1. Get Your Agreements in Writing. Oral contracts leave lots of room for misunderstanding and tend to change when the going gets tough.
2. Use Standard, Widely Accepted Form Contracts: If you do so, not only do you save money on drafting but courts of law tend not to dispute their fairness. Further, courts interpret contracts against the writer, so if you don’t write the agreement (i.e., you obtained it from a third party, such as your trade association), you’ve eliminated this risk.
3. Penalties for Late Payment. Such stipulations, agreed to by the opposing party, provide incentive for on-time payment. It also reinforces to any and all that payments are (or were) intended to be paid on time as agreed.
4. Escrow and/or Collateral. If the amount of the contract is substantial, consider mitigating your risk by requiring escrow funds (can be deposited with an escrow agent or law firm) or collateral (an asset that creditors agree to allow you to have if they don’t pay).
5. Deposit or Progress Payments. If the amounts are sizeable and/or the creditworthiness and character of the other party are unproven or questionable, consider requiring a deposit/down payment and/or require progress payments as you incur cost and/or fulfill your end of the bargain.
6. Promissory Note. Financial obligations memorialized in a promissory note have considerable advantages. If the amount is sizeable, get a promissory note signed in addition to the main agreement.
7. Arbitration Clause. Arbitration can be a swifter, thriftier way to resolve disputes. Consider including an arbitration clause in your agreements.
8. Small Claims Court. Most states provide this low-cost way to pursue legal collection of judgments in disputes involving less than $10,000. If you have such an amount in dispute, look into small claims court.
Of course, talk to your attorney before implementing any of these suggestions.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
This publication is intended to provide general information on the subject matters covered. It is sold and distributed with the understanding that neither the publisher nor any distributor or advertiser is engaged in providing legal, tax, insurance, investment or other professional advice. The advice of a qualified professional should be sought before any reader applies a concept presented herein to his or her particular situation or business.
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