Payment Terms in Contracts: Five Clauses That Can Help Protect Your Cash Flow

You've delivered the product or completed the work. You send the invoice.

Then you wait.

When payment is delayed, one of the first places to look is the contract. Unfortunately, that is often when businesses discover that their payment provisions aren't as clear as they thought.

Here are five areas worth considering.

1. When payment is due

"Payment within 30 days" might sound clear, but 30 days from when?

Is it from the invoice date, receipt of the invoice, delivery of the goods or completion of the services?

Your contract should make the trigger for payment as clear as possible.

2. How invoices can be disputed

A customer raising a genuine issue with an invoice is very different from an invoice simply being ignored.

Consider setting out a process for disputes, including how and when an invoice should be challenged and what information the customer should provide.

The contract can also address whether undisputed amounts must still be paid while the disputed element is resolved.

3. Interest on late payments

Your terms should address what happens financially when a payment becomes overdue.

Depending on the circumstances, businesses may have statutory rights to interest and compensation for late commercial payments. Contracts can also contain their own provisions dealing with interest.

Whichever approach is appropriate, the important thing is understanding what rights your business has before you need to rely on them.

4. Suspending your obligations

Imagine continuing to provide services for three months while invoices remain unpaid.

You may be increasing your financial exposure with every additional piece of work you complete.

Depending on the nature of the arrangement, businesses may want their contracts to provide a right to suspend services or deliveries where invoices remain unpaid.

The circumstances and process for doing so should be carefully drafted.

5. Termination for persistent non-payment

Occasionally, late payment stops being an isolated problem and becomes a pattern.

Your termination provisions should make clear when non-payment constitutes a breach and what steps must be taken before the agreement can be terminated.

This might include notice requirements or an opportunity for the customer to remedy the breach.

Your contract should support your commercial processes

There is little benefit in having detailed payment provisions that nobody within the business follows.

Your finance, sales and operational teams should understand the basic payment terms offered to customers and know what happens when those terms aren't met.

Good contracts work best when they reflect how the business actually operates.

If your payment terms have evolved over time or haven't been reviewed recently, Lawpoint can help you assess whether your contracts still provide the protection your business needs.