Effective credit management - Part 2 Terms and Conditions of Trade

By Mark Logue MICM CCE*

This is the second article of the series discussing the importance of credit risk management to all businesses that provide credit. In Part 1, published in October 2022, we discussed the cost of bad debts, the correct approach to opening a new account and the role of a collection agency in recovering overdue debts. In part 2 we discuss terms and conditions of Trade.

A credit application and terms of trade form the basis of your relationship with customers. They establish the rules of the game and if a problem occurs with the relationship, you want to rely on these documents to resolve the issue.

Just like a prenuptial agreement, when the relationship is travelling smoothly, you don’t give it a second thought, but if things go awry, it is the document you reach for to check your options.

A well drafted credit application and terms of trade will pay big dividends over many years by removing any uncertainty about what was agreed between you and your customer. AMPAC regularly relies on these documents when chasing overdue debts and sometimes we find they are lacking in protection for the creditor.

Below are a few clauses which can help you recover overdue accounts and reduce the associated costs.

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

Cost Recovery Clause

l A cost recovery clause allows you to recover most of your collection costs (including collection agency commission), thereby reducing the overall cost of recovering your debt. In most cases your collection agency will be able to automatically add all recovery costs to a 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

l This allows the charging of an agreed amount of interest from the date the debt was due for payment. This is a real incentive for a customer to pay. It also provides a powerful negotiating tool to bring about a settlement.

Do your terms contain an Interest Clause?

Jurisdiction and Governing Law

YES  NO  l Where organisations trade nationally, their terms and conditions should specify the state and the law to be used to determine a dispute. For example, if you are located in NSW, then the matter is heard in NSW, using NSW law. Predetermining where a matter will be heard and which law will be applied can save a lot of time and inconvenience.

Do your terms establish jurisdiction and Governing Law?

YES  NO 

Registration of Security Interest

l If you supply goods, and want to retain ownership until paid, then this applies to you. The Personal Property Securities Act 2009 (PPSA) was introduced in 2012 and allows a supplier of goods (not services) to register their Security Interest in the property, goods or equipment. Businesses need to consider whether registration of a security interest is appropriate in their circumstances, and if so, update their documentation to secure ownership.

Have you considered PPSA in relation to your business? YES  NO 

Guarantee and Indemnity (with a Charging Clause)

l Successful litigation is of little 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 your debt. A good Guarantee will also contain a charging clause which allows you to lodge a caveat over property owned by the guarantor.

Do your terms contain a Personal Guarantee? YES  NO 

Variation Clause

l Over time, you may need to vary certain terms in your agreement. This could result from a change in legislation a new product or market opportunity, or perhaps an acquisition of, or the sale of a part of your business. Does your documentation allow you to vary the way you do business and your terms of business? YES  NO 

Warranting Information Accuracy

l When granting credit, it is important to have confidence that the information provided is correct. If later, the information is found to be inaccurate, 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

l Where the customer is a trustee of a trust, it is likely that it has no assets, and 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 can’t contract out of warranties implied by the various Trade Practices Acts however, you can limit liability in the event that you breach the terms of your 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?

Privacy Statement and Policy

YES  NO  l The Privacy Act covers organisations with an annual turnover more than $3 million which means the Australian Privacy Principles (APPs) apply. These organisations must have a privacy policy in place. It is also a requirement that organisations meeting this criteria post a Privacy statement if they collect any customer or website visitor information, including email and physical addresses.

Are your privacy obligations up to date?

YES  NO 

These are just a few things to consider, and should be part of your ongoing credit risk management which costs little, but returns lots.

*Mark Logue MICM CCE AMPAC Debt Recovery

E:

m.logue@4ampac.com.au

T: 0409 749 709

www.4ampac.com.au