Terms of Trade for Small Businesses: What are they about and should I have them?
Company Trading Policies: When businesses trade – a sale (or service) contract process is occurring. Sometimes the trading processes do not run smoothly and conflicts or misunderstandings arise. Other than resorting to expensive legal actions, this leaves a grey area for traders to deal with issues. Hence some framework is needed … which brings us to the Terms of Trade.
A number of NZ Acts, Laws and Regulations have some influence over contracts and business trading practices but do not cover all the issues of trading processes. This means businesses have scope to retain rights to set some trading policies to protect their own company’s interests. This includes how issues or disputes will be dealt with. These are called Terms of Trade, or some businesses may refer them as Conditions of Sale. (We say ‘some’ as there are certain legislations businesses cannot contract out of.)
In a nutshell, ‘Terms of Trade’ is a business’s published contract statement that outlines the rights of their business, and what the obligations of the other party (purchaser) will be. It will outline expectations of the trading process. Purchasers then have the opportunity to view the company’s trading policies and can either accept or reject at the start of trade.
What is covered in those Trade Terms?
One usually finds a listing of reference points. They outline any specific actions or rules on that topic or issue during the trade process. Examples of reference headings are:
- Parties of the Contract. Identifies who the seller and buyer are.
- Goods or Services Provided. Any limitations, like installation costs, may be mentioned here.
- Pricing. The right to set prices, and trade discounting may be mentioned.
- Return of Goods / Refunds. A discussion on rules over refunds, damaged or incorrect stock returned etc.
- Payment Terms. Payment processes and due dates may be mentioned, for trade buyers.
- Ownership of Goods. As in when ownership of the goods will pass to the buyer?
The above is just a brief summary of the common points usually covered in Terms of Trade. Terms will differ from business to business, depending on the type of business and whom they trade with. Some businesses will have long detailed trade terms, others will be a few paragraphs.
A Binding Contract: It is important the Terms of Trade are viewable by the buyer at the time of contract or purchase. Once terms are accepted they are legally binding on both seller and buyer. If the buyer had no opportunity to access or view the trading terms, then the terms will not apply to the contract. Terms of the contract may be altered after start, but only if both parties agree.
Making the Trade Terms visible: Potential purchaser must be able to read them. Display them on Service Contracts, Account Application forms, Quotes/invoices or on walls in retail premises. Business websites need to display them, or a clear link to access them. Have some purchaser action with either a signature or a click action online, to show they accepted the Terms of Trade.
Debtor and Asset Control: Businesses will state their policy on cash and credit transactions, refunds, and other payment arrangements offered. They can highlight any late payment penalties or debt recovery costs will be passed on to debtors. It is important to mention, this action is not enforceable if this advice is not stated in the Terms of Trade, or at time of contract being signed. Trade terms often mention until goods or services are paid in full, the Ownership of the goods shall not pass to the buyer.
Certain procedures must be followed when businesses wish to do credit checks for account applications. There are very specific rules to follow on requesting authority to do credit checks because of the Privacy Act. Your business legal advisor should be able to help here.
Disclaimer: this blog is written only for the purposes of outlining what Terms of Trade are used for and the reasons businesses have them. Setting Terms of Trade involves complex contract law. Existing Trade Acts can impact on trade terms written, and it all depends on your type of business. Contact a business lawyer or professional financial advisor if you are considering a Terms of Trade policy written for your business.
How can having Terms of Trade help my business?
Surely with time and money invested into your business, is it not worthwhile making the effort to protect business income and assets? Having a term of Trade notice is one useful tool to help this process. Being able to pass debt collection costs to non-payee. (Why should your business bear the expenses chasing them because they won’t pay?) Use a retention of title clause that states your business retains ownership over the goods until payment is made in full. Notify any applicable financial limitations or clauses in case of possible events that may affect completion of contracts. For example, third parties (shipping, courier deliveries) or weather events. A well set out Terms of Trade can help minimise potential business costs and future liability claims for your business.
Do The Sums Bookkeeping and More is a friendly bookkeeping business working to make number crunching easy for your business. We work with a wide variety of small-medium businesses across New Zealand. If you are needing some assistance with your accounts or tax returns, or other financial services for your business – contact us today.
GST TAX RETURNS – INVOICING – INCOME TAX RETURNS – PAYROLL – CASHFLOW MANAGEMENT