Business Contracts – Default Provisions and Why You Need Them

I spent over 20 years as a chief financial officer (CFO) of various companies, and I’ve owned my collection agency for over a decade, so I’ve seen a lot of contracts. A large percentage of the contracts I’ve seen lack one or more key provisions that would make collecting on an unpaid invoice much easier. That’s because lawyers don’t always consider collection issues when advising their clients, but they should.

Unpaid invoices are one of the biggest threats to the health of a small business. If your customers don’t pay their bills, you can’t pay yours and you can’t invest in marketing or business improvements.

In the simplest terms, default provisions are statements about what happens if your client stops paying you. Including default provisions in your contract can help you avoid some unpaid invoices and make it easier to collect on others.

Here are some of the more common default provisions that you should consider adding to your contracts.

Late Fees and Interest

Having late fees in your contract gives your clients an incentive to pay you on time. If a client is knowingly racking up late fees, it is probably because they are having trouble paying a bill. This gives you a tip that you may have a collection problem that needs to be addressed sooner than later.

It also gives you or your collection agent something to negotiate if your customer insists they can’t pay immediately. Some states restrict the amount of late fees or interest you can charge, so it’s important to discuss these terms with a lawyer or at least research on the Internet.

Acceleration Clause

An acceleration clause states that if your client defaults on part of the contract, the entire amount of the contract becomes due. This is especially important for businesses that have monthly or quarterly payments for long-term contracts.

Revoke Access/Suspend Service

It seems obvious that if someone stops paying you, you should stop providing a service. But, if you do not have a provision in your contract that explicitly states that the entire contract amount is due even if you stop providing services as a result of past-due invoices, your client could argue that they no longer owe you money because you stopped doing the work.

This provision is especially important for businesses providing marketing or other ongoing services.

Personal Guaranty

A personal guaranty can be helpful if you are dealing with another small business. As you may have guessed, a personal guaranty says that the owner of the business is personally responsible for any money owed. You can include a personal guaranty clause in a contract or in your initial credit application.

As a small business owner, you should also be aware of when you are agreeing to a personal guaranty. Even if the guarantor is not personally wealthy, this will give your invoices priority over other vendors who do not have a personal guaranty.

Collection Costs & Attorney Fees

Going after unpaid invoices can wind up costing you money, especially if you have to go to court in order to collect. Including a provision that requires the client pay collection costs and attorney fees if you have to send the account to collections or court gives you leverage in negotiations to avoid court and may help you recover some of the costs if you can’t.

Home Field Advantage

Thanks to the internet, even small businesses may be working in multiple states. If that’s true for you, then you want to make sure that your contracts include language that if you have to take the client to court, it happens on your home turf. This will save you from incurring the additional costs of travel if you have to sue.

These are just some of the default provisions that you might want to include in your contract. You can also include default provisions in your credit application, and even on your invoices.

Of course, you should also be aware of what you’re agreeing to when you sign a contract. Working with a knowledgeable lawyer or collection agent, can help you create contracts and applications that protect you and your business, and make you aware of any other provisions and terms that you should also include.