This is a series of Q & A interviews with Nicki Kinton of NK Credit Consultancy in which PPD is looking at the typical excuses that suppliers often hear when chasing late payments, and asking Nicki how best to handle them.

 

Excuse #4 Our payment terms have changed

 

This seems like a mechanism used by large companies as a means of hanging on to cash for longer, is that a generally fair assessment?

Not just larger companies, though it a more common occurrence coming from larger businesses.

 

 

How is it even possible for payment terms to change halfway through a contract?

It’s not unusual for parties to want to vary the terms of an existing contract. Circumstances change, markets change and contracts need to be responsive to those changes.

That said, one party cannot arbitrarily decide to change the terms of a contract. Any amendment is considered by law to be a contract and needs to be agreed by both parties. If one of them does not agree to the changes, then they will not be enforceable.

 

 

What should a supplier do if payment terms change without having first formally agreed terms?

If you have not formally agreed terms then you have put yourself at risk of uncertainty and misunderstandings. Trading without having any defined agreed terms can create implied acceptance, i.e. by trading you have accepted the terms under which that transaction took place.

If something changes, such as payment terms and you continue to trade then implied acceptance could also apply, therefore it’s important to use this opportunity to step back and negotiate terms that are appropriate for both parties.

Be prepared to walk way from the relationship if the new terms would create a level of risk that is detrimental to your business.

 

 

Is it possible for payment terms to be changed even after they have been agreed?

As mentioned above it is possible for either party to propose an amendment to the existing contract, however for that amendment to be enforceable it need to be accepted by both parties.

Acceptance should be express acceptance, i.e. written acknowledgement of the changes and the willingness to abide by the changes.

Remember if you continue to trade after the new payment terms have been brought to your attention that could be considered as implied acceptance.
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What would you say is the best way to avoid this situation from the outset?

  1. Always make sure that you negotiate terms with any supplier before you start doing any business with them.
  2. Have them in writing and signed by representatives of both parties.
  3. Make sure that all involved in the payment process are made aware of these terms before the first payment is due.
  4. Have regular reviews with your customer, that way if something is happening in their business that may prompt them to look for a change in terms you are already aware and could be in a position to offer an alternative solution if you can’t accept the change in terms.

 

 

NK Credit Consultancy Ltd offers a complete credit management solution for your business covering all the core competencies including due diligence / designing credit policies / designing terms of business / improving the accounts receivable process / ensuring compliance with consumer credit regulation and Credit Insurance Policy / establishing reasonable credit limits and payment terms and more. To contact Nicki click here.