Why Crystal-Clear Payment Terms are a Must for Small Businesses

For small businesses, is there anything more important to viability and success than getting paid?  You deliver exceptional products or services, and you deserve to be paid fairly and on time. Even though critical to success, we frequently see poorly-defined payment terms in contracts.

Clear payment terms set the stage for smooth financial operations. They establish when and how you expect to be paid, helping both parties avoid misunderstandings that can lead to tension or financial strain.

Well-defined payment terms also protect your cash flow and let customers know what to expect. By communicating expectations up front, you demonstrate reliability and business acumen while giving customers the information they need to make payments efficiently. 

The High Cost of Vague Payment Terms

Think of your contracts as the financial backbone of your business. Weak or ambiguous payment terms can lead to a host of problems, potentially crippling your cash flow and creating unnecessary legal headaches. Here are just a few of the consequences you might face:

Delayed Payments

When payment dates or methods aren't clearly defined, clients may delay payment, claiming confusion or misunderstanding.

Vague Invoices

Not enough attention is paid to the information on invoices.  Invoices lacking detailed information often lead to delayed payments.

Disputes and Lawsuits

Ambiguity breeds disputes. Disagreements over payment amounts, due dates, or acceptable forms of payment can escalate into costly and time-consuming lawsuits.

Uncollectible Debt

Vague terms make it difficult to prove the exact amount owed and when it was due, making debt collection a nightmare.

Damaged Client Relationships

Financial disputes can sour even the best client relationships, leading to lost business and negative reviews.

Crafting Payment Terms That Protect Your Business

So, how can you ensure your payment terms are airtight? Here are some key provisions to consider including in your contracts:

Payment Amount

Clearly state the total price for your products or services, including any applicable taxes or fees. If the price is subject to change (e.g., based on hourly rates or project scope), explain how the final amount will be calculated.  Additional charges are a frequent topic of dispute.  It’s important to carefully describe the scope of work covered by your prices.  That will make it easier to justify charges above the base price for additional products or services.

Payment Schedule

Specify when payments start and are due. Will you require a deposit upfront? Will payments be made in installments based on timing (e.g. every month), milestones, or upon completion of the project? Provide specific dates or clear triggers for each payment.  Will you be invoicing the customer?

Payment Methods

Outline the acceptable methods of payment (e.g., check, credit card, electronic transfer). Various payment options, such as bank transfers, ACH payments, credit cards, and digital wallets, can encourage faster payments. Customers are more likely to pay on time when convenient payment options are available.  If you charge a fee for certain payment methods (e.g., credit card processing fees), clearly state this in the contract.

Late Payment Penalties

In Pennsylvania, interest does not automatically accrue on unpaid amounts due to a business.  If you want interest, you have to put that in your contract. Implement a late payment policy, including interest charges or late fees. Be clear to define what constitutes a late payment (is anything less than full payment a late payment?  Are payments made within 5 days of the deadline considered late for penalty purposes?) If your dispute over payment leads to litigation and you are successful, the court may award prejudgment and post judgment interest at the statutory rate of 6% (which is less than the typical contractual rate).  Pennsylvania law sets limits on the interest rates you can charge in some instances, so be sure to comply with these regulations.

Invoice Details

Specify how invoices will be delivered (e.g., email, mail) and what information they will contain (e.g., invoice number, date, description of services, payment due date).  Its not uncommon for a customer to say they did not receive an invoice so agreeing in advance on the method of delivery is very important.  You might even provide your customer with a copy of a sample invoice up front to avoid any subsequent arguments over the contents.  

Suspension of Work

Your contract should address the consequences of late or non-payment in the event of an ongoing project or deliverable.  Giving yourself the right to declare the contract in default and suspending the work until payment is made gives you powerful leverage over the customer. It also avoids disputes over your right to stop work in the event that topic is either not addressed at all or ambiguous.   

Confession of Judgment

A confession of judgment clause is a provision in a contract that allows you to enter a judgment against your customer in court without prior notice or a hearing. This means that if a default occurs under the contract, you can immediately obtain a judgment against your customer without having to go through the typical litigation process.  You cannot use this in a consumer contract but they are perfectly acceptable in B2B contracts.  They are strictly construed by the courts so its best to consult an attorney on the enforceability of any such provision in your contracts. 

Personal Guarantee

If your customers are often business entities, you might consider including a personal guarantee in your contract for the business owner to sign.  Essentially, a personal guarantee is a promise that the business owner, as an individual, will be responsible for the debts or obligations owed to your business if the business customer cannot fulfill its contractual obligations. In simpler terms, if the business customer fails to pay or perform as agreed in the contract, you can seek payment or performance directly from the owner(s) of the customer personally. Their personal assets (like your house, savings, etc.) could be at risk.

Dispute Resolution

Include a clause outlining the process for resolving payment disputes. This could involve mediation or arbitration before resorting to or in lieu of court litigation.  You can also dictate who pays the filing fees for initiating mediation or arbitration. You can also specify the state law that governs the dispute and restrict the location (state and county) where lawsuits can be filed.

Collection Costs

Successful litigants are not entitled to collect attorneys fees in addition to the amounts due from the customer.  That’s an urban legend we hear frequently.  Nor are you entitled to be reimbursed costs incurred in the collection process other than court filing fees.  State that the client will be responsible for all costs associated with collecting overdue payments, including attorney's fees.

Pennsylvania-Specific Considerations

Keep in mind that Pennsylvania law may impact the payment terms available for your contracts.

The Pennsylvania Home Improvement Consumer Protection Act (HICPA) applies to virtually all contracts involving work at consumers’ homes.  It includes restrictions on down payments, requires your contract to include clear and specific schedule of payment provisions and prohibits certain dispute resolution provisions.

The Pennsylvania Prompt Payment Act governs all commercial and some residential construction contracts.  It includes provisions relating to payment deadlines, interest on late payments, withholding payments, attorneys fees and expenses.   

Don't Leave Money on the Table

Thorough and well-defined payment terms are an investment in the financial health of your small business. The experienced business attorneys at Fiffik Law Group can help you craft clear and comprehensive contracts, so that you can minimize the risk of payment disputes, protect your cash flow, and foster strong client relationships. Working with our team to develop clear and completes contracts for your business is money well spent.  Don't leave money on the table – make sure your payment terms are working for you.