An Insider’s View by Tom Cavanaugh
Reading all those detailed provisions in the contract with your financing source can be tedious at best. Often the “boiler plate” seems innocuous enough to skip through. However, there are two important provisions in any financing contract that require very close examination. If you look closely at nothing else you must pay attention to:
In our industry the more onerous these provisions are the less likely they are to be discussed. The key words are Watch Out and Read Carefully.
A minimum fee clause requires that the Client pay the financier a certain sum per month. If normal business activity does not produce the required fee amount the Client must make up the difference with cash payments just like any other bill that you receive. This can be a problem and a surprise expense for any company which has even normal sales fluctuations. For a seasonal business this fee can become truly burdennsome when business is at the seasonal low point.
A Minimum Term Clause requires the Client to remain in the contract for a specified period of time. If the Client wishes to terminate the contract before meeting the time clause requirements, for any reason, they can be subject to specific monetary penalties. This can mean that even if you are unhappy with the service or no longer need the lender sooner than anticipated, you must pay the penalties if you leave. The Minimum Term Clause is frequently accompanied by the Termination Notice Clause requiring that the Client hit a specific date and time frame for giving notice that they want to leave that financing source. If the Client does not hit the date/time requirement exactly they can be locked in to the contract or required to pay a significant separation penalty.
All these clauses work together to charge the Client the maximum fee and penalty for wanting to change their financing relationship. For example, if the Minimum Monthly Fee is $2,000 per month and the Client is two months into a one year contract the penalty to terminate could be $20,000 (ten months times $2,000) plus a penalty if the Termination Notice is not given as specifically documented in the financing agreement. These charges are rarely waived.
How do you avoid these problems? Easy, use a financing source that does not require Minimum Monthly Fees or a Minimum Term, a company where you stay for the excellent service not because of the contractual requirements. Premier Trade Solutions, Inc. (PTSI) is such a company.
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