The Importance of Contracts Before Starting a Business Relationship

December 4, 2019
What does your business use as a reference when you go to a client to collect on a debt that is owed? Many businesses can immediately produce invoices or itemized lists of services performed, but some small and mid-sized businesses that haven’t encountered any trouble collecting in the past might not have contracts. Contracts are essential when entering into a business relationship of any kind, as they protect both the person purchasing your goods or services and your business. What is the importance of contracts for your business, and how can they help you when it’s time to collect?

The Best Defense Is A Good Offense

As in almost any industry, the best defense is a good offense. The same is true in the collections industry. The best way to prevent debt collection problems is by laying the groundwork before they have a chance to start. Studies have shown that, after 120 days the chances of collecting on a debt are only 28%. At 360 days your chances of getting any money are down to 10%!  It is imperative that you have clear, defined structures in place to collect, and one of the best structures available to the average business is the contract.

What Should Your Contract Include?

You should always include interest terms and late fees in the contract that you have new businesses and clients sign. Late fees and defined interest terms can also help you to offset the cost of collections and the money that you lose from waiting on payments. Start by precisely defining payment terms. When is payment due? 15 days from the date of service? 30 days from receipt of the invoice? You should also state what interest will be charged for late payments and include a phrase like, “Accounts not paid in accordance with the terms above are subject to a ##% finance charge.” This can remind clients of the importance of timely payment and encourage them to pay quickly instead of letting the invoice sit in a stack of papers for weeks on end.

Reach Out Early

Even with a signed contract, you should still reach out to clients with unpaid invoices as soon as a payment is overdue. In some situations, waiving a late fee could be prudent. For example, if there was a delay in the mail service due to a postal holiday or a client who has been loyal and on time for years had a slip-up after a new employee was hired. However, having a contract and paper trail ready to go in the event that the client does not pay will come in handy. The importance of a contract often does not come into play until you struggle to collect and cannot provide the client or a collection agency with documentation showing the defined terms of your relationship.

Hiring a Professional Collections Agency? Alacrity Collections Is Here to Help

Alacrity Collections is proud to be a leader in debt collections. We achieve great results that are over twice the national average and treat all of our customers with dignity and respect, on social media and offline. We work tirelessly to protect your brand and improve your net returns. To learn more about our services and get in touch, please call us at 1-800-752-9663 or set up a phone appointment directly on our representative’s calendar via this link:  

Other Blog Posts You May Be Interested In:

Additional topics can be found in the side bar or simply scroll through the main blogs page.  

Want to stay connected on social media?

Remember to “like” our Facebook page to receive more informational posts about how to improve your cash flow, management topics and motivational quotes.