, varying for state contracts). If a government department is paying late, the issue is escalation through the agency CFO, not term renegotiation.
Large corporate buyers often dictate 60- or 90-day terms as a non-negotiable. Three options:
Price the terms in. Adjust unit pricing upward to reflect the financing cost. A 1.5-2.5% pricing premium covers the cost of 60-90 day terms in most cases.
Use invoice finance. Factor the receivable, accepting the 1-3% per month cost. Often cheaper than the alternative of declining the customer entirely. Most Australian invoice finance providers (e.g. Octet, ScotPac, InvoiceX) integrate with Xero and advance 80-90% of invoice value within 24-48 hours.
Decline the customer. The hardest option, but sometimes the right one. If the all-in cost of serving a customer (including the financing cost of their terms) is below your hurdle rate, the revenue is not worth having.
The Australian Government Payment Times Reporting Scheme (administered by the Department of Treasury) publishes payment performance for large businesses (over $100M turnover), accessible at paymenttimes.gov.au. It is worth checking before agreeing terms with a large customer to see what their actual payment behaviour looks like, not what their terms say.
Is there a legal requirement around payment terms in Australia?
Mostly no. Payment terms are generally a matter of contract between the business and the customer. The exceptions are: federal government contracts (legislated maximum terms), state government contracts (varying), and the Payment Times Reporting Scheme which requires large businesses to report on their payment behaviour to small business suppliers. The Australian Small Business and Family Enterprise Ombudsman publishes guidance at asbfeo.gov.au.
Can I charge interest on overdue payments?
Yes, where the right to charge interest is specified in your contract or terms of trade and the customer has agreed to it. Most Australian SMEs use the RBA cash rate plus 5-7% as a defensible rate, currently around 9-11%. Without a contractual basis, you cannot unilaterally charge interest.
How does the GST timing work on extended payment terms?
GST is generally remitted on an accruals basis (i.e. when you invoice, not when you collect). For businesses on extended terms, this can create a timing mismatch where GST is paid to the ATO before the customer pays the invoice. Cash basis BAS reporting (available for businesses under $10M turnover) avoids this. Speak to your tax agent or registered BAS agent for specific advice on which basis applies to you.
What is invoice finance and when does it make sense?
Invoice finance (also called factoring or debtor finance) is a financing arrangement where a third party advances 80-90% of the value of an invoice within 24-48 hours, in exchange for a fee typically of 1-3% per month. It makes sense when the financing cost is lower than the alternatives (overdraft, declining the customer entirely, or tying up working capital that could earn higher returns elsewhere). It usually does not make sense for small invoices, B2C, or customers with material credit risk.
Should I offer 2/10 net 30 (2% discount for 7-day payment)?
Mathematically equivalent to charging customers 36% annualised. Worth offering only if cash is genuinely scarce and the alternative is overdraft at a much higher effective rate. For most businesses in normal operations, tighter terms upfront are a better lever than discounting for early payment.
Can I claim a tax deduction for bad debts on extended terms?
Yes, where the income was originally recognised on an accruals basis, the debt is genuinely irrecoverable, and you have written it off in your accounts before the end of the income year. You may also be able to claim back the GST you paid on the original invoice. This is general information only; specific advice should come from your tax agent.
What is the Payment Times Reporting Scheme?
A federal scheme requiring large businesses (over $100M turnover) to report twice yearly on the time they take to pay their small business suppliers. The reports are publicly available, allowing small business suppliers to see actual payment performance before agreeing to terms. The scheme is at paymenttimes.gov.au and managed by the Department of Treasury.
How do I know if my receivables are tying up too much working capital?
The simplest test: calculate your debtor days (average debtors / annual revenue × 365). If the number is more than 10-15 days higher than your contractual terms, the system is failing. If it is more than 50 days regardless of your terms, the working capital cost is likely material to the business and worth a structural look.
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We review and check this guide periodically. At the time of writing (April 2026), all information was current. Scale Suite is a registered BAS Agent, not a licensed tax advisor or financial advisor. This content is general information only and does not constitute professional tax, financial, or legal advice. Some details may change over time.
Scale Suite is a Sydney-based provider of outsourced finance and HR services for Australian SMEs. We deliver bookkeeping, financial reporting, payroll processing, fractional CFO support, recruitment, employee onboarding, people and culture support, and fractional HR oversight, all as a fully embedded team that works inside your business.
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