Are Your Contracts Harming Your Business?

In a perfect world, our customers buy our product or service and turn right around and pay us back for that product or service. And, most of the time, that is what happens. But when a customer’s business starts struggling, are you poised to recover that loss, or are you forced to write it off as a bad debt?

We have the pleasure of helping numerous businesses with their commercial collections, including a major food distributor who has been our client for over 20 years. We’ve found that the factors affecting our ability to collect on any one particular account generally fall into two categories: 1) the quality of the information collected about the customer at the outset of the relationship, or 2) the strength of the terms of the contract.

People are not always forthcoming or honest with their information. Sometimes, for example, a debtor will provide an incorrect business entity name that makes it difficult to know whom to sue if a collection lawsuit is needed. The more quality information businesses can collect about their customers up front, the smoother the collection process will be.

The terms of the contract are equally important. A business might be missing out on a chance to reserve additional security or to recoup its attorney fees and collection costs, for example, if those items are not part of the contract. So, it might be worth a couple minutes of your time to sit down and review the contract your customers are signing. Some questions you should ask:

  • Are attorney fees and collection costs covered in the event you need to take collection action against a customer?
  • Does the person signing on behalf of customer confirm that he or she has authority to bind the business to the contract?
  • Would added security for payment improve your chances of collection if the customer’s business fails? If so, then you should try to get a personal guaranty or a security interest in the customer’s assets.
  • Is there language in the contract that does not make sense to you or leaves you unsure of its purpose?
  • What terms in your contract might not be enforceable?

There is certainly a business benefit to having short, concise contracts and credit applications that do not put off the customer. At the same time, your contracts are the best way to spell out what you bargained for and to protect you in the event you don’t receive that bargain.

We always welcome the opportunity to review your contracts with you and discuss ways in which they can be strengthened to further protect your business.