How to control the terms on which you do business – four tips to consider

First published in the NSW Government Industry & Investment newsletter, Business Tips.

What are Terms of Trade?

Terms of Trade are the terms and conditions on which your business buys goods and services from your suppliers and sells goods and services to your customers. These terms are the basis on which your business trades. Generally, if you do not take the initiative and set the terms on which your business trades, you will be stuck with the terms set by the person you are doing business with (which are unlikely to protect the interests of your business).

In some instances, such as where your business is purchasing goods or services from a large corporation, you will have little or no choice but to buy on the terms set by the seller. For example, a small business buying a mobile phone will have no choice but to agree to one of the many mobile phone plans that are available. You will be able choose which plan you want but you will not be able to change the terms of the plan you choose.

On the other hand, if you are trading with a small to medium business, you have the opportunity to negotiate and agree the terms on which you do business. However, many small businesses fail to take the opportunity to determine the terms on which they do business.

Here are four tips that may help you to take control of the terms on which you do business.
 

Tip One – Set the terms on which you provide commercial credit

Whenever you offer to sell goods or services to customers on commercial credit terms, you should ask your customer to apply for a commercial credit account with your business. That application should set out the terms and conditions on which credit is to be provided to your customer (for example, it may specify that your invoice must be paid within 30 days). In the application you can give yourself the right to use the information provided by the customer to check the customer’s credit worthiness. You should ask for (and check) trade and credit referees that a customer supplies.

In summary, you should not give commercial credit to a customer unless the customer has applied for it, provided information that enables you to check their credit worthiness and agreed to the terms on which your business provides that credit.
 

Tip Two – Set the terms and conditions on which you sell your goods or services

If you want to control the terms on which your business sells its goods or services, the first step is to prepare a document that records these terms.

The terms should set out the basis of the business relationship you want and cover such things as:
 

• how orders are placed and accepted
• prices
• payment terms
• delivery
• cancellations and returns
• risk and insurance of goods
• warranties and the ownership of any intellectual property in the goods or services (and many more).

Most importantly, the terms should limit the liability of your business to the extent allowed under the Trade Practices and Fair Trading laws. However, you should never try to completely exclude all liability if something goes wrong (this does not work under Australian law).

We often see businesses simply copy the terms and conditions used by a competitor (or one that they have found on the Internet). Unless those terms have been carefully considered they may not be suitable for your business and may do more harm than good.

Tip Three – Agree the terms before the deal is done

Terms of trade, or any other conditions that your business may want to be able to enforce against a customer or supplier, must be agreed before the ‘deal’ is done. Any terms (such as payment terms) that your business tries to impose on a customer after your products have been delivered to the customer will have little, if any, chance of success.

We often see businesses print their terms of trade on the back of their invoice. Courts in Australia will rarely enforce terms on the back of an invoice because the invoice is sent after the deal has already been done. If you want your terms of trade to be enforceable by your business then you must bring them to the attention of the person who you are planning to do business with (before the deal is done) and obtain their agreement. It is good practice to send out your terms of trade at the time you provide a quotation or estimate and to ask your customer to sign the terms of trade as evidence that they have agreed to be bound by them.

Tip Four – Ask for a personal guarantee

If you do business with a company, and that company ‘goes broke’ then there is a risk that you will not be able to recover money owed to you. If your business intents to provide a commercial credit facility to a small company that is at risk of going broke, you should consider asking the directors or owners of that company to provide a personal guarantee for the money that the company owes to your business. This guarantee will be of little use unless it is agreed with your customers’ directors before the sale of your products occurs.

Of course you probably will not be able to obtain a personal guarantee from the directors of large companies (the directors of public companies will almost always refuse to provide one). However, you should always ask for a personal guarantee from the directors of any company that has a poor credit history. If the directors refuse to give one then you should ask yourself whether or not it is worth taking the risk of doing business with the company.

---

For any legal assistance with preparing terms of trade for your business or for advice on how to protect your business, call 1300 565 846.