It is common for a business to be approached by a client that is performing work for its own client, and needs materials, parts, equipment or services in order to complete its contract.
There is nothing wrong with taking on work as a subcontractor, independent contractor, supplier, or in another capacity that will allow your customer to serve its client. However, if you're not careful when negotiating your contract with your customer, you may find that you have agreed to payment terms that are exceptionally unfavorable to you.
A common and highly problematic example is where the customer's contract provides that no payment is due to you until after its own customer has paid in full.
If you agree to that condition, you may find yourself waiting for payment long after you have provided goods or services, perhaps at considerable expense to yourself or your company. You may even find that your customer is not going to pay you, but due to the terms of the contract that you have no recourse to collect payment.
Their Customer is Unhappy: Their customer may be unhappy with your customer's products or services and decline to pay;
They Underperformed: Their customer may have a legitimate grievance with the quality of the goods or services they provided;
Their Customer is a Slow Payer: Their customer does not prioritize paying its bills, causing significant delay in payment to you;
Their Customer is Paying Over Time: Their customer may have agreed to make payments over a considerable period of time, but with your customer owing you no payment until their own customer's payment plan is completed; or
Their Customer is Insolvent: If their customer has poor cash flow, goes out of business or declares bankruptcy, your customer's bill may never be paid.
It's easy to see why your client or customer would include that type of payment clause in its contract, or why you might want to use that type of clause with your own contractors and suppliers. But if you accept that type of contract language you may find that you are waiting a very long time to receive money that your business desperately needs, or that you never recover a penny for your goods or for the work you performed.
Whenever you are offered a contract by a prospective customer or client, you need to review its terms carefully to make sure that you're not agreeing to provisions that will allow your customer to unreasonably delay or even avoid making payment to you based upon conditions that you cannot control.
- You should have a contract of your own that you can offer to clients that provides appropriate protection to you, including appropriate terms for payment of your invoices.
- If you do agree to a contract that puts you at risk of a late payment or nonpayment, make sure that you understand the risks that you are accepting and can afford the financial loss that you may incur.
It will most often be better to negotiate for different payment terms or, if that fails, to decline to do business with the prospective customer. After all, if they're confident that their own customer is going to make timely payments, they should not have a problem providing you with assurances that you will be paid within a reasonable time after you deliver your goods or complete your services for their client.