Payment terms in your commercial contracts

When you extend credit to a customer it is very easy to forget that it is the same as handing over cash. In order to preserve and protect the financial health of your business, it is vitally important to ensure that you regularly review and update your contractual terms with your customers, suppliers and contractors. This will ensure that your contractual relationships grow and adapt alongside your business. A new business, of course, will do very well to have a robust set of terms and conditions at the outset.

According to Tom Kemp, a specialist in company law at Ingram Winter Green in London:

‘Nothing stands still in business, so to remain competitive, financially secure and future-proof you will need to look after the agreements which underpin the success of your business relationships.’

Know your customers

One aspect which is often overlooked by business owners at the early stages of a contractual relationship is the need to conduct proper due diligence into those businesses or consumers that you are about to supply. It is easy to be so focused on winning new businesses and ensuring that they sign up to your terms and conditions that you ignore assessing whether they will be likely to meet those financial obligations.

While every business is different, it can be valuable to classify different customers or clients into varying categories of risk thereby determining the terms on which you engage with them.

Payment options

For some new and unknown customers, you may require full or partial payment up front. If you offer a subscription-based service, you may require your customers to set up a standing order in advance of provision of the service. If they do not pay, they do not get the service.

For more established customers you could offer interim payments. Specific agreed milestones could trigger payment at certain stages of completion, and details of how agreement will be reached on those milestones should be set out in the contract.

For those whom you have the most trust, you could offer more generous terms of credit extension.

Late payments

Do you have a set procedure to follow when a customer is late in paying their invoices which is set out clearly in the contract? It is often possible to charge interest under the Late Payment of Commercial Debts (Interest) Act 1998. This is currently set at eight per cent above the Bank of England base rate, plus a fixed recovery sum depending on the amount of the debt.

Early payment discount

Offering a discount for early payment can be an effective way to control cashflow. While this means that you may need to consider this when setting your contract price, a real cost saving to your customers is not only of benefit to them but also reduces your administrative costs of having to monitor and chase older invoices.

Invoice dispute procedures

You should ensure that if a customer has a dispute over an invoice – whether to do with the goods or services provided, timing or quality – there should be a clearly defined procedure to follow. Your terms and conditions have to be unequivocal and it is vitally important to get this right to prevent unnecessary and costly litigation.

Set off

If two parties have monetary debts against each other, you may be entitled to set off the sum owed to your business against money held by you which belongs to your debtor. In order to enhance the opportunity to use this remedy it is most effective to include it in the terms of your contract.

Retention of title clauses

A retention of title clause can be an effective means of ensuring that the legal ownership of the goods does not pass until your customer has paid for them. Obviously this does not work for businesses offering services, but can be very useful in situations in which the goods provided are not going to be incorporated into something else (and therefore it becoming impossible to separate them from other items). As this is industry specific, it is very important to seek expert legal advice.

Disbursements and Expenses

Given that disbursements can have a significant impact on your cashflow, you should consider a term in your contract which requires them to be paid upfront or within a short time frame.

Payments on termination

It is worth considering what happens at the end of your contract with your customer and what might be payable and when. Could a pro-rata payment be required? Take legal advice if you are considering imposing penalties, as if they are not drafted carefully the terms may be unenforceable.

If you want to take control of your business’s finances and improve your cashflow, the first step is to ensure your terms and conditions are well-drafted.

Our specialist lawyers will get to know your business and tailor their advice to fit your specific needs and what to do if things go wrong. If built into your contract terms, mediation and arbitration can also be an effective means by which to settle disputes without having to resort to court proceedings.

For further information, please contact Tom Kemp in the corporate team on 020 7845 7425 or email

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.