Getting Paid On Time – The Importance of Effective Terms of Trade and Debtor Control Processes
By Sarah Sheppard
With the current challenging economic environment it is an excellent time to review terms of trade and debtor control processes to ensure optimal cash flow.
Terms of trade set out the terms of a contract between the seller of goods or services and the purchaser. Terms of trade should deal with a variety of matters, but are particularly useful for setting arrangements in respect of payment.
Some tips for terms of trade:
- The purchaser needs to be made aware of your terms of trade and agree to these terms before any goods or services are supplied.
- The terms of trade should clearly set out when payment is required and any consequences for late payment (including payment of interest for late payments).
- Consider whether a personal guarantee is required in your terms of trade. This may be necessary if you are dealing with a company, rather than individuals.
- Review your terms of trade regularly, to ensure that they are still reasonable and up to date with current technology, business procedures and the law.
Standard terms of trade do not fit every business. Accordingly, you should obtain legal advice when drafting terms of trade for your business.
Some tips for debtor control generally:
- The party you are trading with should be clearly identified. Are they an individual or a company? Always obtain correct names and addresses. Do not rely on trading names. For example, "JD Services" is not a legal name; it is simply a trading name. Your terms of trade should state "John David Smith trading as JD Services". A company name will end with "Limited". Terms of trade are much more difficult (and sometimes impossible!) to enforce without the correct and complete name.
- Implement a diary system to remind you to follow up the late payers.
- Don't be afraid to pick up the phone, to ask why a payment hasn't been made.
- Do not send inappropriate signals to your debtors by having statements printed with ‘Current', ‘30 days', ‘60 days' and so on. Current and overdue is all that is necessary.
- Perform credit checks at the outset, or request trade references to establish whether the purchaser is creditworthy, before you supply any goods or services.
Getting paid in a timely fashion is a challenge for all business owners. Putting into practice appropriate terms of trade and effective credit control processes can result in considerable improvements to your business cash flow and mean the difference between operating smoothly or stressfully, or at worst, it surviving or not surviving.
