For many entrepreneurs this task may not be their first priority, but getting it right is crucial to ensuring a healthy cashflow
When you are in the early days of starting up your business, there's a neverending list of tasks to complete. Sorting out the terms and conditions of trade is not at the top of the list. Getting your product market ready, finding customers and marketing your product take priority in the startup process.
Neglecting this less sexy part of your business, however, could impact your cashflow through delayed payments and having to pay for materials before taking payments.
In a worst-case scenario, you could end up spending lots of money and wasting time on debt collections.
Late payment is a fact of life for small businesses, as customers often give lower priority to bills from small firms. With the right terms in place, however, you can ensure that you get paid first. Get your terms right and there's no excuse for slow payments.
Protect your business
Plainly, if you don't specify terms and conditions you put yourself at risk of uncertainty and misunderstandings – it's vital to establish the actual arrangement between the two parties involved in any deal. You need to cover yourself, so clients or partners have no opportunity to go back on their word.
"If there is nothing in writing there is no proof," says Joanna Tall, commercial lawyer and the founder of Off To See My Lawyer. "Equally, if the terms are in writing, it is evidence you can produce before a court if you need to."
Emma Jones, the founder of Enterprise Nation and co-founder of small business campaign StartUp Britain agrees. "Essentially, having terms and conditions protects you as a business," she says. "Terms and conditions certainly have an important role to play when it comes to two parties (customer/supplier, joint venture partners) understanding their duties, rights, roles and responsibilities."
What to include
According to Tall, well-drafted terms should act like a manual or recipe book for doing business and having absolute clarity on what should happen in a given situation. "They should set out what the agreed terms are between parties and more importantly what happens if things go wrong or one party wants to leave or is unable to continue," she explains. "Terms and conditions can also save a lot of money by addressing all issues at the outset. This in turn avoids disputes later on about what might or might not have been agreed."
The exact elements to include depends on the individual business but you should consider including:
• A clear definition of what products or services will be provided
• Setting out the payment terms – when is payment due
• Any guarantees or warranties offered
• Timelines for delivery and any queries
• Specifying what happens if either party doesn't deliver or pay or wants to end the relationship
• The term of the agreement and what notice is required to get out of it
• Which law shall govern the contract
Some things must be included on invoices. "There is a legal requirement for invoices to set out the business name and address as a minimum," says Tall. "Additionally, if they are a limited company they must set out the company name; the company number; where it is registered; the registered office address, which may be different to your actual trading or correspondence address; and if you wish, all the names of the directors — not just some of them. If the business is registered for VAT, it must state the VAT number.
There is no legal requirement to include terms and conditions on invoices though many people put their terms on the back of them.
When things aren't clear
Failing to specify terms could have a serious impact on your cashflow, according to Tall: "You may end up in a situation where the customer thinks they will pay at the end of the project and you think you are being paid at the beginning or in stages, so you could end up having to pay for materials and staff before you have received the money from the customer," she says.
"Equally, if you do not specify so in your terms, you have no right to charge interest for late payment, so again you will be out of pocket if a customer pays late."
One size doesn't fit all
Tall says it's important to make sure your terms are specifically written for your business – you can't assume another business will have the same needs as yours. Crucially, she says, don't think you can wing it. "Consult a lawyer and avoid the temptation to copy someone else's terms as their business is different and they may not have consulted a lawyer themselves," she says.
In her startups Jones has both used lawyers and written terms herself. "This of course depends on the particular project," she says. "But a site I reference a good deal is clickdocs, where you can download basic contracts, templates, agreements and terms and conditions. If the situation requires something more specialist or sophisticated, it's worth seeking advice from a lawyer," she adds.
Jones doesn't think entrepreneurs pay as much attention to this area as they ought to. "But I understand this as there is a lot to do when starting and growing a business, so the detailed business of terms and conditions may drop to the end of the to-do list," she says. "I would advise startups to display terms and conditions on their website and agree terms on payment; both receiving funds from customers and paying funds to suppliers. With these main and standard terms and conditions covered, you hopefully won't have to spend too much more time on this particular task."
Top tips for setting out your terms and conditions
• Draw up a list of the key commercial terms that you are offering your customers
• Think of all the scenarios of what could possibly go wrong and then set out what you would do in each case.
• Imagine the most awkward customer possible in doing this exercise
• Put yourself in the shoes of your customers and make sure the language is at their level and user friendly. Hiding everything on one page in the smallest font possible will not endear you to your customers
• Don't forget about the terms of trade – this should be something that you revisit and update, as and when required.
• When in doubt, seek help. Ask for advice from your mentor, a professional or fellow business owners.
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