We are all in the business of either selling goods, services or both. In all respects, business owners invest in supplies and/or people. These goods and services are then sold in order to repay capital, cover operating expenses and, if all goes well, make a profit for the benefit of the shareholders/owners alternatively fund the growth of the business.
If only it was all that simple. When goods and services are sold by the business, the business becomes a creditor to the client. Most sales that take place are not cash but on terms often referred to as “on account”. If all goes well the account is settled at the end of the month by the debtor, but what if it is not. As a law firm we have noted that some of the most sophisticated businesses often fail in having proper terms and conditions for doing business, fail to have proper securities in place, and if they do, fail to adequately deal with the legal processes and costs involved in collecting their monies from debtors of the business.
Often poorly drafted terms and conditions for doing business provide very little protection to the business when matters become litigious, resulting in the incurring of significant legal costs and the inability of the business to have collection matters remedied speedily. Our court system and the mechanisms to bring matters before the court creates many opportunities for debtors with the assistance of their attorneys to delay matters and ultimately, even if judgement is granted in favour of the business, the legal costs can be greater than the original debt.
It is for this reason that the terms and conditions for doing business must be carefully considered. A few thoughts for business owners:
- Have proper terms and conditions for doing business in place.
- Put in place, where relevant, a proper purchase order process for credit transactions.
- Ensure that business is done on that basis and that client understand and accepts the terms and conditions.
- If dealing with a company as a client, ensure the directors and/or shareholders are personally responsible if the company fails to pay;
- With high value and reoccurring sales on account, consider requesting performance and or bank guarantees;
- Have a clear procedure dealing with quality, quantum, credit notes and refunds together with formal correspondence and notification procedures with specified time-lines.
- Make sure dates for performance and payment are clearly specified.
- Ensure that proper provision has been made for interest, the rate of interest and the calculation thereof on late payments.
- Consider alternative more speedy mechanisms for resolving disputes and incorporate them into the terms and conditions.
- Ensure that the debtor bears liability for legal costs that have to be incurred in the collection of outstanding debts on an attorney/own client scale, not the usual party/party scale as provided by the courts which is significantly less.
- Ensure your terms and conditions provide for the issue of certificates of indebtedness to avoid the liquidity of your claim being challenged and the debtor being able to raise dispute of facts regarding the quantum of the debt.
Taking the aforementioned steps will not only secure your business’ cashflow but avoid unnecessary and time consuming litigation. It may also place you in a position, where appropriate to factor your debtor’s book and bridge fund cashflow particularly in high value reoccurring transactions.
For further information, please do not hesitate to contact us.