In our work helping business owners get their outstanding invoices paid ahead of 30, 60, or 90 day payment terms, sometimes we’ve come across clients who don’t have a written contract with their customer, and they want a primer on customer contracts. (This is especially common with our oil and gas clients.) Oftentimes the business owner already has a good relationship with the client and didn’t see a need to have a contract.
While verbal contracts are legal, they can be impossible to enforce if there’s a disagreement. Having customer contracts in place before starting a project ensures that both you and your client are on the same page about what exactly needs to be done and when by both parties. We’ll go over the requirements to make a contract enforceable, the basics to include in your customer contracts going forward, and why contracts matter for invoice factoring. (We also have a post about vendor agreements if you’d like more information on another type of contract!)
Customer contract requirements
A contract is an agreement between two or more parties upon mutual obligations, that is also enforceable by law. For a contract to be legally enforceable, each of these elements has to be present:
- Offer. One party offers to perform a service or sell a product.
- Acceptance. The other party who is being presented the offer has to agree to the terms.
- Consideration. Both parties have to have an obligation under the contract; they aren’t binding unless there’s something of value exchanged. In the case of customer contracts, one party delivers goods or services and the other party pays money for them.
- Capacity. Each party has to fully understand their obligations when they agree and assume that the other party has the legal capacity and practical ability to fulfill their obligation.
With that background, what should you include in your customer contract?
Elements to include in your customer contract
It’s entirely possible to write a contract yourself. You don’t need to include any legalese as long as you write in clear, easy to understand language. If you decide to go this route, it’s always a good idea to have it reviewed by an attorney first. As you draft your contract, make sure you include the following:
- Contact info. Include the mailing address, phone number, and email address of each party at the top.
- Date. The full date of when the contract was executed, or signed by you and your customer.
- Project scope and details. Explain everything you’re going to do for the customer along with anything they need to do in order for you to complete the work.
- Payment terms. Beyond the total cost, include a payment schedule for down payments and payments based on project milestones. Add the ways you accept payment, payment due dates, and what happens if a payment is late.
- Non-disclosure agreement. If either of you will communicate sensitive company information during the course of the work, make sure you both agree that it needs to stay confidential.
- Independent contractor status. Make it clear that you’re not an employee of your customer.
- Termination provisions. Decide on the conditions that would have to be met for the contract to be terminated. Examples include late payments or missed project deadlines.
- Dispute resolution. If a contract disagreement comes to the point where it needs official resolution, both you and your customer can save time (and possibly money) by agreeing to settle the dispute with a mediator rather than going to court.
- Signature. Obviously, include a signature line for both parties.
Why customer contracts matter for invoice factoring
If you’re considering invoice factoring as a way to fund your business, it’s important to have a contract in place. It shows when the payment from the customer is due, enabling a factoring company to offer a firm price up front based on the length of the payment terms.
For oil and gas customers in particular, a contract is helpful because a customer might not always give explicit approval of an invoice. Another option in this situation is to look at the contract and verify that you’ve sent in all the required backing documentation that you need to get paid. For some factoring companies, knowing that you’ve fulfilled your end of the deal to your customer in accordance with a contract is proof enough that the invoice will get paid, so they will go ahead and get you funded.
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