News

April 21, 2011

“Handshake agreements” costing firms money

Businesses are losing out on money by relying on “handshakes” rather than written contracts when making agreements with clients, credit-checking service Creditsafe has warned.

A Creditsafe study of 600 businesses of all sizes found that 47 per cent have lost money in the last 12 months as a result of trading with another business without putting a signed contract in place, or failing to carry out due diligence.

A Creditsafe spokesman said that small firms in particular tend to rely on handshakes or informal agreements. “This can lead to them not getting paid at all for their work, or it just drags out because they don’t have a contract to say when they need to be paid by,” he said.

“In addition, those that don’t check up on clients – for example, by checking they have a valid business address, or verifying their financial history with Companies House or a credit checking agency ? leave themselves vulnerable to fraud.”

He added that small firms often have tight resources and focus on keeping clients happy and generating sales rather than protecting themselves. “They should take time out of the business to check up on the customers they are dealing with and to draw up terms and conditions as this will be cost-effective in the long run,” he said.

Small-business owner Helen Hammond, founder of marketing consultancy Elephant Creative, said that it can seem expensive for a small firm to draw up contracts with clients.

“It costs a few hundred pounds to get proper contracts drawn up by a solicitor, which seems like a lot to a small firm, but in the grand scheme of things over the course of how much business I do in a year it’s a small price to pay,” she said. “I would also say that although there are contract templates online, it is well worth paying a solicitor to make your contracts directly applicable to the work you do.”

She added that start-ups often feel uncomfortable asking clients for formal agreements.

“When I first set out I felt like clients were doing me a favour by giving me work, and I didn’t want to hack them off by asking them to sign contracts,” she added. “I used to just have an email trail showing what we’d agreed, but once a client queried the final bill and I was unable to find the relevant emails. So I lost out. Having proper contracts protects you financially as well as protecting your intellectual property, and it will mean that clients take you more seriously.”

• For more information on contracts, visit the Law Donut guide to business contracts