In the early days of your start-up business, having in place solid business contracts can help avoid unnecessary hiccups, ensuring the smooth development of your company and a level of protections against future disputes or misunderstandings. By ‘business contracts’, we are referring to the legally binding agreements between two or more parties, setting out the terms and obligations between the parties (including in case of a possible breakdown in relations). We recommend that these agreements are made in writing, to avoid possible disagreement about unclear or unspoken provisions. It is also important that the agreements cover the essential contract elements and respect the contractual obligations and commitments.
A service agreement is a legally binding contract that sets the obligations of the parties regarding the provision of services by the provider to the recipient (or principal). The general contract rules apply to this type of contract and outline the terms, rights, obligations and conditions of each party. This type of contract is very common and is used in situations such as franchising, licensing arrangements, rental of products and services or services from a business to a customer.
The essential terms of a service agreement are as follows;
- details of both parties (names, addresses etc.);
- payments terms ( fixed fees or hourly rate) and the expenses;
- timeline provision (start and end date);
- each party’s responsibilities;
- nature of the service;
- confidentiality and privacy; and
- termination and insurance provision.
Start-up businesses often need a little cash injection, or otherwise require funds sourced through a loan. There are many variables in a loan arrangement, and therefore it is highly recommended that the terms of the loan (particularly with respect to repayment) are agreed in advance and formalised in a contract. A loan agreement will set out the obligation between the lender and the borrower. The key clauses of a loan agreement are as follows:
- the amount of the loan;
- repayment plan ;
- the purpose of the loan;
- interest payable on the loan (fixed fee or floating fee)
- default interest (when money is due and not paid);
- co-signer (in case that the borrower have trouble repaying a co-signer can help secure the loan); and
- late fees.
Also, it is important to clarify the type of loan agreement you are agreeing on to safeguard your assets. Here are the different types of loans:
- Secured loan: guarantees the lender a level of protection allowing them to take possession of certain assets of the borrower in order to repay the debt;
- Unsecured loan: has no recourse to underlying assets of the borrower upon default of payment; and
- Division 7A loan agreement: is where a private/proprietary limited company is lending to a single borrower and that borrower is a director or shareholder of the lending company or one of their associates, the loan may be classified as a dividend.
A confidentiality agreement protects your businesses confidential information and specifies the terms under which confidential information will remain private. It ensures that a person or organisation, that has access to your confidential information, does not reveal it to any third party without your consent. A confidentiality agreement may also specify the terms under which that person or organisation would be allowed to share that information. The confidentiality agreement protects information that has the required quality of confidence. It helps in protecting confidential information, concepts or idea from being stolen and disclosed. However, common knowledge or public knowledge cannot be protected in a confidentiality agreement.
When it comes to your employees, a confidentiality agreement allows your business to maintain the confidentiality of your information that has been shared with employees (i.e. client list, special codes or financial statements). In these situations, your confidential information (as well as your intellectual property) is often protected within the employment agreement. This way both during employment and after employment the employee is legally bound by the agreement.
Trading terms and conditions
The trading terms and conditions oversee transactions between your business and your customers. It is important that you include a clear definition of the product or service, payment terms, and timelines for delivery, guarantees and warranties – the clearer the terms, the lower risk of a future misunderstanding or dispute. The trading terms and conditions allow you to limit your liability as well as your obligations (to the extent permitted within the law). Though, these days customer service is a very important marketing tool for your business and having a range of customer rights and after-sale guaranties could favour a long term relationship with your customers. The business terms and condition should be given to each customer before each transaction. From the moment the customer accepts a quote or makes a payment, he/she has presumably accepted the terms and conditions.
Customer credit applications
There are different payment methods you can offer to your customers, such as cash, cheque or EFTPOS. Depending on the nature of your business, it is common for the customers to be able to pay upfront, on delivery or on credit. The difference with paying on credit is that the payment is deferred for a period of time after the goods or services have been supplied.
Offering credit often encourages customers to spend more and more – resulting in increased sales and a potential competitive advantage for the business. However, along with providing lines of credit is the risk of a bad debt. As a start-up business it is important for you to manage the risk of bad debts. You should assess whether your potential customers will be able to answer the credit terms and conditions before providing it to them. As part of this assessment, we recommend that you create a credit application form including full contact details (including, for a business, the ABN, company structure, details of the directors, partners or owners), contacts of referee(s) and a signature confirming that the terms and conditions have been read and understood. However, in addition to increasing the risks of unpaid debts, offering credit also involves other risks such as being paid late and a reduction in your cash flow (e.g. you may have to wait for a customer’s payment to be able to invest money).
Offering credit to customers really depends on your business needs and cash flow requirements. To avoid bad surprises, we recommend that you screen your customers and avoid these with a poor credit history.