Having made a sale to a customer it’s only reasonable that you, the supplier, should expect to be paid what is due to you and in a timely way. Common sense, right?The answer, of course, is yes, but it is often not quite that simple. How much should the payment be? Is that with or without VAT? When should the payment be made? Is it a single payment or are there instalments? At what point has the sale really been made and completed? What if the customer finds fault with the service or goods? And so on. All these may arise if they’ve not been covered and if they’re not included in the relevant supplier contract. Dealing with such questions after the event can lead to delays in payment (with the obvious impact on cash flow) and potentially costs (e.g. legal costs for advice and to seek to recover amounts due). So here are five payment terms to include in supplier contracts to ensure that there is a clear understanding between supplier and customer from the outset. It should be very clear to the extent that if a customer does not adhere to these terms, making the discussion and any action subsequently required is far simpler.
1. A clear definition of what constitutes delivery and triggers the need for a payment on the customer sideIs it physical (e.g. the delivery of goods, with a delivery note/signature etc)? Is it performance based (and if so how is the delivery to be confirmed and evidenced)? Either way, the supplier contract should make very clear the point at which deliver? occurs and how this is evidenced.
2. The amount to be paid, delivery having occurredIs the full value to be paid in one payment? Are there multiple delivery events according to milestones (if so, each event should be defined and agreed). Is the amount VAT inclusive or exclusive. Is there a discount for payment by a certain date? Is there interest to be added if payment has not been received before a certain date?
3. The due date(s) for payment(s)Is it 7, 14, 30 days from invoice (or some other agreed number of days)? Be clear on when amounts are due and therefore when they become overdue.
4. Retention of titleFor physical supplies you should consider including a Retention of Title (or Romalpa) clause, a provision in a contract providing that the title to the goods remains with the seller until certain obligations (usually payment of the purchase price) have been fulfilled by the buyer.
5. A clear process for resolving any disputesIncluding time limits for issues to be raised, the process to be followed (meeting to discuss and attempt resolution, possibly arbitration if required), and the court of competent jurisdiction in which any claims/actions would be heard (e.g. the contracts may be subject to English Law and to the exclusive jurisdiction of the English Courts). Clearly, at the point a sale is made, all parties hope that delivery and payment will happen smoothly and without issue. Most of the time, this is so. It is in the minority of cases where issues do arise that a supplier contract with clearly drafted payment terms can be invaluable to you the supplier. It is not an area to shortcut or ignore. Get it right at the outset. Paul Turner is a finance director with My Business FD, which offers high-calibre finance directors to ambitious smaller and growing companies on a part-time, flexible and affordable basis.
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