Customer Contracts and How they Protect Your Accounts Receivable

Customer Contracts and How they Protect Your Accounts Receivable

Customer contracts are a must if you are going to grant credit terms. While no document can guarantee that you will never have any problems getting paid, a customer contract is a great first step in protecting your accounts receivable.

Here are some things to remember:

A customer contract must be in writing. 

Oral contracts are legal in most states. However, with an oral contract, you leave yourself open to someone else’s interpretation. And, trust me, in a payment dispute, your customer’s recollection will be different than yours. A customer contract must be executed before any transaction.

A customer contract must clearly detail payment terms.

Customer must agree that they to pay you for the product or service you are offering.  Be as specific as possible as you can about how and when when you expect to be paid.

Detail any consequences of late payments or non-payment.

Do you want to charge interest or late fees on past due balances? You must indicate the interest rate and how and when it will accrue. Too many small business owners fail to contract beforehand, and believe they can simply begin applying them. I often hear, “It is on my invoice”. That is too late, like closing the barn door after the cows get out, as my mom used to say.  Think about what would happen if you took the case to court. Without an written agreement beforehand, no judge would award you interest. And, why should you give an interest free loan? Take the time and get it in writing.

Similarly, if you refer your customer to a collection agency, you can lower your cost of collection if you get customer to agree (again, in writing, beforehand) that they will be responsible for all associated costs.

Make sure contract is signed.

This item seems like a “no-brainer” but all too often, I receive contracts that are not signed. You contract needs to be bi-lateral, which means that two parties must agree to it. Without a signature, you do not have a two-party agreement. If your contract is online, and you have the customer indicate their agreement (for example, by checking this box, you agree to terms and conditions..) you are covered.

Get a personal guarantee if your customer is a business.

A personal guarantee means that the business owner agrees to pay you if the business is not able to pay.

A contract does not have to be complex.

Being too busy is not a valid excuse for not having a customer contract. If you compose a simple email that details basic terms as listed above and ask the customer to email you their agreement, you have a basic contract.

Do not fall into the trap of thinking that a customer contract is “too negative”. It is the opposite.  Starting a business relationship with great customer contract is starting with great communication, and that is always a good thing.





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