How to Get Paid on Time: Legal Tools to Protect Your Cash Flow

Introduction

Cash flow is critical for all businesses. Even profitable businesses can run into issues when invoices are paid late or not paid at all.

Late or missed payments are a common challenge for SMEs, particularly when businesses are relying on informal arrangements or poorly drafted contracts.

Payment issues can often be mitigated or avoided entirely by implementing the right legal tools in place. Strong contractual protections not only improve the likelihood of getting paid on time, but also provide clear enforcement mechanisms if payment is not made or if disputes over payment arise.

This article outlines the key legal tools that can be used by businesses to protect their cash flow.

Well-drafted payment terms

For businesses supplying services or products, it is essential to have comprehensive terms and conditions in place.

Well-drafted terms and conditions of business can:

• Clearly define the scope of work to avoid disputes;
• Include payment milestones for larger projects;
• Set out rights to pause or terminate services for non-payment of invoices; and
• Allocate responsibility for debt recovery costs, where applicable.

These terms clearly outline clients’ obligations from the outset, reducing the likelihood of payment disputes in the future.

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Deposits and upfront payments

A key way to manage cash flow risk is to require a deposit or upfront payment by customers and clients.

Deposit clauses should be clearly included in the terms and conditions and specify:

• The amount payable upfront;
• Whether it is refundable or non-refundable;
• Circumstances where the deposit may be refunded or forfeited; and
• How the payment is applied to the total fee.

For higher-value or higher-risk projects, staged payments tied to milestones can also be beneficial to reduce further cash flow exposure due to non-payment.

Retention of title and ownership clauses

For businesses that supply goods, another tool is retention of title clauses, which provide that the ownership of goods does not pass to the client until full payment is received.

For service-based businesses, similar provisions can be built in relating to intellectual property and deliverables, ensuring that anything created is not fully transferred until payment is made in full.

Suspension and termination rights

Another key tool is clearly setting out in the relevant agreement what happens if a customer or client does not pay on time.

These clauses will often include rights to:

• Charge interest on overdue amounts;
• Suspend work immediately when payment becomes overdue;
• Terminate the agreement for non-payment; and
• Recover outstanding amounts and associated costs.

Debt recovery and enforcement clauses

If non-payment issues escalate, having clear contractual rights to recover the outstanding debt can make enforcement more efficient.

Such clauses may include:

• Dispute resolution procedures including an agreement to certain processes such as mediation;
• Recovery of legal and enforcement costs; and
• The relevant jurisdiction and governing law provisions.

Without these clauses, chasing unpaid invoices can become costly and complex.

Conclusion

Getting paid on time is a key concern for all businesses and as such, it is important to have the right legal framework in place before work begins.

Well-drafted contracts with clear payment terms and enforceable rights are essential tools for protecting a business’ cash flow and reducing risk.

While having a clear contract in place cannot eliminate all payment issues, it can significantly improve a business’ ability to prevent and mitigate late payments and provide avenues for redress.

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