The statistics show that only around 50% of UK based SMEs agree written terms and conditions with their clients when offering goods and services on credit. Of those that don't, you might think those businesses have some sort of terms and condition in place. They often don't.
Our team often see many businesses run incredible risks by operating and selling goods and services without the protection of terms and conditions. Why is this important? Well the simple reason is that correctly drafted terms and conditions can significantly reduce the risk of late and non payment.
There are a few common mistakes firms make. The first is copying terms and conditions from other businesses. This can often be worse than not having any terms and conditions at all. The other is to have out of date terms and conditions. After all, legislation tends to change and a business must keep pace.
One of the easiest ways to improve the security of a business' cash flow is to spend a few minutes by addressing the statutory late payments interest.
I see with worring frequency that the penalty rate of interest is often lower than what is permitted under UK late payment legislation (this is stated in default area of T&Cs). I would go as far as to say that in many cases this actually diminishes the business' statutory rights and here's why.
Under current legislation, late payment interest can be charged at 8% per annum over and above the base rate set by the Bank of England. Despite this, I often see rates as low as 2, 3 and 4%. Businesses must be so careful not to reduce or eliminate their legally enforceable rights should there be a case involving a despute or legal action.
One solution would be to remove any penalty rates of interest that are currently mentioned in your terms and conditions (the statutory rate is likely to be higher). Even better than this would be to ensure any penalty rates that are mentioned are at least as high as your statutory rights allow.
To conclude using well drafted terms and conditions is crucial in defining the business relationship by which both parties agree to do business.
My next post will address an easy way for businesses to handle disputes.