Getting your Terms of Trade right is important

TERMS OF TRADEGetting your Terms of Trade right is important

Why do you need Terms of Trade?

The old Kiwi attitude of “she’ll be right” can leave businesses open to serious risks where a customer or client refuses to pay. Overdue debts can cause serious cashflow issues for a business (and considerable stress for the owners). Written terms of trade, provided at the start of the business relationship, can go a long way in speeding up the process of obtaining payment. While verbal contracts are binding and enforceable, proving the existence and terms of the verbal contract can be expensive, time consuming and often unsatisfactory.

When should you provide terms of trade?

Your terms of trade should be provided whenever your business is about to supply goods and/or services. The easiest time for this to take place is when you provide a quote or estimate, or when setting up an account for credit. The client should be provided with the terms, which should be signed and a copy returned to you. Alternatively, you should look to obtain a written acknowledgment that the client agrees to the terms of trade, or if a verbal confirmation is all that you can get, record the conversation in writing. In the event of a dispute, the side with the best evidence is usually in the strongest position. If you have been supplying goods and services on an ongoing basis without terms of trade, you may look to incorporate them into your next invoice – these will apply going forward, but not to earlier transactions.

Are they up to date?

Terms of trade need to be reviewed regularly, and if necessary, updated to ensure that they meet the requirements of your business.

What to incorporate into your terms of trade:

  • The parties: Terms of trade should always contain the legal names of the parties. In the event that you seek to enforce the terms of trade, it is vital to know to whom you are supplying goods and/or services.
  • Payment terms: This will define how payment is to be made, whether by cash on delivery, instalments, or monthly.
  • Penalties: This will set out the process for adding interest to outstanding debts.
  • Costs: Indemnity clauses allow suppliers of goods and services to pass on the costs of chasing the debt to the debtor. These provisions are used when there is no dispute as to the amount of the debt, but where the debtor simply refuses to pay.
  • Security: Where there is an ongoing supply of goods, terms of trade should contain provisions whereby the client agrees to allow for a financing statement to be registered on the Personal Property Securities Register. These enable suppliers of goods on credit to recover their goods in the event that the customer goes into liquidation or receivership.