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The second tip I discuss as part of a series of hints and tips on how to minimise bad debts and improve your cash flow is ‘Terms and Conditions’:
Make sure you have a set of terms and conditions that accurately relate to your company and the way you do business. Downloading some standard terms from the internet can be a useful starting point and may be better than nothing but if they are not relevant to the way you work they can quickly become worthless.
Ensure they are supplied to all prospective customers before you accept any orders or your terms may not apply. Quoting your terms and conditions on the back of an invoice may assist where there is a trading history but on a one off or first order this will be too late; the contract has already been entered into long before the invoice is sent and you cannot at this stage impose your terms on that contract. Similarly it is a good idea to have your standard terms and conditions on your website but you need to make sure you bring these to your customer’s attention up front and any deviation from these terms should be agreed in writing to avoid confusion.
Be wary of the “battle of the forms” where a customer places an order stating it is based upon their standard terms; if you accept the order without question you may find your terms have been replaced by theirs.
Explicitly agree payment terms in advance and confirm in writing; particularly if you are agreeing a change to your standard terms. Remember that extending a credit period will be costing you money so make sure you are happy with any terms agreed. Do not just allow a customer to set their own terms. Use this as a negotiating tool if appropriate rather than allowing extended credit as the norm.
Make sure you have methods in place to identify customers who fail to meet the agreed terms and a plan for dealing with this such as revoking their credit limit, placing them on stop and charging interest.
If a customer unilaterally informs you they are going to take longer to pay than agreed consider promptly how to deal with this. If you have agreed payment terms as set out above then they may be in breach of their contract with you. How you choose to deal with that may depend on the importance of their business to you but you should still be sure to raise the matter with them and make your expectations clear. You should insist on payment for those invoices already raised under the previously agreed terms.
On any commercial contract consider imposing charges for late payment under the Late Payment legislation if you do not have other arrangements in your contract. Include in your terms and conditions and/or on your invoices the statement “If payment is not made in accordance with our agreed credit terms we will exercise our statutory right to claim interest at 8% above the Bank of England base rate together with compensation for debt recovery costs under the Late Payment legislation.”
As well as giving you the option to apply these charges if necessary the threat of doing so can be a deterrent against late payment. You can raise a separate invoice for the interest and late payment charges which may help focus your customer’s attention on your unpaid invoices. It also gives you a tool for negotiation with a defaulting customer.
For further advice, a review of any existing terms and conditions and/or to draw up terms and conditions for you contact the Commercial Recoveries team.