4 Ways To Protect Your Business From Bad Debt

Good terms & conditions will strengthen a credit controller’s position when a customer pays late and protect your business from bad debt. However, terms & conditions are useless unless they have been properly incorporated into a contract between you and the customer. For example, there is a misconception that if you refer to your terms on an invoice, your terms will apply to the contract. This is not correct because an invoice is considered a post contract document and only terms & conditions referred to before or at the point a contract is formed will be valid.

 So how do you ensure your terms & conditions apply? Here are 4 ways you can incorporate your terms & conditions and protect your business:

1.  A Signed Contract Or Credit Account Application Form

Out of the 4 ways, this is the most important. A signed credit account application form or contract enclosing your T&C and expressly stating that the terms will apply to all future dealings between the parties will ensure incorporation. An application form or contract will also help establish who you are actually contracting with. If the company stated on the application form or contract does not show up on your searches, ensure you make enquiries and get clarification from the customer in writing as this will protect you should you need to take legal action and enforce a judgment later on.

Some form of signed application form or contract is also vital if you trade with customers overseas, especially in the Middle East as they will often refuse to recognise a debt without a signed contract.

2.  Create A Paper Trail Referring To Your T&C’s

When a quote or estimate is sent to a customer, ensure that it makes reference to your T&C. When you receive a purchase order, be vigilant to any reference to the customer attempting to incorporate their T&C and reject them. The easiest way is to do this is to send an order confirmation form once again reiterating your T&C will apply.

3.  Create An Email Footer Referencing Your T&C’s

More and more business is done by email meaning contracts can be formed immediately upon acceptance without necessarily having a clean paper trail as mentioned at item 2.

To ensure incorporation of your T&C, make it Company practice for everyone to have an email footer making reference to your T&C and if possible create a link to your website T&C page. An example is set out below:

AN Example Limited

Co. Building ABC-123
London, E1 3XP

Unless otherwise expressly agreed in writing, the T&C of AN Example Ltd – see www.anexample.com/terms – shall apply to and govern any purchase arrangement between AN Example Ltd and the customer

4.  Obtain A Guarantee

If you are giving credit to a company you are taking a calculated risk. To reduce the potential risk you could seek to obtain a signed document with a personal guarantee from a director or even a cross company guarantee from a parent company. The guarantee is a promise to accept responsibility for the customer’s debt in the event they fail to pay it. This will give you leverage and some additional protection especially if the customer becomes insolvent.

 Previously: For the Cost of a Coffee, a Solicitor’s Letter Prompts Payment in 84% of Cases

20 January 2016