Credit Application Terms For Building Suppliers

Offering trade accounts can be a smart way to build loyalty with builders, tradies and construction businesses. But when materials leave your yard before you get paid, your cash flow is carrying the risk.

That risk can add up quickly in the building supply industry. One unpaid account for timber, cladding, fixtures or concrete products can wipe out the profit from several good jobs.

The good news is that your credit application terms can do a lot of heavy lifting. With the right terms in place from day one, you can set clear expectations, reduce late payment issues and put your business in a stronger position if an account goes overdue.

What Should A Credit Application Do For Your Building Supply Business?

Your credit application should do more than collect a customer's contact details. It should create a clear, signed record of who you're dealing with, what credit you're offering and what terms apply.

For a building supplier, this matters because your customers may be companies, sole traders, partnerships or trusts. If you don't identify the customer properly, you may struggle to work out who is actually responsible for the bill.

A strong credit application usually collects:

• the customer's legal name, trading name, NZBN and Companies Office number, if they have one
• the customer's business structure, such as company, sole trader or partnership
• director, owner or authorised contact details
• billing address, delivery address and site contact details
• trade references and estimated monthly spend
• the credit limit requested
• consent to run credit checks and verify information
• agreement to your terms of trade
• any personal guarantee, if you're requiring one

The application should also make it clear that you can approve, decline, reduce or withdraw credit at your discretion. A customer applying for a trade account shouldn't automatically mean you're promising to supply them on credit forever.

Say Hemi runs a building supply yard in Hamilton. A new company applies for a $40,000 monthly trade account and lists a project manager as the contact. If Hemi's form doesn't check who can bind the company, the project manager may later say they had no authority to open the account. A better form asks for director details, confirms signing authority and, where needed, gets the director to sign a personal guarantee separately.

What Terms Should Be In Your Trade Account Agreement?

Your trade account terms should set out the rules for supply, payment and non-payment in plain language. They should be accepted before you supply goods on credit, not attached for the first time after the account is already overdue.

Your terms will usually sit behind the credit application. The application is the front door, and the terms of trade are the rulebook.

For building suppliers, useful terms often cover:

• orders and acceptance: when an order becomes binding, who can place orders and whether email, phone or online orders are accepted
• pricing: whether prices can change, whether quotes expire and whether GST, delivery and handling charges are included
• delivery and risk: when risk in the goods passes to the customer, especially for site deliveries
• payment: invoice due dates, account statements and how payments are applied
• credit limits: your right to set, change or reduce limits
• late payment: interest, fees and recovery costs, if clearly stated
• security: retention of title and Personal Property Securities Register clauses
• personal guarantees: when directors or owners are personally liable
• account suspension: when you can stop supply or move the customer to cash on delivery
• business warranties: if the customer is buying for business purposes
• privacy: how you collect, use and disclose personal information

If your customers are buying goods for business purposes, your terms can often limit some obligations under the Consumer Guarantees Act 1993, provided the contracting out is fair and reasonable and both parties are in trade. This can be useful for trade accounts, but the wording needs care.

You also need to keep the Fair Trading Act 1986 in mind. You can't use your terms as a licence to mislead customers about products, pricing or availability. If your terms are standard form terms for small trade contracts, the unfair contract terms rules may also apply. A small trade contract is generally a standard form business-to-business contract where each party is in trade and the trading relationship has an actual or expected annual value of up to $250,000 including GST in a 12-month period, assessed when the trading relationship first arises.

That doesn't mean your terms need to be soft. It means they should be clear, balanced and genuinely connected to protecting your business.

How Should You Set Credit Limits And Payment Terms?

You should set credit limits and payment terms based on the customer's risk profile, not just the sales opportunity. A bigger account is only helpful if it gets paid.

Common trade account payment terms for building suppliers include:

• payment within 7, 14 or 30 days of invoice
• payment by the 20th of the month following invoice
• cash on delivery for new or higher-risk customers
• deposit or staged payment for large or special-order items
• reduced terms while the customer builds a payment history

Your terms should state the exact due date. Phrases like payment due promptly can cause arguments, especially if the customer has their own internal payment cycle.

Credit limits also need clear wording. Your terms can say that:

• you may set an initial credit limit after reviewing the application
• you can reduce or cancel the limit if payment history changes
• orders above the limit may require upfront payment
• the customer must tell you about material changes to their business or ownership
• approval of one order doesn't mean you must approve future orders

This helps you avoid the awkward situation where a customer assumes an old limit still applies even though their account has been consistently overdue.

A Practical Credit Limit Example

Imagine a new plasterboard installer asks for a $25,000 limit. You might approve $8,000 for the first three months, require payment within 14 days, and review the limit after a clean payment history.

That approach still lets you win the customer, but it avoids giving a new account more credit than your business can comfortably absorb.

Can You Charge Interest And Recovery Costs For Late Payment?

Yes, you can usually charge interest and reasonable recovery costs if your terms clearly allow it. The key is to write the clause carefully and make sure the customer accepts it before the debt arises.

In New Zealand, there isn't a general automatic right to charge commercial customers interest just because an invoice is late. Your contract needs to create that right.

Your late payment clause should cover:

• when interest starts to accrue, such as the day after the due date
• the interest rate or how the rate is calculated
• whether interest accrues daily or monthly
• whether you can recover reasonable collection costs, legal costs and administrative costs
• whether you can suspend further supply while amounts remain unpaid

Keep the rate sensible. A very high rate or a harsh fee that looks like a punishment may be harder to rely on and could create Fair Trading Act concerns, especially for standard form small trade contracts.

The same goes for debt recovery costs. A clause saying the customer must pay your reasonable costs of recovering overdue amounts is usually easier to justify than a large fixed charge that doesn't reflect the work involved.

Late payment clauses aren't just about the money. They also give your accounts team a clear process. Instead of negotiating from scratch each time, your invoices and statements can point back to agreed credit terms.

Should You Ask For A Personal Guarantee?

Yes, you should consider a personal guarantee where you're supplying a company, especially for new, high-value or higher-risk accounts. A company is a separate legal entity, so without a guarantee you may only be able to pursue the company if invoices go unpaid.

A personal guarantee means an individual, often a director or business owner, promises to pay if the customer doesn't. For building suppliers, this can be a useful way to reduce the risk of a company account with limited assets.

Your guarantee should be separate and obvious. Don't hide it in small print and assume the director has personally agreed.

A well-drafted guarantee usually states:

• the full legal name of the guarantor
• which customer account the guarantee covers
• whether the guarantee covers future supplies as well as current amounts
• whether interest and recovery costs are included
• how the guarantor can end the guarantee for future supplies
• that the guarantor is signing personally, not only as a director

It's also sensible to give the guarantor a real chance to read the document and get their own advice. That can help reduce arguments later about pressure, confusion or lack of understanding.

If you're collecting personal information for a guarantee or credit check, the Privacy Act 2020 matters. Your application should include a privacy statement explaining why you're collecting the information, who you may share it with, such as credit reporters or collection agencies, and how the person can access or correct their information.

Can You Register A Security Interest On The PPSR?

Yes, if your terms create a valid security interest, you may be able to register it on the Personal Property Securities Register. This can help protect you if the customer becomes insolvent or tries to deal with goods before paying.

For building suppliers, this usually starts with a retention of title clause. This says you keep ownership of the goods until you're paid. But a retention of title clause on its own may not give you the priority you expect unless it's backed by proper Personal Property Securities Act 1999 wording and registration.

Your terms may create a security interest over:

• goods you supply but haven't been paid for
• proceeds from those goods if they're on-sold
• mixed or processed goods, where appropriate wording is used
• all present and after-acquired property, where commercially justified

A purchase money security interest, often called a PMSI, can give a supplier strong priority. Timing matters. For inventory, you generally need to register before the customer obtains possession of the goods. For non-inventory goods, the registration timing is different and should be checked before you rely on it.

Accuracy matters too. A small error in the debtor's legal name, NZBN or company number can undermine the registration. Your credit application should collect the details you need to register correctly.

PPSR protection is one area where templates often miss the practical details. The security clause, credit application process and registration process need to work together.

When Can You Suspend Or Close A Trade Account?

You can usually suspend or close a trade account if your terms give you that right and you use it consistently. Clear suspension rights can stop a late account becoming a much larger exposure.

Your terms might let you suspend supply, cancel credit or move the customer to cash on delivery if:

• an invoice is overdue
• the customer exceeds their credit limit
• you receive concerning credit information
• the customer becomes insolvent or appears unable to pay debts as they fall due
• the customer gives false or incomplete information in the credit application
• the customer fails to provide a requested guarantee or security

Be careful with existing confirmed orders. If you've already accepted an order on particular terms, stopping supply without checking the contract position can create its own issues. Your terms should say whether each order is separate and when you can cancel or pause accepted orders.

It also helps to have an internal process for your team:

1. check the account against the credit limit and due dates
2. send a clear overdue notice referring to the agreed terms
3. pause new credit orders if the threshold is met
4. require payment, a payment plan or cash on delivery before further supply
5. review whether the credit limit should be reduced or cancelled

This keeps the decision commercial rather than personal. It also means your sales team and accounts team are working from the same playbook.

Key Takeaways

• Your credit application should identify the customer properly, confirm authority to open the account and record acceptance of your terms.
• Clear credit limits and payment dates help you control exposure before late payment becomes a bigger problem.
• Interest, late fees and recovery costs should be clearly written, reasonable and accepted before the debt arises.
• Personal guarantees can be valuable for company customers, but they need to be separate, clear and properly signed.
• PPSR registration can strengthen retention of title rights, but timing and accurate customer details matter.
• Account suspension rights help you stop supplying on credit when warning signs appear.

If you'd like help with your credit application terms, trade account terms, personal guarantee wording or PPSR security clauses, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.