If you are a small business owner, sole trader or freelancer, cash flow is crucial. How can you protect yourself, strengthen your cash flow, and strengthen your rights to be paid for your goods and/or services? This article sets out 5 key steps to strengthen and protect your right to be paid.
1. Written Proposal/Quote and Terms and Conditions
If you work for someone without providing them with (i) a propal or quote and (ii) terms and conditions, then it may be difficult to enforce your rights. Your proposal/quote and your Ts&Cs should include, among other things:
- The scope of work, i.e. what you will provide, and how you will provide it
- The time-frame, i.e. when you will provide the goods or services
- Client obligations, e.g. to provide you with information, materials and/or progress payments
- Your payment terms e.g. pay by credit card within 7 days of the invoice
- Your rights if the client does not pay, including charging interest and using debt collection services
- Australian Consumer Law requirements including the consumer guarantees
- Limitations on your liability, including your maximum liability if there are faults or problems
- Rights to terminate the contract, including for non-payment
- A dispute resolution process to help you settle problems early
The client may have certain rights to refunds or replacements, in certain circumstances, under the Australian Consumer Law. This depends in part on whether you provided the products and services that you agreed to provide, in the timeframe agreed, or in a reasonable time-frame. If the scope and timing is clear in your proposal/quote, then it is easier for you to establish that you fulfilled the contract and have a right to be paid.
2. Explain how your client accepts your Ts&Cs
The Ts&Cs should set out how they can be accepted. It is important to show that your Ts&Cs were accepted, for them to be enforceable. Methods of acceptance can include signing, email confirmation, and/or payment. An accepted contract has considerably more weight than a contract that was not accepted, if legal action becomes necessary in the future.
3. Payment upfront and easy ways to pay
Obtaining a deposit or payment in advance protects you if the client defaults on the remaining payment. If you need to pay in advance, for example you purchase a product for $100 which you then on sell for $200, it is prudent to obtain the $100 payment up front, to at least cover your initial costs.
A common position is to obtain 50% payment upfront, and 50% at the end. This assists to manage your risk if the client does not pay the balance.
Give your client easy ways to pay, for example, credit card, as well as direct deposit to your business account. You or another staff member can call for payment, and take credit card details over the phone.
4. Written Invoice with short payment terms
You need to send a written invoice for the client to pay. If you have to take the matter further, this invoice becomes your proof of your claim of the debt owed. The invoice should include a reference to your quote/proposal (e.g. by quote/proposal number or by date), and the scope and time-frame.
In your Ts&Cs, you can set out when invoices will be issued and when they are payable. It is prudent to have a short payment schedule, for example 7 days or 14 days from the date of the invoice. This assists you to be paid more rapidly, and quickly identify who has not paid you on time.
5. Protect your work product
Strong Ts&Cs will help you, but practical protections are important and wise. For example, you can:
- Only provide final work products once full payment has been made;
- Only provide editable work product once final payment has been made;
- State that ownership of any logos, designs, images etc. will not be assigned until full payment has been made.
- If the client does not pay, you retain the rights on your work and the client cannot use it without permission. This method does not guarantee that you will be paid, but it definitely gives you leverage.
It is important to strengthen your rights under contract law and the Australian Consumer Law. 3 key documents are:
1. Quote/Proposal – setting out scope and time-frame in writing
2. Business Terms & Conditions – setting out comprehensive legal and business protections
3. Invoice – with a description of scope and work performed your payment terms, and how to pay.
A good business lawyer can create a customised quote/proposal and a set of terms and conditions for your business. These should cover the business and legal essentials, and specific variations and additions for your business and your industry. Well-drafted Ts&cs can be the difference between being paid and not. If just one extra client pays, rather than defaults, then your well-drafted Ts&Cs may have paid for themselves.
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