When you sell goods or services to a customer and they don’t pay, it’s not just an annoying cash flow issue - legally, you’ve become a creditor.
But not all creditors are treated the same if that customer collapses financially. In many insolvencies, the people who get paid first are those who planned ahead and properly secured their position. Everyone else is often left to share whatever is left (which can be very little).
If you’ve ever wondered what an unsecured creditor is, where you sit in the queue, and what you can do to protect your business before things go wrong, this guide will walk you through it in plain English.
What Is An Unsecured Creditor (And Why Does It Matter)?
An unsecured creditor is a person or business that is owed money, but does not have security (legal protection) over the debtor’s assets to back up that debt.
In practical terms, you’re usually an unsecured creditor when:
- you supplied goods or services on invoice terms (e.g. “14 days”) and you weren’t paid;
- you didn’t register a security interest over the goods you supplied (where that’s available/appropriate);
- you don’t hold collateral (like a charge over property, equipment, or inventory); and
- you don’t have another enforceable “back-up” avenue for recovery (such as a properly drafted personal guarantee).
This matters because if your customer becomes insolvent (can’t pay debts when they fall due), unsecured creditors are typically paid after secured creditors and certain “priority” claims.
So if your customer goes into administration or liquidation, you may only recover a portion of what you’re owed - or nothing at all.
Common Examples Of Unsecured Creditors
Many everyday business relationships create unsecured debts. For example:
- Trade suppliers who provide products on account without registering a security interest;
- Service providers (marketing agencies, IT consultants, subcontractors) who invoice after delivery;
- Landlords for unpaid rent (depending on the lease and any security held);
- Businesses owed a refund or compensation under a contract;
- Customers who paid deposits for goods/services that never get delivered (they can also be unsecured creditors).
Unsecured Vs Secured Creditors: What’s The Difference?
The key difference is security.
A secured creditor has a legal right connected to particular assets of the debtor. That security can allow the secured creditor to be paid from those assets ahead of others (assuming the security is valid, properly documented, and has the necessary priority).
For small businesses, “security” often looks like:
- a security interest registered on the Personal Property Securities Register (PPSR);
- a retention of title arrangement for supplied goods (done properly and usually supported by a PPSR registration);
- a mortgage (more common for property lending);
- a fixed and/or floating charge (often seen in business finance); or
- a general security agreement where a lender takes security over broad categories of a borrower’s assets.
By contrast, an unsecured creditor is relying on the debtor’s promise to pay, and your primary “asset” is your legal claim for the debt (which might be enforceable in court, but usually doesn’t give you priority over secured creditors in an insolvency).
Why Many Small Businesses Are Unsecured Without Realising
A lot of businesses assume that because they have a signed quote, purchase order, or invoice, they’re protected.
Those documents help prove the debt - but they usually don’t make you secured.
If your customer becomes insolvent, being able to prove you are owed money is only half the battle. The other half is whether there’s anything left to pay you, and whether you’re high enough in the priority order to actually receive it.
Where Do Unsecured Creditors Sit In An Insolvency?
If a company goes into insolvency in Australia (for example, voluntary administration, liquidation, or a restructuring process), an external administrator (like a liquidator or administrator) is appointed to manage the company’s affairs.
One of their jobs is to identify creditors and distribute available funds in the legally required order.
While the exact order can vary depending on the circumstances (including the type of assets available, whether assets are subject to valid security interests, and any statutory priorities), unsecured creditors are generally behind:
- secured creditors (to the extent their security attaches to assets and those assets can be realised, and depending on priority and timing);
- priority claims (often including certain employee entitlements, and costs/expenses of the administration); and
- other statutory priorities depending on the situation.
After those are dealt with, unsecured creditors may receive a “dividend” (a percentage payout). In many liquidations, that dividend is small, and sometimes it is $0.
Do Unsecured Creditors Ever Get Paid?
Yes - but it depends on whether the insolvent business has enough remaining assets after secured and priority claims are satisfied, and on what assets are actually available to unsecured creditors.
For example, unsecured creditors may receive payments where:
- the business has unencumbered assets (assets not tied up by a secured creditor);
- the liquidator recovers funds through unfair preference claims or insolvent trading actions (where available);
- there is a deed of company arrangement (DOCA) that provides a return to unsecured creditors; or
- the business is restructured and continues trading, allowing a negotiated repayment plan.
Even when a return is possible, it often takes time. So from a business perspective, your best strategy is usually to reduce the chance of becoming an unsecured creditor in the first place - or at least reduce your exposure.
How Do You Reduce The Risk Of Being An Unsecured Creditor?
You can’t always avoid credit risk (especially if you operate in B2B supply). But you can make smart legal and operational decisions to improve your position.
1) Tighten Your Payment Terms Before You Supply
The simplest protection is to reduce how much credit you extend.
- Consider deposits, milestone payments, or payment in advance for higher-risk customers.
- Shorten payment terms where commercially possible (e.g. 7 days instead of 30 days).
- Include clear late payment rights (interest, recovery costs, suspension rights).
This is often built into solid terms of trade, so expectations are clear from day one.
2) Use A Credit Application Process
If you supply on account, a credit application is a practical way to collect information and set enforceable rules around trading on credit.
A well-drafted credit application terms document can help you:
- confirm who you’re contracting with (and reduce disputes about the debtor entity);
- set credit limits and require updated information;
- include personal guarantees (where appropriate); and
- support retention of title and PPSR registration clauses.
Just remember: the document needs to be properly drafted and actually used in your onboarding process (a template that sits in a folder won’t help much).
3) Consider Registering A Security Interest On The PPSR
For businesses that supply goods (and sometimes certain equipment or serial-numbered property), the PPSR can be a game-changer.
In simple terms, registering on the PPSR can help turn what would have been an unsecured position into a secured one - or at least give you stronger rights if the customer collapses (provided the registration is done correctly and on time).
If you’re not familiar with it, it’s worth understanding PPSR basics and how PPSR registrations can protect your assets and your priority.
From a practical perspective, this is most relevant where:
- you supply goods on credit and want retention of title to actually work in insolvency;
- you provide equipment on hire or lease; or
- you want priority over other creditors for specific collateral.
For many small businesses, getting the process right (including what you register, when you register it, and how your contract is drafted) is the difference between having enforceable protection and having a registration that doesn’t achieve what you hoped.
Where it fits, registering a security interest is often handled as part of register a security interest support.
4) Get Personal Guarantees (Where Appropriate)
If your customer is a company, the company’s insolvency can leave you stuck as an unsecured creditor.
A personal guarantee (for example, from a director) can give you another pathway to recovery - because you may be able to enforce against the guarantor personally even if the company fails.
That said, guarantees need to be drafted and executed properly, and they’re not suitable for every relationship. They can also be commercially sensitive, so it’s usually best to approach them as part of a wider credit policy.
5) Have A Clear Path For Debt Recovery
Even if your customer isn’t insolvent, delayed payment can spiral quickly. The earlier you respond, the more options you usually have.
Many businesses put in place a staged approach such as:
- friendly reminder and statement of account;
- formal letter of demand;
- negotiation of a repayment plan (document it); and
- legal recovery steps if required.
Putting your process into a debt collection agreement (or ensuring you have the right contract terms to support recovery) can make enforcement smoother and reduce disputes about what’s owed and when.
What Should You Do If A Customer Is Heading Towards Insolvency?
Sometimes you can see the warning signs: slow payment, repeated excuses, requests for extended terms, or sudden silence.
When that happens, the aim is to limit further exposure and preserve your rights.
Practical Steps To Take Early
- Stop extending further credit until arrears are cleared (or move to payment in advance).
- Check your contract for suspension rights, default clauses, and retention of title wording.
- Confirm who owes you money (the correct company name/ACN), especially if the customer operates through multiple entities.
- Gather evidence of what was supplied and accepted: purchase orders, delivery dockets, emails, invoices.
- Consider PPSR steps if you supply goods and haven’t registered yet (timing can be critical).
- Act promptly - delays can reduce your leverage and, in insolvency scenarios, may limit your ability to recover.
If The Customer Has Entered Administration Or Liquidation
If an external administrator has been appointed, you’ll usually need to:
- submit a proof of debt form by the due date;
- monitor updates from the administrator (reports, meeting notices, dividend notices); and
- consider your position if you have any security, retention of title, or set-off rights.
It’s also worth knowing that continuing to supply during administration can be risky without clear payment arrangements - but it can also be commercially necessary in some industries. This is the point where tailored advice can help you decide whether to continue, pause, or restructure the relationship.
What Legal Documents Help Protect You From Unsecured Creditor Risk?
Having the right contracts in place won’t eliminate credit risk entirely, but it can significantly improve your ability to:
- get paid on time,
- recover debts faster, and
- protect your position if a customer becomes insolvent.
Depending on how your business operates, the most relevant documents often include:
- Terms of trade: Sets out payment terms, late fees, interest, recovery costs, limitation of liability, and suspension/termination rights.
- Credit application terms: A structured onboarding document for customers who want to trade on credit, often including guarantees and PPSR/retention of title clauses.
- Supply or service agreement: Useful for higher value or ongoing engagements, where you need detailed deliverables, milestones, and dispute processes.
- Retention of title clause: Helps you claim back goods if not paid (but is usually far more effective when paired with a PPSR registration).
- Debt recovery process documentation: So your internal team knows exactly what to do when payment is late, and your legal position stays consistent.
A good rule of thumb is: if unpaid invoices would seriously hurt your cash flow, it’s worth investing early in a contract set-up that reduces the odds of being left as an unsecured creditor.
Key Takeaways
- What is an unsecured creditor? It’s a person or business owed money without security over the debtor’s assets - which usually means you’re lower priority if the debtor becomes insolvent.
- Many small businesses become unsecured creditors simply by supplying on invoice terms without additional protections like PPSR registration or guarantees.
- Unsecured creditors often get paid later in insolvency, and in many cases recover only a small dividend (or nothing).
- You can reduce risk by tightening payment terms, using credit applications, registering security interests where appropriate, and having clear debt recovery pathways.
- Strong contracts (especially terms of trade and credit terms) can improve your ability to manage non-payment and protect your legal position.
This article is general information only and does not constitute legal advice. If you’d like help reviewing your payment terms, setting up credit documents, or protecting your business from unsecured creditor risk, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
