Insight
October 28, 2026
Here’s what you need to know.
Allowing customers to pay within 30 days may help secure a sale, retain regular customers and build long-term commercial relationships. Naturally, extending credit has become common practice for many businesses.
It is important to note that, when payment is delayed or never received, the consequences extend beyond an unpaid invoice. Your business’s cash flow is affected, operating expenses still need to be paid, and time that should be spent running the business is diverted towards collecting outstanding debts. This why a properly drafted credit application agreement can help your business manage these risks before they become disputes.
Credit is not just for large businesses
A common misconception is that credit agreements are only relevant to banks and large financial institutions. In practice, a business may extend credit whenever it allows a customer to receive goods or services and pay at a later date.
Consider a supplier who delivers building materials to a contractor on 30-day payment terms, or a professional services firm that allows a client to settle its account at the end of the month. Both businesses are exposed to the risk of non-payment.
Depending on the nature of the arrangement, the National Credit Act 34 of 2005 (the “NCA”) may apply. The fact that a business is small, or does not ordinarily operate as a credit provider, does not automatically exclude it from the Act.
Why put a credit application agreement in place?
A credit application agreement records the terms on which a business is prepared to extend credit to a customer. It provides a written record of the parties' obligations and helps establish a clear basis for managing the account.
The agreement should be tailored to the business and the type of credit being extended. Depending on the circumstances, it may address the following:
Payment terms and credit limits
The agreement can establish when payment is due, the credit limit approved for the customer and the consequences of exceeding that limit. Clear terms help manage expectations and reduce uncertainty when an account becomes overdue.
Smaller businesses, such as spaza shops, local cafés and smaller retailers, may prefer shorter payment periods for smaller purchases, while businesses supplying building materials, equipment or goods in bulk may allow customers more time to pay, given the larger amounts involved.
Interest on overdue accounts
Businesses sometimes assume that they may charge interest simply because an invoice has not been paid by its due date. This is not always the case. The applicable legal requirements must be considered, including whether the NCA applies and whether the relevant charge was properly disclosed and accepted.
A properly drafted agreement can record the applicable charges from the outset and help avoid disputes about their recoverability.
Customer verification and authority
Where credit is extended to a company or close corporation, it is important to establish the identity of the customer and confirm that the person opening the account is authorised to do so. The application process can also facilitate appropriate credit checks, subject to applicable data-protection requirements.
Consequences of non-payment
The agreement can set out the consequences of default and the steps available to the business when a customer fails to pay. This may include provisions dealing with the suspension of further credit, notices of default and the recovery of permitted legal costs.
The agreement also records the customer's business details such as its contact details and business address, responsible personnel and so forth. Having this information available can make it easier to follow up on outstanding accounts and take the necessary steps to recover amounts owed.
Credit Agreements also include a section for a suretyship to provide additional security for a customer's obligations. This may be particularly relevant when extending substantial credit to a smaller company. The suitability and enforceability of the suretyship, together with any applicable NCA requirements, must be considered before it is implemented.
What happens when there is no written agreement?
Without a properly documented agreement, your business may face unnecessary difficulties when attempting to recover an outstanding account.
The parties may disagree about the payment period, the applicable interest rate or whether the customer accepted the terms on which credit was granted. The business may also lack the necessary documentation to establish who opened the account or whether that person had the authority to bind the customer.
These issues can complicate debt recovery and increase the time and expense involved in resolving a dispute.
Importantly, an invoice is not necessarily a substitute for a credit application agreement. Although invoices and other correspondence may provide evidence of a transaction, they do not automatically establish that every term relied on by the supplier was agreed to by the customer.
A written agreement in place helps address these issues before a dispute arises.
Does the national credit act apply to your business?
The answer depends on the nature of the credit arrangement and the parties involved.
Some ordinary trade accounts may qualify as “incidental credit agreements”. These commonly arise where a business supplies goods or services on account and imposes interest or a late-payment charge if the account is not settled by the specified date.
Although incidental credit is subject to a lighter regulatory framework, certain requirements remain applicable. For example, the NCA regulates the interest or late-payment charge that may be imposed and requires the charge to be disclosed to and accepted by the customer before or when the goods or services are supplied.
Other credit arrangements may trigger more extensive obligations, including registration with the National Credit Regulator. The application of the NCA also depends on factors such as the identity of the customer, the amount involved and the type of agreement.
A review and analysis of the business's existing credit arrangements can help identify which requirements apply and whether its current documentation adequately addresses the relevant risks.
A commercial decision, not just a legal formality
A credit application agreement should form part of a broader approach to credit management. It is not a guarantee that every customer will pay, nor does it replace sensible credit approval procedures and consistent account monitoring.
However, it provides an important contractual foundation for the relationship. When combined with appropriate credit checks, clear payment terms and an effective follow-up process, it can help your business manage its exposure to unpaid accounts.
For smaller businesses in particular, addressing these matters at the outset can help reduce avoidable disputes and protect the cash flow needed to support ongoing operations and growth.
We understand that commercial agreements must do more than record a transaction. They should reflect the realities of the business, allocate risk appropriately and provide a clear framework for managing the relationship.
Our Commercial and M&A team assists businesses with drafting and reviewing commercial agreements, including credit application agreements, to help identify potential risks and ensure that contractual arrangements are aligned with the applicable legal requirements.
Whether your business is introducing a credit application process for the first time or reviewing existing terms and conditions, we can help establish a stronger foundation for protecting your business.
