Are Your Credit Terms Enforceable?

Are-Your-Credit-Terms-Enforceable

Getting paid can sometimes cause complications for your business yet it’s a critical part of maintaining a positive cashflow. It’s especially easy for small businesses to feel bullied when it comes to getting paid because big businesses are quick to set their terms.

Unfortunately, simply sending an invoice that says your client must pay within 30 days is not legally enforceable if your client hasn’t agreed when the transaction began. So what can you do in order to ensure the transaction between you and your client is based on your terms and not theirs?

1. Understand that unpaid debt is a form of credit

When you sell goods or services to your customers via an invoice in essence you are lending your client the invoice amount for the length of the invoice. If you provide the product or service before you’ve received payment then your customer has essentially borrowed credit from your business. As with any form of credit you need to ensure that both parties understand the fact that they are entering a credit relationship.

2. Establish your credit terms

Before you enter into a transaction with your customers ensure that you’ve clearly defined your trading terms. You should focus on the length of your credit terms, for example 30 day invoice is typically the standard. However industry research has shown that businesses with a 30 day payment term typically get paid in an average of 50 days so you may find that you need to set a smaller term especially if you’re a small business.

There is 52% chance or less for recovery of debt older than 6 months

Remember to have a clear understanding of your cash flow cycle and identify when you need to be paid in order to be able to pay your suppliers, staff and any other form of expense. If your payment terms are set to 30 days yet your suppliers terms are at 14 days then it’s common for businesses to run into negative cashflow issues that may have easily been avoided.

3. Communicate your credit terms

It’s critical that you communicate your credit terms with your client before the credit transaction has occurred. Have the conversion with your customer via telephone and then follow-up in writing, such as email, and ensure that you have understand your terms and have agreed in writing. This forms the basis of a legally binding contract between you and your customer. Failing to do this means that you may in fact be operating on your customers trading terms which will not have your best interest at heart.

We also spoke previously about how you might also want to include debt collection fees in the trading terms where you’ve been required to use a debt collector in an attempt to retrieve unpaid debt. In order to be paid quickly you might also want to put incentives for early payment or disincentives such as charging interest for a late payment. If you decide to do any of the items mentioned you’ll want to ensure that it’s clearly stated within your terms so that there is no cause for disagreement.

4. Include credit terms on your invoice

We recommend that your credit terms are signed and agreed before the transaction occurs and in most cases you should provide your terms on quotes in preparation for signing. Credit terms should also be displayed on your invoices to ensure that your terms are clearly stated and ready and available should accountants need a reminder. Things such as the payment due date should be clear and stand out to make it as easy as possible for customers to see when they’re required to make payment.

5. Make it easy to be paid

We’ll be speaking about this in an upcoming blog post about making it as easy as possible for you to be paid. Essentially there are range of techniques and tools you can use to ensure that you get paid as quickly as possible.

We recommend:

  • Including all of business details such as ABN, business address, telephone and bank details.
  • Include all of the transaction information such as the amount outstanding, due dates, payment methods, bank details and anything else
  • Include your terms of trade or credit terms reminding the customer of their agreement.

Other areas can be improved using accounting software such as XERO or MYOB such as automatic invoicing and easier identification of outstanding debt and cashflow issues.

 

Written by Richard Thompson

Richard Thompson is the Managing Director and owner of JMA Credit Control and has over 25 years’ of trusted experience. Richard has a wealth of knowledge in Credit Management and Debt Recovery ensuring client’s recovery bad debt quickly and cost effectively.

Leave a Reply

Your email address will not be published. Required fields are marked *