Saturday, 30 June 2018

Tips for setting up your trade terms and conditions

You’ve got your big idea, your products or services are ready to go, and there is certainly interest from potential customers. As a small business owner about to launch operations, one of the top tasks to check off your list should be setting down your terms and conditions. Terms and Conditions (T&Cs), sometimes known as terms of trade, protect your rights by specifying, in written form, how you want to work with your clients.

In Australia, your terms and conditions constitute an integral part of your sales contract, and are therefore governed by contract law. Your T&Cs essentially define the scope of your liability, explaining what you agree to do and under what conditions, and spelling out your expectations of your customers (or suppliers). Clear policies that create a clear mutual understanding will decrease the chance of disputes arising in the future.

So what are, in practice, the areas covered by trade terms and conditions? Common provisions found in T&Cs relate to:

  • description of goods and services to be supplied,
  • pricing and shipping conditions,
  • payment terms,
  • terms of credit,
  • warranty and refunds policy,
  • limitation of liability,
  • debt collection policies,
  • data privacy

Some of these may have more or less relevance, depending on the type of business you are in. Keep in mind that including legally enforceable payment and credit terms will provide extra security for your operations and your cash flow. Did you know that almost half of all invoices are paid late? Establishing clear terms of credit will reduce the chance of late payments, eventual debt collection costs and, in the longer run, your risk of insolvency.

Know your options

Knowledge is power, so it pays to be informed about the different options available to you in each area of your Terms & Conditions.

Terms of payment are a good example. You want your product or service to be as easy to pay for as possible; with fewer people carrying around significant amounts of cash, why not offer card, e-transfer, PayPal or Apple Pay options to cater to a broader market? If you serve customers overseas, you should indicate your preferred currency of payment. Maybe you’re thinking of increasing your sales by extending advantageous credit terms to your clients – beyond paying on receipt (also known as COD or cash on delivery), your customers will have the option of paying net 30 (within 30 calendar days), net 21 and so on. However, offering credit makes your cash flow less predictable, and you’re essentially funding your customer’s business until you get paid. Evaluate the trade-off of providing more value to your customers while taking on more financial risk yourself, and draft up your T&C’s accordingly.

Know the market

Standard Terms and conditions vary considerably across industries, and your particular niche may present more or less variety in this regard. In considering how bold you should be in your T&Cs, and to avoid pushback from your customers, pay attention to what is customary in your industry, and what terms your competitors are offering. You want to get paid as quickly as possible, but if the market operates under extended credit terms, demanding payment upon receipt of goods might prove to be unpopular, so design your offer accordingly.

If you want to differentiate your offer from your competition, you may want to offer attractive payment terms to encourage an inflow of customers to your business – that is, if you are comfortable with the cash flow risk this entails. Conversely, if your service is already unique and provides many other benefits, you can afford to be bold with your credit terms and only offer up to 7 days’ credit (net 7). When a new client commissions a large, bespoke project that may take you days or weeks to complete, you may wish to consider asking for an upfront deposit to help you cover running costs and reduce the risk of eventual late or no payment.

Communication

Clear, concise and consistent: this three-C’s mantra should be your go-to where any customer communication is concerned, including in your terms and conditions.

Make your T&Cs crystal clear and discuss them upfront. Have your customer agree to, and sign your T&Cs, and print them on the back of your invoices as a reminder. If a dispute arises, you will have a solid case right from the start, with written confirmation to back you up.

While sending out an invoice may be the first step to getting paid, confusing or unclear terms can offer a tempting excuse for your customers to delay payment. A bit of preparation can go a long way towards streamlining the payment process, saving time spent chasing unpaid invoices and ensuring prompt payment.

Use a carrot and stick approach

We all know it: people love paying less and hate paying more. So get smart and use a carrot and stick approach in your terms and conditions, offering a discount to virtuous customers who pay early and penalising those who pay late.

We’ve already talked about terminology concerning payment terms. Let’s now expand that to include early payer discounts, for example, a payment term that states “2/10 net 30”. This shorthand simply means that a 2% discount is available if payment is received within 10 days of the invoice, otherwise the full sum is payable within 30 days.

How high should your early payment discounts be? In most industries, this percentage sits around the 1-2% mark. Even a small discount offers a positive psychological reinforcement, and may go a long way in fostering the kind of behaviour you’d like to see in your customers ie. paying on time. An incentive of this kind may be a smart investment if it saves you time and money chasing debts further down the line.

Late payment clauses, on the other hand, may also include a penalty for late payment, such as interest charged on the amount outstanding. This is also usually around the 1-2% mark. Alternatively, you might include a clause that states that after 2 strikes – late payments – payment terms will move from standard (e.g. net 21) to restricted (say, net 7) for customers whose payments are consistently overdue. If the customer fails to respect this clause, you may have to block their shipments until payment is received.

Hope for the best, prepare for the worst

Make sure your terms and conditions include provisions for when things don’t go as planned. “Worst case” clauses can include retention of title (any goods supplied remain yours until full payment is made), time limits for raising a dispute, circumstances under which a contract can or may be breached, and, if you work with international customers, the applicable law and jurisdiction (Australian or overseas) governing the contract in case of action in court.

The official government website dedicated to business – www.business.gov.au – also suggests including your debt collection policies directly in your terms and conditions. Debt collection policies describe how you will follow up to request payment of any outstanding debts. These policies may include letters of demand, phone or email contact, and enlisting a professional debt collection agency.

In most cases, you probably won’t even need to resort to your “worst case scenario” provisions, but if you do, you will undoubtedly be happy to have them.

Pro-Collect can help with writing your T&C’s

After reading this article, you may be tempted to draw up an exhaustive (and exhausting!) list addressing all possible scenarios, including a variety of complex clauses. However, it might be wise to recall the KISS principle here: keep it simple, stupid! In fact, unclear or overly complicated T&Cs might put prospective customers off, or dissuade them from doing business with you.

Maybe you simply feel that T&Cs are just not your cup of tea, and wish that someone else would take the hassle off your hands. Whatever your situation, a professional debt collection agency can help you draft T&Cs to protect your business. At Pro-Collect, we have many years’ experience in dealing with customers who try to avoid paying, and our team are experts in Australian contract law. We will put together a set of clear, dispute-proof terms and conditions for your business, so that you can make agreements and demand payment with confidence. In the event that even that fails to deliver, we are just a phone call away to help.

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