By Darren Brown
There is little point running businesses if you are inefficient in making sure you get paid. Getting paid by customers can be a battle in itself and it is essential that you employ effective tools and tactics against your debtors, designed to assist in securing payment.
A properly drawn Credit Application and Terms and Conditions ('Terms of Trade') is a cost effective weapon to assist a business to win the competition to get paid.
This competition is often as fierce as the competition of making a sale.
A hard fought for sale is worthless and even damaging, if you do not get paid or if payment is long delayed.
Allowing debtors to be in control of when (or even if) to pay can clearly be very damaging for any business.
Terms of Trade should not merely be a document setting out payment terms and shipping details. They are a weapon to be wielded and designed to:
Above all else, Terms of Trade are used to get you paid.
A common tactic employed by debtors to avoid or reduce payment is to allege, often months after the goods or services have been provided, that the goods or services were defective.
Another is to claim that the goods or services did not conform to what was ordered or that the creditor/supplier failed to deliver on time. Often these claims are without merit but are made simply to delay, reduce or avoid payment.
Terms of Trade can be used as a shield to defend against claims of that type as well as being a potent sword to be wielded against a debtor.
Terms of Trade can be designed to:
Competition is not simply competition in getting a sale. Every business needs to get paid.
Your bad debtor may have debts with your competitors and other businesses and it is in your best interest to get paid first. Terms of Trade can provide a competitive advantage in recovering payment. Use a debenture charge to rank ahead of competitors for payment instead of equally with them.
A business should not adopt a 'one size fits all' mentality to their Terms of Trade by utilising similar terms and conditions to competitors or from other businesses. If you have the same Terms and Conditions then you are on equal footing to collect payment. You need to get paid first. What happens if the Terms of Trade you have signed contain a defect? Your ability to rank ahead of other creditors could be compromised and, in a worst case scenario, you may not even be able to recoup the debt owed at all.
Terms of Trade should be tailored to industry and business specific issues and reviewed regularly to take into consideration changes in the law or other circumstances.
Do not use a set of clauses copied from others. Often this leads to ambiguities or contradictions which can result in the Terms of Trade containing fatal flaws. Terms of Trade clauses should be properly designed as a whole to work together, rather than as a set of 'ad hoc' clauses. There is little point having a clause allowing you to place a caveat over a debtor's property if you do not have a clause giving you the appropriate rights to support the caveat. Without that power, the debtors may be able to easily have the caveat removed.
Terms of Trade are, and should be, regarded as formal contract conditions that apply between a business and its customers. They should be prepared by a lawyer.
Terms of Trade can be designed to minimise the need to sue debtors by giving a creditor/supplier sufficient alternative powers against the debtor to aid in recovery. A threat to sue does not create the fear it once did. However, registering a debenture charge to place a debtor into administration still has the power to terrify.
Reducing the need to resort to litigation can also reduce the number of debts that you may have otherwise chosen to write off because of the possible legal costs involved.
Debtors are generally aware that most people will avoid litigation wherever possible due to its associated cost. They will sometimes rely on this assumption and attempt to 'hold out' hoping that a creditor will write off a debt rather than sue. You must, therefore, arm yourself with other alternative weapons via effective Terms of Trade.
Properly drawn Terms of Trade will provide avenues for recovery, often at less cost and inconvenience than legal proceedings.
Terms of Trade can be drafted to fit on the back of a consignment note, invoice or quotation.
They can also include a fully fledged Credit Application through which valuable information is obtained which can be used to assist in recovery.
Sadly no. There will be situations where recovery is not possible or commercially viable. There will also be instances where a debtor will have no assets with which to pay. However, questions contained in the Credit Application (utilised in conjunction with the Terms of Trade) can be carefully designed to help identify these problem debtors before a decision is made to trade with them.
The ability to obtain payment from a debtor is greatly increased with well drafted Terms of Trade. To illustrate, ponder this question—who would you pay?
Creditor A: who has sent a letter of demand begging for payment; or
Creditor B: who has exercised powers under their Terms of Trade by registering a debenture charge over your company, taken out a caveat over your family home and investment property, is about to place your company into the hands of an Administrator and take steps to sell up your properties?
Well drafted Terms of Trade can assist to put you in the shoes of Creditor B.
Darren Brown is a Senior Associate of Kliger Partners, Lawyers.
kligers.com.au
