Why Contracts Are Important For Small Businesses


Small businesses do a large number of transactions, and while you may not think that's the case for your small business, it likely is. You have vendors who provide you with supplies, software and support services, you may use independent contractors or employees to help your business run, on some level you have customers or clients and other aspects of the business to make sure you're up and running on a day to day basis. These relationships add up quickly, and build the backbone that allows your small business to keep running. All of them also present some level of potential risk, and it's important to take proactive steps to minimize risk where you can. Contracts formalize agreements between the parties, set out roles and responsibilities, can limit disputes and can play an important role in revenue generation, operational efficiency and ensure compliance with regulations. Here are some reasons that contracts are important for small businesses: 

Record the Commitments of Both Parties. Contracts are about relationships, and solidifying those relationships in writing. It allows the parties involved to come together, put their commitments in writing and start off on solid footing with each party having an understanding of their roles, duties and responsibilities. In the context of small business, where it's common for personal and professional relationships to mix, clear documentation can be critical. This makes getting the expectations, timelines, terms, and other important aspects even more important and helpful in reducing the likelihood of misunderstandings and disputes. 

Build Credibility and Trust. A lot of small businesses don't think they need contracts - they know the people they are doing business with, they don't want to be so formal, working on a handshake feels more personal and makes it easier to do business with them. It's possible that is true (but the risks outweigh the rewards), but there are compelling reasons to use contracts as well, on top of the protection it gives your business. A well drafted contract fosters trust and credibility with your clients or customers. It portrays a level of professionalism, shows that you have taken the time to take your business seriously, protect it and protect your clients and customers. This allows third parties to look at your business and feel some level of confidence in working with you, it's tangible evidence of your commitments, and it's a way to build trust and credibility with your partners (be they vendors, contractors, customers or clients) which is important in the early stages of relationship building.

Mitigating Risks and Legal Protection. Small businesses operate in a dynamic and unpredictable environment that is inherently risky. Any steps available to mitigate risks are important and should be taken. Contracts are a great risk mitigation tool for small businesses in several ways: you can clearly define each party's responsibilities, liabilities, remedies in the case of a breach and stipulate how dispute resolution will work. This can save you from uncertainty, disputes and court cases, which means you're saving the business from spending time and money dealing with those issues. 

Strengthening Relationships with Suppliers and Vendors. Small businesses rely on a variety of supplier and vendors to provide their product or service. Contracts with these strategic partners help establish the terms of supply, including pricing, delivery specifications, quality standards and payment terms. Formalizing these agreements allow small businesses to build stronger relationships, negotiate favorable terms and ensure a steady supply of goods and services. These contracts can (and should) include remedies for your business if the supplier doesn't perform or breaches, which provides some safeguards in terms of your business interests and continuing operations. Suppliers, distributors and other partners also play a crucial role in helping small businesses facilitate growth and expansion by scaling up their operations. These agreements can help with consistent supplies or services needed for expansion, access to new markets and strategic alliances. 

Ensuring a Steady Flow of Income. Contracts can be instruments to help small businesses secure consistent revenue streams, in particular for those businesses in service based industries. Service contracts and retainer agreements outline the scope of services to be provided, the frequency of delivery, and fees associated with all of that. This provides clarity to both parties and ensures a steady income for the business, which helps with financial stability, cash flow and steady income. In particular, small businesses in the consulting, marketing, IT and ongoing services sector can benefit from long term or evergreen contracts with clients that lay a solid foundation and provide opportunities for growth and expansion. 

Safeguarding Intellectual Property and Confidential Information. Every small business has some intellectual property, and it's important to be able to recognize it and protect it. Contracts help small businesses protect their intellectual property: trademarks, copyrights, trade secrets and patents. Confidentiality clauses, non-disclosure agreements and intellectual property assignment agreements can be used to specifically safeguard this proprietary information, prevent unauthorized use, reproduction, or disclosure. As a small business your intellectual property is a valuable company asset, it's worth the effort to make sure you're protecting it. 

Enhancing Employee Relations and Accountability. Don't underestimate how valuable contracts can be when it comes to employee relations, compliance and accountability. Internal contracts (ones you use with employees or independent contractors) may be just as important as the external ones you use with vendors, clients and customers. You'll want to establish the terms of employment, roles, duties, responsibilities, compensation, and benefits to name a few things that would go in employment agreements. You can also incorporate some safeguards for the company, such as confidentiality clauses, non-solicitations, non-competes and intellectual property provisions mentioned above. You may also have obligations to comply with labor laws and regulations, so it will be important to address those and prevent issues with non-compliance. These agreements can be an important step in minimizing the risk of legal disputes and employee grievances. 

Contracts are vital to small businesses because they provide clarity, legal protection, credibility, growth opportunities, IP protection, employee relations management, and flexibility to adapt to changing circumstances among other things. By investing in the drafting, reviewing, execution and enforcement of contracts, small businesses can mitigate risks, build trust, and create a solid foundation for long term success, growth and sustainability. 

Have questions about contracts for your small business? Contact us for a free consultation. 


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