Leveraging Terms of Trade for Cashflow

15 June 2023

Despite New Zealand dipping into recession recently, and the doom and gloom of various commentators, business carries on. The unfortunate side effect is payment days for accounts receivable starting to push out, with the odd non-payer or bad debt starting to arise.

Having robust terms of trade in place with your customers will give you peace of mind that if a slow payer or bad debt scenario arises, you are in the best position to recover what you are owed. Ceasing supply outright is often an unpalatable approach, so having a range of options available is important. These terms of trade need to be put in place earlier rather than later, to ensure that they have the greatest likelihood of being accepted by the Customer. Often bundling the terms with account application forms works well.

Below are a few areas to check in your terms of trade to ensure your expected cashflow is able to be recovered:

  • Accounts – clear terms and conditions about how your credit account operates are important. These include the ability to undertake credit checks, set and vary credit limits, and the ability to move to cash in advance terms where credit account limits are reached or exceeded.
  • Security – retaining title in goods supplied is common, but this needs to be protected by registering a charge on the PPSR to have the greatest effect. Other forms of payment security can be taken over other customer or third party assets via personal guarantees from directors/shareholders, parent company guarantees and mechanisms like agreements to mortgage land
  • Payments – ability to allocate payments to amounts owing in the supplier’s discretion.
  • Deposits – ability to request deposits on accepting an order, or to invoice and receive payment in advance. This is particularly relevant where goods are ordered in or on back order.
  • Interest – ability to charge interest on any money not paid on the due date, with an interest rate that varies with changing market conditions (for example linked to 90-day bill rate or OCR).
  • Costs – ability to charge any costs incurred in debt collection activity from the customer in addition to principal and interest owed.
  • Default – in the event of non-payment it is helpful to have a range of options available, such as the ability to cease supply, terminating unfulfilled current orders and terminating the terms of trade. Other remedies may also be relevant, such as the termination of other agreements in place between the parties, or in some cases the ability to appoint a receiver over secured assets to recover amounts owed.

If your terms of trade could do with a review, please get in touch.

Chris Steenstra and Tom Corkill are part of our Corporate & Commercial team at Norris Ward McKinnon.