New entrepreneurs can get intimidated by the idea of using contracts. You may have lots of questions: Do you need one? How do you make one? What are the steps involved? How do you start? Here’s a look at the basics of contract creation.
Why You Need Contracts
Contracts may seem too complex or expensive for a small business. However, they are an essential tool for protecting and running your company.
When you have a contract, every party understands the agreement. A contract spells out expectations, costs, terms, and conditions. It leaves nothing to chance. If a party disagrees, your contract is the instrument to use for resolution.
Tools to Use
You have several choices of online tools to create, edit, modify and present contracts.
You may have multiple business contracts that contain the same language or terms. Rather than redo entire agreements, you can use this online tool to extract PDF pages and reuse sections of an existing contract. Choose the relevant pages and then make a new, modified PDF for your next contract.
Negotiating a Contract
It is vital to understand your company’s financial health before you get into a contract. Many small businesses overlook this step. One study shows that 82% of small companies fail due to cash flow issues.
Use accounting software to understand your company’s financial health. Accounting software that works for you can help you manage all of your finances in one place and give you real-time insights into cash flow during negotiations.
Ensure that you and the other parties agree on the contract’s main points first. Compile sections for each party to agree upon separately. Developing an all-or-nothing agreement isn’t always possible, but you can probably find some points on which all parties agree.
Make sure you understand your objectives. What elements are the most critical if you can’t get everything you want? The other parties should perform the same examination. Ask questions so that you understand their motives and requirements.
Don’t rush the negotiations if you can help it. Make each step thorough:
- Before drafting the contract, do your research and gather the required documents.
- Take your time and keep your emotions in check during negotiation.
- After negotiations are complete, follow up with questions or complete required tasks.
Creating a Contract
Business contracts need to include specific components. The first is a comprehensive list of all parties. As an example, say you want to build a warehouse. You draw up a contract with the builder, and your business and the construction company are parties.
The next component is each party’s consideration or gain from the agreement. In the example, your business gains a warehouse, and the construction company gains the fee you pay.
Your contract should spell out the obligations and rights of each party. The construction company commits to building the warehouse, and you agree to pay for it.
You would presumably have many other rights and obligations in your contract. You may specify that if the construction company needs to change the warehouse design, it must notify you in advance. Likewise, if you fall behind on payments, you owe interest.
Terms and conditions are also essential. Each party should agree on how to terminate a contract and resolve disputes. You can also nail down specifics such as exact payment amounts and work timeframes.
Contracts are a necessary part of business ownership, but they don’t have to be complicated. Straightforward contracts may not require a lawyer. However, you should seek legal advice if you have any questions about creating a contract.
Article by Corinne Hammond