Many small businesses struggle with cashflow due to slow paying customers. Often customers choose to move bills from small businesses to the back of the pile, and pay other bills first. Well drafted terms and conditions of trade can turn customer behaviour around so they pay your bills first. The team at Parry Field Lawyers are experienced in drafting terms and conditions of trade that can help improve cashflow.
How can terms and conditions of trade help my cashflow?
If your business does not have clear payment terms and conditions, your customers have no reason to pay your bills promptly. Your customers often face cashflow problems of their own that cause them to delay paying bills when they can do so.
Cash flow problems are often compounded by poorly drafted or non-existent credit terms and terms of trade. Problems we commonly encounter include:
- Spending thousands of dollars in debt collection or legal costs but recuperating as little as 20% of these costs when a Court judgment is obtained.
- Giving credit to a customer because you believe the customer to be a wealthy individual, only to later discover the debt was in fact being incurred by a (usually insolvent) company.
- Being unable to recover any costs or interest because terms of trade were not provided to the customer at the right time.
Well drafted terms and conditions of trade help encourage your customers to pay your bills quickly. They do this by making sure the true cost to you of delayed payment is recognised and passed on to your customers. If your customers are required to pay the real interest and administrative cost you incur in chasing unpaid bills, the incentive for them to pay your bill quickly increases.
What payment terms should I have?
At a minimum, your payment terms should clearly explain:
- When payment is is due.
Your terms should specify when the contract price is to be paid and record that it must be paid without deduction for any reason.
- What security the customer gives for payment of your bill.
This might include a personal guarantee from the customer’s shareholders, or the right to register a financing statement on the personal property securities register that allows you to repossess goods if your bill isn’t paid. The Personal Property Securities Act 1999 (“Act”) changed the process for taking security over personal property. Retention of title clauses must not comply with that Act
- What interest rate the customer must pay if payment isn’t made on the due date.
This should be high enough to cover both the interest you pay to your own lender and your own administrative costs in chasing payment. It must be clear that interest applies whether a debt is disputed or not, when interest runs from, and the amount and manner of calculation of the interest. Be wary of setting the interest rate too high, some “interest” rates look like penalties, and run the risk of being unenforceable.
- What other steps you can take if the customer doesn’t pay.
These steps should include the right to immediately stop supplying further goods and services to the customer and the right to hire a debt collection agency or lawyer to recover payment. You should also record your right to recover from the customer the full amount of any costs you are required to pay to your lawyer or debt collection agency.
What else can I do to achieve faster customer payments?
As well as having clear terms and conditions, you need to send your customers polite reminders when bills become overdue. The reminders should include the invoice amount, the daily interest charge they owe you for late payment, and the steps you will need to take if payment isn’t made promptly.
You don’t want to be rude, but your customers need to know you are serious about getting paid on time. For more help with the debt collection process, see our article on how to collect unpaid debt.
Are there other issues my terms and conditions should deal with?
Payment conditions are an important part of your terms and conditions of trade, but your terms also need to cover other issues like the extent of your liability for mistakes, who carries the risk when goods are being transported, and what warranties you give in relation to your goods and services. For further advice these other provisions, see our article on how to use terms and conditions of trade to limit business risk.
Won’t detailed terms and conditions of trade scare off customers?
Well drafted terms and conditions of trade don’t have to be complex and intimidating. They should use simple plain English where possible so that your payment requirements are clearly explained. They do need to carefully worded, though, so that you don’t fall foul of technical legal rules that reduce the effectiveness of your terms.
Parry Field can help you to draft effective terms and conditions of trade. Should you need any assistance with this, or with any other Commercial matters, please contact Peter van Rij or Kris Morrison at Parry Field Lawyers (348-8480).