A well-known adage is to ‘start as you mean to go on’, and nowhere is this is truer than when engaging with a new client to deliver your product or service.
Although we all enter into agreements in good faith, external circumstances can come into play, meaning that when it’s time for your invoice to be paid, there is no cash in your customer’s coffers.
However, there are steps you can take to safeguard against this as much as possible, giving you the best chance of success from the outset of a relationship.
All these steps can be combined into one document which is called a Terms of Trade. In essence, this sets out the terms and conditions on which the parties will do business. Not only can it protect your rights, but it can also function to limit the potential liabilities of your business and provide some security for debt recovery if your customer falls onto financial hardship.
When you’re setting up Terms of Trade, make sure you tailor the terms to your business. There are many templates available online which are a good starting point, but you should always take these as a foundation only and customise them to your needs. This ensures they give you as much protection as possible if a debt recovery situation arises.
There are some must-haves to include, whatever your business.
1. As the point of a Terms of Trade is to set up the rules of trade, you need to outline how orders are placed, provision and acceptance of quotes, and at what point in this process the order moves to being a binding contract. Usually placement of an order, and the acceptance of the Terms of Trade at the same time, constitutes a binding contract.
On a practical note, ensuring you are setting up invoices correctly from the outset is going to save all parties a lot of pain in the long run. From invoices with the wrong billing details, to manual processes that mean the sending of invoices is ad hoc, using one of the many cost-effective accounting software programs to set up your invoices and create invoice reminders is a smart way to operate.
2. Clarity about price and payment is paramount. This includes specifics like any prompt payment discounts, late payment fees or interest charges, and any process around recovery of late payments. Hint: building a late payment fee or percentage cost into the terms is proven to spur clients to pay your invoices before other debts which don’t have a financial penalty for late payment.
3. Being crystal clear about when ownership of the goods passes to your client is also important. Especially when you’re dealing with high value goods, you will probably want to ensure that you retain ownership until the payment is made in full by your customer.
As part of this process, you could take a registered charge of the goods until payment is made, but as there are legislative requirements around creating these charges, you may want to seek external advice before you do so.
4. Shareholder/director guarantees. If your client has difficulty paying you for any reason, one of the best defences is having a guarantee in place from directors and or stakeholders. Under a guarantee, a director is personally liable for debts incurred by their company, so even if the company cannot pay, you can pursue the directors for payment.
It’s worth noting that in your business, you may be asked to sign Terms of Trade for goods or services that you are purchasing. Do take the time to read and consider any terms you are offered to make sure that you’re not potentially compromising your position in future.
