Effective Credit Management – Part 2

Terms and Conditions of Trade

A credit application and terms and conditions of trade form the basis of your organisation’s relationship with its customers. They establish the rules of the game, and if a problem occurs with the business relationship, you want to be able to rely on these documents to help resolve the issue.

We often think of them a bit like a prenuptual agreement! When the relationship is travelling smoothly, you don’t give it a second thought, but if things go awry, it’s the first document you reach for, to see what your options are.

A well drafted credit application and accompanying set of terms and conditions will pay big dividends to a business over many years by removing any uncertainty about what was agreed between the supplier and their customer. As a debt collection firm, AMPAC regularly relies on these documents when chasing overdue debts for our clients, and sometimes we find their credit documentation lets them down in a number of ways.

Below are a number of clauses, which will help your business recover its overdue accounts, and reduce the associated costs.  

Effective Credit Management

Take a moment to compare the clauses listed below against your current set of credit documents to identify where you could benefit from a small investment which will pay you back many times over. 

  • Cost Recovery Clause

A cost recovery clause allows recovery of costs on a full indemnity basis including collection agency commission, thereby significantly reducing the overall cost to recover debt. The technology used by some collection agencies will automatically calculate and add all recovery costs to a debt, which means you don’t have to keep track of what has been spent chasing the debt, and often you will recover, not only the amount owing, but also most of your recovery costs.

Do your terms contain a Cost Recovery Clause?

  • Yes
  • No
  • Interest Clause

An interest clause allows businesses to charge an agreed amount of interest on overdue accounts from the date the debt was due for payment. Additional interest is a real incentive for a debtor to pay and gives you a powerful negotiating tool to bring about a settlement.

Do your terms contain an Interest Clause?

  • Yes
  • No
  • Jurisdiction and Governing Law

For organisations that deal nationally, their terms and conditions should specify the state and the law to be used to determine a dispute, if one arises. Ideally, a court located in the state most convenient to the you should be selected. This means if you are located in New South Wales, you would want the matter heard in New South Wales. Additionally, you can also specify which state’s law will be applied if the matter goes to court. Predetermining where a matter will be heard, and which law will be applied can save you a lot of time an inconvenience.

Do your terms establish jurisdiction?

  • Yes
  • No
  • Registration of Security Interest

The introduction of the Personal Property Securities Act 2009 (PPSA) in 2012 has meant that many organisations have had to update their terms and conditions of trade to allow them to register their Security Interest in property, goods or equipment. The registration of a Security Interest replaces an organisations previous ability to retain title over goods by including a Retention of Title Clause in their terms and conditions. Businesses need to consider whether registration of a security interest is appropriate in their circumstances, and if it is, update their documentation to allow this to be done.

Have you considered PPSA in relation to your business?

  • Yes
  • No
  • Guarantee and Indemnity (with a Charging Clause)

Successful litigation is of no use if the debtor has no assets. If the debtor is a company, often assets will be secured by a financier, so wherever possible it is important to have the company directors guarantee payment of the debt. A good Guarantee will also contain a charging clause which permits the supplier to lodge a caveat over property owned by the guarantor.

Do your terms contain a Personal Guarantee?

  • Yes
  • No
  • Variation Clause

As circumstances change, it may be important to be able to vary basic terms and conditions by written notice to the customer. You may want to alter your terms and conditions of sale as a result of legislative change, new products or markets, or perhaps an acquisition or the sale of a part of your business.

Do your terms allow you to vary the way you do business and your terms?

  • Yes
  • No
  • Warranting Information Accuracy

When deciding whether to grant credit, it is important to have a further level of assurance that the information provided is accurate. If later, the information is found to be inaccurate, the plaintiff (you) may gain a tactical advantage in any subsequent legal proceeding.

Do you require your customer to warrant their information?

  • Yes
  • No
  • Dealing with Trusts

Where the debtor is a trustee of a trust, it is likely that the debtor has no assets, and that all the assets are held in the trust. It is therefore important to bind the debtor in its capacity as trustee of a trust.

Is your position secure when dealing with trusts?

  • Yes
  • No
  • Limiting Liability

You cannot contract out of warranties implied by the various Trade Practices Acts throughout Australia however, suppliers can limit their liability in the event that they breach the terms of their supply contract. For example, in the case of faulty goods, suppliers often limit their liability to either the repair or replacement of the goods or services.

Do your terms limit your liability?

  • Yes
  • No

Reviewing and updateing your terms of trade should form a part of your ongoing management of credit risk. It is one of those activities which costs little, but returns lots.

Mark Logue is a debt collection specialist and the joint managing director of AMPAC Debt Recovery. He has more than 30 years experience in the debt recovery and credit reporting sector, covering all segments of industry and commerce throughout Australia and overseas.

Mark can be contacted by phone on 0409 749 709 or by email at m.logue@4ampac.com.au

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