How Often Should You Review Your Credit Terms and Conditions?

The importance of having professionally drafted terms and conditions of credit is well known to savvy business owners. They provide a protective structure within which business sales can be promoted by offering goods or services on credit, while at the same time managing risk. So how often should business owners consider reviewing such terms?

Terms and conditions of credit set out the framework of your contractual relationship with customers. They create and define your legal rights and obligations, especially with regard to extended credit and may mean the difference between being able to recover unpaid credit or losing it. How so?

Credit terms can be drafted to take advantage of legal protections to:

  • create a right to interest on overdue payments;
  • allow you to recover your debt recovery costs;
  • create security interests which act as an insurance policy of sorts to cover unpaid credit; and
  • ensure that you have the upper hand if litigation erupts.

Therefore the value of having effective, professionally drafted and up to date terms and conditions cannot be overstated.

Notwithstanding this, many business owners forget that they are not operating in a vacuum but are subject to economic shifts, development of industrial regulation and frequent changes to legal policy, legislation and case law. This means that the very legal and economic premises upon which their terms and conditions are hung could fall out from underneath them at a moments notice.

Without a regular system of reviewing terms and conditions of trade business owners open themselves up to serious financial risk which is ultimately preventable.

 

So how often should documentation reviews take place?

What is necessary to manage risk will vary on a case by case basis. If you have never had your complete sales documentation package (i.e. your credit terms and conditions, credit application, invoices, purchase orders, quotes and credit notes) reviewed by a legal professional, invest in this as soon as possible.

Once you have professionally drafted sales documentation, annual reviews are a good start. This can be arranged with your lawyer and will usually be a simple and straightforward process.

However, there will also be external events which may trigger the need for a review much sooner.

 

4 key factors which may trigger the need to adjust your terms and conditions of credit

 

4 key factors to adjust your terms and conditions of credit

Legislative Amendments or New Case Law

Legal policy, legislation, industry-specific regulation and case law are constantly changing, and if you don’t have access to a legal reporting subscription chances are you won’t hear about it. New laws and amendments to laws which impact on your industry can either remove protections you have incorporated in your terms and conditions, cause you to lose out on legal protections which are not in your terms and conditions or even cause you to commit a crime or incur a fine for trading illegally.

 

Changes to Accompanying Documentation

While the terms and conditions of credit comprise the framework of your contractual relationship, the finer points are incorporated in customer credit applications, customer quotes, purchase orders, invoices and credit notes. This set of documents together forms your contact with your client and must, therefore, work together in harmony, in order to protect your interests and ensure your trade rights are optimised. Any contradiction between documents can create uncertainty and may jeopardise your rights in a dispute.

 

Increasing Industry Competition

If you are at risk of losing clients to a competitor who is offering more attractive terms of trade, you may wish to review your terms to determine whether you can match them or even offer something better. Such a review would involve a careful analysis of the financial risk.  To be successful, a perfect balance needs to be struck between limiting exposure and offering trading terms which are attractive enough to retain your customers or entice some new ones over the fence.

 

Economic Shifts

Changes to the economic conditions within your industry may dictate that credit terms need to be tightened by bolstering the disclosure requirements imposed on clients. For example, if many of your clients are struggling financially, you may include a term requiring regular financial disclosures so that you can monitor their ability to repay the credit.

 

 

The problem for businesses is not so much being aware of what these triggers are, it is knowing when they will occur.  It is rare that business owners will know when a key case is handed down that changes the way that a contractual principle is construed or when a competitor embarks on a campaign to undercut its business by offering more favourable trading terms.

Having your lawyer conduct a routine annual review of your terms and conditions of credit having regard to legal changes, economic shifts, competitor’s offerings and adjustments to sales documentation can ensure that you are regularly realigning with your commercial environment. Doing so will ensure you remain competitive while also mitigating against risk.

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