Ensuring positive business cash flow with effective terms of trade

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Ensuring positive cash flow is an important part of running any business. The most effective way of achieving this is by controlling your debtors. The simplest way of achieving that is by having in place up-to-date and appropriate payment clauses in your terms of trade.

Terms of trade outline for you and your customer how the two parties will conduct business together, laying out specifically the duties and obligations of each party.  The payment clauses within your terms of trade are the backbone of your debtor control procedures. These provide an effective part of the credit control process and ultimately this can result in considerable improvements to your business’ cash flow. 

The payment clauses of your terms of trade should spell out the core terms of the contract between you and your clients, including; 

1)     Terms of payment
When you will bill the customer for your goods or services and when you expect payment for those goods and services. 

2)     Consequences of late payment
Consequences could include interest or late payment penalties, and should outline the steps you may take to recover monies owed such as bankruptcy or liquidation proceedings. 

3)     Ability to mortgage a debtor’s property
A clause within which provides the ability to the creditor to register an unsecured mortgage, by way of caveat on the title. 

In a nut shell, terms of trade provide clients with all the details of the contract, to ensure that there no miscomprehension when it comes to, among other things, paying an account. By spelling out these details ahead of time, your clients are aware of when they are expected to pay and the consequences of failing to do so. 

Whether it is you, an employee or an external contractor who is charged with following up on late debtors, strong finance/payment clauses in your terms of trade give that person the back-up documents to pressure a debtor to pay.  In the worst case scenario, they allow you to seek reparation through legal means such as liquidation or bankruptcy proceedings. 

If you do not have terms of trade in place, it may be more difficult to recover money owed. Terms of trade should be tailored to specifically suit your business and the way you deal with your clients. 

For assistance reviewing or drafting your terms of trade, contact experienced commercial lawyer, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smithpartners.co.nz