So, you have decided to start your own business. You are not alone; in the modern world, there is an increasing trend for people to work for themselves or start a small business. In addition to the traditional tradesmen and shopkeepers, more and more people are harnessing the power of the internet and their Personal Computers, laptops or tablets to set up a business from home. The freedom and flexibility of working for yourself can be a very attractive alternative to commuting and working in an office or factory.
However, whilst you have carefully considered your products or services, customers, business plan, how much profit you intend to make, how much investment you, have you considered the importance or ensuring you have contracts in place with your customers? Or are you someone who thinks;
- “contracts are only for large companies, not for my small business”
- “contracts require lawyers and are full of legal jargon”
- “contracts will put off customers from buying my products/services”
- “I don’t need a contract where I’m working with friends or family”
These are standard misconceptions for many small business owners and are understandable as very few people have any legal education. Let’s look at those issues in turn.
Contracts are only for large organisations
This is probably the most often-used excuse given by small business owners. If you step back and give it some thought, however, why should you regard your business any differently to a CEO of a large company employing hundreds of staff and turning over millions in revenue? Why should you take a bigger risk than that organisation in protecting your business? Although you are operating on a smaller scale, the principles you are working to and the risks you face are roughly similar. You both want to sell a products or services, you both want to be paid by your respective customers for your products or services in a timely manner to minimise the impact of cashflow, to make a profit and (probably) grow your business.
In all likelihood, those large companies have probably become successful and grown because, from an early stage, they realised that formalising the relationship with their customers through written contracts was a necessary part of their business, along with proper sets of accounts, insurance etc…
Written contracts in fact, if worded correctly, are designed to protect you and your business. An agreement in writing will provide assurance for you and your customer on such issues as product sales, delivery of services and payment. This will avoid any misunderstandings and make it more unlikely that you will end up in a dispute.
In reality, disagreements can and probably will arise with regards to your business, but they are more likely to be resolved, and at a lower cost to you, if there is a written document that clearly articulates the rights and obligations of both parties. If there is no written agreement, even if you do have a verbal contract, there is a greater chance of misconceptions or lack of clarity leading to a dispute which may only be resolved by the use of expensive lawyers and going to court.
Therefore, as a small business owner, it is very important that you treat the use of written contracts as an integral part of your day to day operation. They will underpin the long term viability of your business and protect your livelihood.
Contracts Require Lawyers and are Full of Legal Jargon
Thanks to search engines on the internet, it is now relatively straightforward for you to find a standard contract template online which you can use for your business. In many cases you can often discover free contract templates. You may need to consider which standard template to use to ensure that it suits your business, but it is not necessary in most instances to require the services of a lawyer to draft a bespoke contract for you. Even if you are not entirely sure about whether a contract template is suitable and you require legal advice, the cost of such advice will be less if the lawyer is amending rather than creating a contract.
Contract templates will vary depending on where you are in the world, and the legal system in place in your country. You can even use these contract templates for international business.
And best of all, there has been a drive over recent years to use plain language when drafting contracts so that you do not require either a law degree or a qualification in Latin to understand the wording.
Contracts will put off Customers from Buying my Products/Services
Actually, you should regard the opposite as being true. A written contract allows for you and your customer to have a clear and unambiguous understanding of what is being provided and the obligations of both parties. You can use the contract as a sales tool by telling your customer that the contract is there to also protect his rights by giving him assurance he will be receiving what he expects. This demonstrates that you are acting, and will continue to act in a professional manner, and should allay any concerns your customer may have.
For example, if you are providing a service to a customer is it clearly understood by both parties what the full scope of that service is, when the service is considered to be complete (and your obligations end), and when (most importantly) you will be paid?
Because you have taken the time and effort in advance to put a written contract in place, you have significantly reduced the possibility of having either;
- an unhappy customer who does not believe he has received what he ordered (there goes any chance of future business!);
- to carry out additional work, at your cost, in order to be paid; or
- to spend time and money going to court to enforce payment (in the knowledge that if no written contract exists, then there is uncertainty as to how the judge will rule).
The use of a written contract will demonstrate to customers that you run your business in a serious and professional way so that, even subconsciously, they will treat you in a similar manner. This means you are far more likely to be paid when you expect, provided that you have delivered what you promised. Further, once that initial contract is in place it should be also far easier to do repeat business with your customers, with the possibility of upselling additional products or services.
An additional and important aspect, particularly once your business grows, is that the requirement for a written contract should filter out any potentially disastrous business. If a prospective customer is unwilling to sign a contract, this is a sure sign of trouble ahead as they are not prepared to treat you seriously. You should not proceed to do business with them even when you are strapped for cash or desperate to take on new customers. You will avoid much frustration, cost and headache by sticking to your principles.
I don’t need a contract with Friends or Family
If you are just establishing your own business, it is very tempting to have dealings with friends or family. If they are being supportive they may be willing to be your early customers or even provide some investment. Such support will be based on good intentions but you should not be naïve and take it for granted that the business relationship with your friends or family, will not at some time in the future face problems.
If you want to preserve friendships and family relationships, a written contract will keep the business relationship separate and make it easier to resolve any problems without emotional heartache.
In conclusion, if you are not currently regularly using contracts to protect your business then there is a good chance at some time you will learn a harsh lesson when you are faced with a difficult or unreasonable customer. You are best placed to decide if that is a risk worth taking, but the common sense approach to take is to mitigate that event occurring by formalising your business arrangements.