SMEs: Avoiding the legal pitfalls of giving away goods and services on credit
A lot of businesses have experienced hard times in the current economic climate. Conversely, the business of some SMEs is booming now more than ever before. The issue I want to write about today is related to managing success and covers some legal issues which come to play when an SME is giving services and goods away on credit.
Giving goods and services away on credit simply means selling goods and services to third parties while they defer payment. It can be an outright deferred payment which can be stated in a contract or receipt or a less obvious form of deferred payment in the form of a post dated cheque. When a business starts accepting transactions like this they are open to a lot of risks and the most notable risk is what if the creditor does not pay?
It is therefore imperative that before an SME gives away goods on credit, the SME fully understands the debt collection process in their country. What remedies would be available if the creditor defaults in payment? The answer to this question differs from country to country but usually the options are:
Filing a court case against the creditor
Reporting the creditor to the police
Reporting the creditor to his professional organisation
When you are thinking of deferring payment, you ought to make amount to be paid on the later date higher than the payment to be made if payment was made instantly: This is because you must ensure that in case payment is not made on the due date, you have charged enough in your deferred payment sum to cover hiring a lawyer to help you get your money back or cover your administrative costs when taking options 2 and 3.
You should also take into consideration the time it would take to exercise any of your debt collection options. Our firm GM George Taylor & Co. specialises in debt collection and we have observed that even in the simplest of cases it can take 1-2 months to recover your money. The question for you SME owner is can you afford an additional delay of 2 months after the deferred date to get your money for the goods you gave away on credit? If the answer is no, then you should not be giving away goods on credit.
Another thing to bear in mind is that where the creditor does not pay, you will need to pay someone to help you get your money back. Apart from any recovery percentage you agree to, you would need to initially pay some money. Can you afford to do that? Before you give away any good or services on credit you need to have this in mind. Only give away sums that you can comfortably afford to recover if need be, the hard way.
Specially drafted contracts by a qualified lawyer will also ease recovering your money if the creditor does not pay. The contracts can create new remedies not listed above which may enable you get your money back faster if the payment is not made at the right date. In summary, even where you are excited for big business as an SME please be careful when giving away goods and services on credit and ensure that you only do so where you can truly afford to do so. Don’t hang your entire business on the promise of a creditor without fully appreciating the debt recovery options available to you. Finally, as I always say, get good legal advice.
Also Read Looking Back, Moving On: My little entrepreneurship journey in Africa
Content credit: CC: Author: Morenike Okebu is the founder of Reni Legal.