We are often approached by clients seeking advice about how they can reign in customers who have a tendency to drag out payment terms, choking their cash flow. Your terms and conditions of trade (“Terms”) are the key to regaining control. As important as they are, the significance of having robust Terms is often overlooked.
Set the Ground Rules
Your Terms play a pivotal role in setting the ground rules to ensure you get paid on time. Having sound Terms in place is integral to your customers understanding the basis on which you provide goods and services.
Your terms must be provided to your customer before their order for goods and services is placed so that they form part of your contract with your customer. If you want to be able to rely on your terms and conditions to enforce payment terms, providing them with your tax invoice is too late!
Your terms and conditions should set out matters including, but not limited to, the following:
- When payment is expected to be made;
- How orders are placed;
- Consequences of late or no payment;
- Terms of delivery;
- Warranty for goods supplied;
- Security for payment, including the registration of applicable security interests on the PPSR; and
- Limitation of liability.
Enforce the Rules
Nothing changes if nothing changes, so if your customers become accustomed to you not following up on late payments, they’ll keep dragging out their payment terms.
Be proactive and call your customer within a few days of the payment being due and find out if there is a reason for the late payment. Often this is just a follow up, as there is likely to be no reason other than they simply haven’t paid, however it is good practice to connect with your customer and give them a chance to confirm payment is on its way or to discuss when payment will be made.
If your terms of trade have been prepared correctly, they will give you a contractual basis to ‘up the anti’, if required. Measures such as the charging of interest, suspending supply and enforcing security can effectively be utilised if your paperwork is in order. Not having appropriate security clauses in your Terms can result in the loss of valuable stock to a liquidator if your customer lands in financial strife.
Ensure Your Terms are Valid
Make sure your Terms are current and reflect the way you do business. Your Terms should cover all issues relevant to the services you provide, from how orders are placed and accepted, right through to delivery obligations and what happens if goods and services are defective.
The warranties you give about your goods and services must comply with the law. There are specific limitations on the ways in which you can limit your liability and the promises or representations you can make about your goods and services. Consumer warranties must not be underestimated and the Australian Consumer Law is very specific about how you need to behave in this regard.
Your terms and conditions must be fair, otherwise you may not be able to rely on them. Standard form contracts entered into or renewed after 12 November 2016 are subject to unfair contract laws. Terms of trade are usually standard form contracts as they are prepared by the supplier and are not negotiated. Your customer essentially ‘takes them or leaves them’.
Being fair means that if you can exit or terminate the arrangement, limit your obligations or vary the Terms, then your customer should be able to as well. If a Court or tribunal finds your terms to be unfair, then the offending clauses will be void and will not be binding.
Get onto it!
Terms of trade are a key document for your business. They can help you get paid on time, limit your liability and ensure you are a secured creditor of your goods whilst you are waiting to get paid. Provided they are tailored to fit your business and are prepared in a way that give you the power to enforce your rights, Terms can be a powerful tool for your accounts department.
Contact us today for a health check of your trading terms so we can help you reduce your debtors and regain control of your cash flow.