Terms of Sale - Mitigating Payment Risks

In this second edition of our “Business Spring Clean” blog series, Head of Corporate Findlay Anderson, addresses various mechanisms that companies can consider in seeking to mitigate payment risk in their contracts.

In the dynamic landscape of commerce, where transactions happen swiftly and globally, protecting your business from the risk of non-payment is paramount. Establishing well-defined and comprehensive terms of sale serves as a crucial foundation for safeguarding your interests and maintaining financial stability. In this blog, we highlight some of the key factors to consider in effectively shielding your business from the potential pitfalls of non-payment.

• Clear Payment Terms: At the core of any robust terms of sale lies clarity regarding payment expectations. Clearly articulate the payment terms, specifying due dates, accepted forms of payment, and any applicable penalties for late payments. By eliminating ambiguity, you set the groundwork for a transparent and efficient transaction process.

• Payment Schedule: For larger transactions or projects, consider implementing a structured payment schedule. This not only ensures a steady cash flow for your business but also reduces the risk of non-payment by securing partial payments at various project milestones. Breaking down payments into manageable chunks provides both parties with a tangible framework, promoting accountability and trust throughout the course of the business relationship.

• Transfer of title – Consider separating the moment of title transfer from the act of physical delivery. So even if your goods have been delivered to the customer, you retain title to the goods pending payment of the outstanding sums.
• Security Measures: Incorporating security measures into your terms of sale can fortify your position against non-payment risks. Utilising mechanisms such as personal or corporate guarantees, collateral, or even letters of credit can add an extra layer of assurance. These safeguards not only act as deterrents to potential defaulters but also provide you with legal recourse in the event of non-payments.

• Credit Checks: Prior to entering into a business agreement, conduct thorough credit checks on your potential clients. Understanding their financial stability and creditworthiness enables you to assess the risk of non-payment more accurately. While a clean credit history doesn’t guarantee payment, it can be a valuable indicator of a customer’s reliability.

• Dispute Resolution Mechanism: Include a well-defined dispute resolution mechanism in your terms of sale. Clearly outline the steps to be taken in the event of a dispute, whether through mediation, arbitration, or legal proceedings. And consider the option for an alternate fast-track dispute resolution mechanism for payment issues. A structured dispute escalation and resolution process can expedite the resolution of conflicts, minimizing disruptions to your cash flow.

• Late Payment Penalties: Deter late payments by specifying clear penalties for overdue invoices in your terms of sale. These penalties can include interest charges or additional fees, providing a financial incentive for clients to adhere to the agreed-upon payment schedule. Clearly communicate these consequences to emphasise the importance of timely payments.

• Consistent Communication: Establish open lines of communication throughout the transaction process. Regularly update clients on project milestones, delivery dates, and any potential issues that may impact payment. By fostering transparent communication, you not only build trust but also create an environment where clients are more likely to address payment concerns proactively.

• Legal Counsel: Seek legal counsel to ensure your terms of sale are legally sound and enforceable, addressing potential legal or regulatory loopholes and strengthening your position in the event of non-payment.

• Continuous Review: The business landscape is ever-evolving, and so should your terms of sale. Regularly review and update your agreements to reflect changes in industry practices, regulations, or your own business model. This proactive approach ensures that your terms of sale remain effective in mitigating non-payment risks over time.