A simple handshake used to be all it took for two individuals or businesses to enter into a legally binding agreement – not anymore!
Today, many small businesses in Nigeria and around the world have opted to protect themselves from losses from broken deals, breach of agreement, etc. by signing legally binding contracts.
The truth is that these contracts do not always have to be bulky and complicated; they just have to contain a few elements like an offer, acceptance, consideration, etc.
Keep reading to learn more about the five contracts your small business needs and how they can help your business grow.
5 Types Of Contracts For Small Businesses
A contract is a legally binding agreement between two or more parties. It is usually in the form of a document that contains agreed-upon terms and conditions under which signed parties must perform.
There are different types of contracts, but these five are important to the growth of small businesses:
1. Business Ownership/Partnership Agreement
When more than one person starts a business, or you buy a business from someone else, it is important to indicate that through a contract.
The ownership/partnership contract indicates the contribution of each partner, their salary and their stake in the business (in case of a partnership).
In the case where the business is bought from someone else, the contract should indicate the agreement to sell and certify the business ownership by the new owner.
The ownership agreement is important to avoid disputes in the future.
2. Loan Agreement
When you apply for a loan, and the bank grants it, the bank would offer a loan agreement for your signature.
This contract shows the terms of the loan: the total amount of the loan, the agreed repayment plan, interest, and penalties for default.
Many small businesses quickly sign these contracts without carefully reading or understanding their implications.
This can be detrimental, especially as most loan contracts are written in the bank’s favour.
3. Sales/Purchase Contract
When a small business owner agrees to offer their goods or service in credit, a sales contract must be signed to protect the business if the buyer defaults.
When the small business owner buys goods from a supplier, it is also important that both parties sign a purchase contract.
The purchase contract would protect the small business if the supplier fails to honour the terms of their agreement.
Say your business enters into a contract with a supplier to supply 200 cartons within two weeks and the vendor defaults, you can sue the vendor for the breach of your agreement and the losses it cost you if you have a purchase agreement.
The sales or purchase contract is important to the small business owner because it helps keep customers, suppliers accountable to the agreed terms.
It also presents important information for comprehensive accounting.
4. Employment Contract
When your small business employs a new staff, they should sign an employment contract.
The employment contracts indicate the rights and responsibilities of the business and the employee. It contains the employee’s salary, responsibilities, confidentiality, etc.
The employment contract clearly defines the duties and benefits to the employee and protects trade secrets and minimizes disputes between the employee and the business.
5. Property & Equipment Lease Contract
Whether you’re leasing a location or equipment, it is important to prepare a lease contract to document the terms your business agreed with the landlord or property owner.
A lease contract would most likely be provided by the owner of the property, where this happens, be sure to carefully go over it before signing.
And where it is not provided, you can draw up one.
It should contain agreed-upon terms like a description of the asset, rental payment, liability for loss or damage, etc.
Having a contract is no longer an option in today’s business world.
Failure to utilize one may expose your business unnecessarily and cause your business to lose lots of money.
The contract is insurance that protects your small business in case of a breach of the agreement.