Shoulda’ Put A Ring On It: Why Trading Terms Matter
- October 28th, 2016
- 5 mins READING TIME
Launching your business should be a time for celebration and champagne, not gloomy, worst-case-scenario thinking. So we get that the last thing you want to think about is something going wrong.
And while the majority of your dealings will run smoothly (fingers crossed), every now and then you’ll hit a bump in your small business journey. It’s at those moments having trading terms in place is essential to protect you and your cashflow.
Trading terms, or terms of trade, refer to the conditions by which you and your business engages with wholesalers, clients, suppliers and contractors. Terms help to define any grey areas there might be in your dealings with others, turning them into a clear agreement both parties can refer back to as required.
Your own trading terms will be as unique to your business as your procedures, systems and processes. But they might cover things like the products or service you’ll deliver, when you’ll get paid, what happens if a delivery is late or not quite as promised, and how you’ll deal with disputes.
Of course trading terms aren’t just about resolving issues when things go wrong. They also help both parties get on the same page – literally and metaphorically – when it comes to working with each other.
Trading terms help your cashflow
Possibly one of the most essential components of your trading terms – and the one most often overlooked – is your credit and payment policy.
Every time you hand over goods or complete a service prior to payment, you’re extending credit to the other party. With a clear and enforceable credit policy in place you’ll find it easier to manage your business’ cash flow and keep on top of debtors.
Without trading terms that cover your credit and payment policy, you might end up being left out of pocket. For example, you may require payment within 7 or 14 days. But, without stating this upfront, your clients might choose to pay you on 30 or 60 day terms, leaving you struggling to pay rent or meet your other obligations.
Likewise, setting out the how and when of receiving payments is crucial. While you might assume your clients will pay using direct deposit, someone might decide to pay you by cheque, credit card or another method. Can you afford to wait while a cheque clears or are you prepared to meet the fees from another form of payment? By setting this out in your terms and conditions, your clients will know what your expectations are.
Terms set out the responsibilities of both parties
When you enter into a contract, whether with a customer, client or another small business, you’re agreeing to provide or do certain things for them in return for payment. But of course, they have responsibilities to the contract as well.
Let’s say you’re a web designer and one of the things you need your clients to provide is the copy for the website. By setting this out before you start, your client knows what they have to provide and by when, and the consequences for the project if they don’t get it done.
Similarly, while we always want our business dealings to run smoothly, sometimes projects need to be cancelled or orders returned, for whatever reason. It’s essential you specify in your trading terms how you and the other party can cancel or renege on your agreement, and what happens in those situations.
This will remove confusion later on and make it clear for everyone what happens if things need to change.
What happens if you don’t have trading terms?
In the majority of situations, you won’t encounter any issues. But in the case where something goes wrong, you’ll certainly wish you had things in writing.
Without trading terms you may have a situation where a client wants to pay you only at the end of a project, whereas you want payment upfront or in stages. Or a customer wants to cancel or amend an order after you’ve already processed it, leaving you out of pocket with stock you can’t clear.
In the worse cases, if you haven’t signed a contract your client may refuse to pay you at all.
This happened to Kate*, a freelance writer who did a video script and voice over for a local government client – a project that took five days of research and coordination. Kate didn’t create a contract because she’d worked for this client previously and they were on a tight deadline. But once she sent the invoice, the project administrator refused to pay because they thought the work was on a pro bono basis.
“Since this happened, I make sure to issue new contracts when the scope of work changes with a current client or they request me to work on a new project. I treat each project as if it is a new client I am working with and have no history to base my trust.”
Luckily, drafting your own trading terms isn’t difficult or an onerous experience. In most situations you won’t even need a lawyer to help you (although one could certainly come in handy for more complex situations). In the next post we’ll take you through coming up with your own trading terms and what you should do with them to ensure everyone’s on board.