Your company just closed a major deal. Everything is set, the product is delivered, but payment gets delayed. Suddenly, you’re fielding frantic emails and calls, trying to resolve the issue. This isn’t just a headache—it’s a potential legal and financial mess. In fact, late payments can significantly disrupt cash flow and damage business relationships.

As in-house legal counsel, it’s your job to prevent these scenarios. One powerful tool at your disposal is a well-drafted payment agreement. This document can make the difference between a smooth transaction and a prolonged dispute. You can ensure that everyone is on the same page from the start by clearly outlining payment terms, due dates, and penalties for late payments.

In this blog post, we’ll explore the critical elements of a payment agreement, best practices for drafting one, and provide you with a free template to get started. 

What is a payment agreement?

A payment agreement is a legally binding document between two parties that details the terms and conditions of payment for goods or services. It ensures that both parties are clear on the payment terms, which helps to avoid disputes. 

In a payment agreement, you will find specifics such as the payment amount, due dates, and accepted payment methods. It might also include penalties for late payments and procedures for resolving disputes. This clarity helps both parties understand their obligations and rights, reducing the risk of misunderstandings or conflicts.

Why do you need a payment agreement?

You know the value of clarity in any transaction. A payment agreement provides that clarity, laying out the specifics of who owes what, when, and how. It eliminates guesswork and ensures everyone is on the same page.

For the payer, it outlines what they need to pay and when. For the payee, it ensures they know when and how much they will receive. This mutual understanding helps prevent disputes and fosters a smoother business relationship.

In the event of a disagreement, a payment agreement acts as a crucial piece of evidence. It provides a written record of the terms agreed upon, which can be invaluable in resolving disputes. Without this document, it’s often one party’s word against the other, making it difficult to prove what was originally agreed upon.

Also read: Finding Common Ground: How to Resolve Contract Disputes

When is a payment agreement used?

You might not think about payment agreements every day, but they come in handy more often than you realize. They are your go-to tool for making sure everyone knows the deal when money changes hands. 

• Business transactions: When companies buy and sell goods or services, a payment agreement clarifies the terms, ensuring both parties are clear on payment amounts and schedules
• Loans: Whether it’s a personal loan between friends or a formal business loan, a payment agreement outlines the repayment terms, interest rates, and deadlines, protecting both the lender and the borrower
• Freelance work: Freelancers often use payment agreements to detail the scope of work, payment rates, and deadlines, helping to avoid misunderstandings and ensure timely payments
• Real estate: In real estate transactions, payment agreements can cover down payments, installment plans, and final settlement dates, ensuring all parties are clear on financial obligations
• Construction projects: For contractors and clients, payment agreements specify the payment schedule tied to project milestones, ensuring everyone is aligned on when payments are due
• Healthcare services: Medical professionals and patients might use payment agreements to outline payment plans for costly treatments, making the financial commitment clear and manageable
• Retail and e-commerce: Payment agreements can be used for large purchases, detailing payment plans or financing terms to provide clarity for both the seller and the buyer

The benefits of a payment agreement

Understanding the advantages of a payment agreement is key to appreciating its role in fostering clear, reliable, and legally sound financial transactions. Here’s how a well-crafted payment agreement can benefit both parties involved.

#1 Ensures clarity and avoid misunderstandings between parties

A payment agreement lays out all the details of a transaction, making sure everyone knows what to expect. This clarity helps prevent any misunderstandings or confusion about payment terms, amounts, and deadlines.

#2 Provides legal protection and evidence of the agreed terms

Having a written payment agreement serves as a legal safeguard. If disputes arise, this document acts as concrete evidence of what was agreed upon, protecting both parties and providing a clear reference point.

#3 Improves cash flow management for businesses

Payment agreements can specify payment schedules that align with your business’s cash flow needs. By knowing when payments are due, you can plan your finances better, ensuring you always have the funds you need.

#4 Sets clear payment schedules to keep transactions on track

With a payment agreement, payment deadlines are clearly outlined. This keeps both parties on track and helps ensure that payments are made on time, reducing the likelihood of late or missed payments.

#5 Specifies consequences for late payments to enforce compliance

A payment agreement can include penalties for late payments, such as interest charges or additional fees. These consequences encourage timely payments and provide a clear recourse if payments are delayed.

#6 Builds trust and professional relationships

Having a payment agreement shows that both parties are serious and committed to the terms. This professionalism builds trust, fostering stronger and more reliable business relationships.

Who creates a payment agreement?

While either party in a transaction can create a payment agreement, it is often the service provider or lender who takes the lead. As in-house legal professionals, your role is to ensure these agreements are comprehensive, clear, and enforceable, providing robust protection for all parties involved.

#1 Either party in a transaction can create the agreement

In any transaction, either the payer or the payee can take the initiative to draft the payment agreement. The key is that both parties must review and agree to the terms laid out in the document. 

For instance, in a freelance contract, the freelancer might draft the agreement to outline their payment terms clearly, ensuring they get paid on time. Conversely, a client might draft the agreement to ensure the deliverables and payment schedules are explicitly stated, protecting their interests.

#2 Often drafted by the service provider or the lender

Typically, the party providing the goods or services, or the party lending money, will draft the payment agreement. This approach allows the provider or lender to set terms that are favorable and clear to them, ensuring they outline all necessary details. 

For example, a construction company might draft a payment agreement with a homeowner, detailing the stages of the project and corresponding payments. Similarly, a lender might draft a payment agreement specifying the repayment schedule, interest rates, and consequences of default to protect their financial interests.

Also read: Real Estate Contract Management: Best Practices

What to include in a payment agreement

Remember, thoroughness is key. The more detailed your agreement, the less likely you are to run into issues later on.

• Names and contact information of both parties: Start with the basics: the names and contact details of everyone involved. This means the full legal names, addresses, phone numbers, and email addresses. Clear identification of both parties is crucial for legal validity and communication
• Description of the goods or services provided: Next, clearly describe what’s being exchanged. Whether it’s consulting services, a batch of manufactured goods, or a piece of software, detail it out. For services, outline the scope of work. For goods, specify quantities, quality standards, and any other relevant details. The more specific you are, the less room there is for misunderstandings
• Payment amount and due dates: Specify exactly how much money is involved and when it’s due. Break it down if necessary—initial deposit, progress payments, and final amount. Be clear on the due dates to avoid any confusion. For example, you might write, “An initial payment of $5,000 is due upon signing, with the remaining $15,000 due 30 days after project completion”
• Payment methods accepted: List all acceptable payment methods. This could be bank transfers, checks, credit cards, or digital payments through platforms like PayPal or Stripe. Providing multiple options can make it easier for the payer to comply
• Penalties for late payments: Include a section on what happens if payments are late. This might involve late fees, interest on overdue amounts, or other penalties. For instance, “Payments not received within 10 days of the due date will incur a late fee of 1.5% per month on the outstanding balance”
• Dispute resolution procedures: Detail the process for resolving any disputes that might arise. This could include mediation or arbitration clauses, specifying that disputes will be handled outside of court to save time and costs. For example, “Any disputes arising from this agreement will be resolved through binding arbitration in accordance with the rules of the American Arbitration Association”
• Signatures of both parties: Finally, ensure the agreement is signed by both parties. This is what makes it binding. Each party should sign and date the document, and ideally, initial each page to confirm they’ve read and agreed to all terms

Payment agreement FREE template

This payment agreement template has been carefully crafted by the legal experts at SpotDraft to ensure it covers all essential aspects of this type of contract.

How to download the template:

• Click below to navigate to the download page
• Provide the necessary information in the form to help us understand your needs better
• Once you submit the form, the template will be sent directly to your inbox, ready for you to use and customize as needed

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Note: While this template provides a robust framework to start from, it is crucial to tailor the details to your specific circumstances. 

Also read: What is a Business Associate Agreement + Free Template

Best practices for writing a payment agreement

Creating a payment agreement that is clear, comprehensive, and enforceable is essential for smooth financial transactions. Here are some best practices to ensure your agreements are up to the mark:

#1 Use clear and concise language

Using clear and concise language in a payment agreement is essential for ensuring all parties understand the terms. Here are some actionable tips and examples to help you achieve this:

Avoid legal jargon

Legal jargon can be confusing and intimidating. Instead, use plain language that is easy to understand. For example:

• Instead of “heretofore,” use “from now on.”
• Instead of “subsequent to,” use “after.”
• Instead of “in consideration of,” use “because of.”

Be specific and straightforward

Clarity comes from being specific about the details of the agreement. Avoid vague terms that can be interpreted in multiple ways. For example:

• Instead of saying “payments should be made in a timely manner,” specify “payments are due on the first of every month.”
• Instead of “reasonable notice,” specify “a notice period of 30 days.”

Use short sentences and bullet points

Breaking information into short sentences and bullet points makes it easier to read and understand. For example:

• “The payment of $5,000 is due on January 1, 2025.”
• “Accepted payment methods include bank transfer, credit card, and PayPal.”

Define terms clearly

If you need to use specific terms, make sure to define them clearly within the document. For example: “In this agreement, ‘services’ refers to consulting work performed by the provider, including project management, strategy development, and training sessions.”

Provide examples where helpful

Sometimes, an example can make a term or clause much clearer. For example: “Late payments will incur a fee of 1.5% per month. For instance, if a payment of $1,000 is 30 days late, the late fee will be $15.”

Use active voice

Active voice makes your writing clearer and more direct. For example: Instead of “The payment should be made by the client,” use “The client must make the payment.”

Test readability

Use tools like the Flesch-Kincaid readability test to ensure your document is easy to read. Aim for a score that is accessible to your intended audience.

8. Get feedback from non-lawyers

Have someone without a legal background read the agreement. If they can understand it without asking questions, you’ve likely succeeded in making it clear and concise.

Also read: 10 Tips to Maintain Clear Contract Language

#2 Define payment terms explicitly

Defining payment terms explicitly in your payment agreements is crucial for ensuring both parties understand their financial obligations. Clear payment terms help avoid misunderstandings and ensure timely payments.

Clearly state the payment amount 

Specify the exact amount to be paid, leaving no room for ambiguity. For example: "The total payment amount is $10,000."

Set specific due dates

Clearly define when each payment is due. This helps both parties plan their finances accordingly. For example: "The payment of $10,000 is due within 30 days from the date of the invoice."

Detail the payment schedule

If the payment is to be made in installments, outline the schedule explicitly. For example: "The total payment of $10,000 will be made in three installments: $3,000 due on January 1, $3,500 due on February 1, and $3,500 due on March 1."

Specify accepted payment methods

List all the acceptable payment methods to avoid any confusion or delays. For example: "Accepted payment methods include bank transfer, credit card, and PayPal."

Provide bank details if applicable

If payments are to be made via bank transfer, include the necessary bank details. For example: "Payments should be transferred to Account Number: 12345678, Bank: XYZ Bank, Branch: ABC, SWIFT Code: XYZAB12."

State the consequences for late payments

Include penalties or interest charges for late payments to encourage timely compliance. For example: "Payments not received by the due date will incur a late fee of 2% of the outstanding balance per month."

Include grace periods if applicable

Define any grace periods allowed for late payments and specify the conditions. For example: "A grace period of 5 days is allowed for late payments. Payments made within this period will not incur any late fees."

Make terms easy to locate and read

Ensure the payment terms are prominently displayed in the agreement, using bullet points or numbering for clarity.

Example:

Original: "The client agrees to pay the total amount in a timely manner."

Revised: "The client agrees to pay the total amount of $10,000 within 30 days from the date of the invoice. Accepted payment methods include bank transfer, credit card, and PayPal. Payments should be transferred to Account Number: 12345678, Bank: XYZ Bank, Branch: ABC, SWIFT Code: XYZAB12. Payments not received by the due date will incur a late fee of 2% of the outstanding balance per month. A grace period of 5 days is allowed for late payments."

#3 Outline penalties for late payments

Outlining penalties for late payments in your payment agreements is essential for ensuring timely compliance and maintaining financial stability. Here’s how to effectively specify these consequences:

Specify the late fee amount or percentage 

Avoid ambiguity by stating the exact amount or percentage of the late fee. For example, “Payments not received by the due date will incur a late fee of 2% of the outstanding balance per month.”

Define the application of late fees 

Clearly explain how and when the late fees will be applied, whether on a monthly, weekly, or daily basis. For example, “Late fees will be calculated monthly on the remaining unpaid balance.”

Include interest charges for prolonged 

delays For longer payment delays, specify interest charges to compensate for the lost time value of money. For example, “In addition to the late fee, an interest charge of 1% per month will be applied to any balance outstanding for more than 60 days.”

Set clear grace periods and conditions 

If you offer a grace period, specify its length and conditions. This provides a buffer for slight delays but ensures penalties for significant tardiness. For example, “A grace period of 5 days is allowed for late payments. Payments received after this period will incur the full late fee.”

Outline steps for escalating penalties 

Specify how penalties will escalate with continued non-payment. This could include additional fees, legal action, or suspension of services. For example, “If payment is not received within 30 days of the due date, an additional penalty of $100 will be applied, and services may be suspended until payment is made.”

Provide a clause for exceptional circumstances 

Include a provision that allows for flexibility in exceptional circumstances, such as natural disasters or unforeseen personal hardships. For example, “In the event of extraordinary circumstances beyond the payer’s control, late fees may be waived upon mutual agreement.”

Communicate penalties clearly in the agreement 

Ensure the section on late payment penalties is easy to find and understand. Use headings, bullet points, and clear language. For example, “Late Payment Penalties: Late Fee: 2% of the outstanding balance per month. Interest Charge: 1% per month for balances over 60 days. Grace Period: 5 days.”

Also read: What is Contract Compliance? The Ultimate Guide

#4 Regularly review and update the agreement

Reflect any changes in the business relationship or regulatory environment. Business needs and legal requirements can change, so it’s essential to review and update agreements periodically. Set a reminder to revisit the agreement every six months or annually.

Reflect changes in the business relationship

Over time, the nature of your business relationships may change. These changes could include adjustments in payment terms, new services or products, or shifts in responsibilities. Regularly reviewing your agreements allows you to update these terms to reflect the current state of your business interactions. For example, if your company starts offering a new service, you should update the payment agreement to include terms specific to that service.

Stay compliant with regulatory changes

Laws and regulations affecting payment agreements can change. It’s essential to stay informed about these changes to ensure your agreements remain compliant. Regular reviews help identify any legal updates that need to be incorporated into your agreements. For instance, new consumer protection laws might require changes in how payment terms are communicated or enforced.

Set periodic review reminders

Establish a routine for reviewing your payment agreements. Setting reminders every six months or annually ensures you don’t overlook this important task. Tools like calendar alerts or project management software can help you stay on schedule. For example, you can set a recurring reminder in your calendar for January and July to review all active agreements.

Use a checklist for reviews

Develop a checklist of key elements to review in your agreements. This can include checking for compliance with current laws, ensuring all terms are still relevant, and verifying that contact information is up-to-date. A systematic approach ensures that no critical aspects are missed. For example, your checklist might include items like verifying payment due dates, reviewing penalty clauses, and confirming dispute resolution procedures.

Note: You can also download this contract review checklist to get started quickly. This will save you the time and effort to build your very own.

#5 Use technology to manage contracts

Leveraging technology to manage contracts is a game-changer for in-house legal teams. Implementing contract management software like SpotDraft can streamline the entire lifecycle of payment agreements, from creation to execution and monitoring. Here’s how you can maximize the benefits of using technology in your contract management processes:

• Streamline drafting. CLM systems provide templates and automated tools that simplify the creation of payment agreements. SpotDraft, for example, offers customizable templates that ensure all necessary clauses are included. This not only speeds up the drafting process but also ensures consistency and compliance with legal standards
  
  
• Centralize document management. Managing multiple payment agreements can be challenging, especially as your business grows. CLM systems centralize all your agreements in one place, making it easier to organize, access, and manage them. With SpotDraft, you can store all your payment agreements in a secure, searchable repository, ensuring that you can quickly find and review any document when needed
  
  
• Automate reminders and notifications. One of the key benefits of CLM systems is the ability to automate reminders for important dates and obligations. SpotDraft can send automatic notifications for payment agreement renewals, terminations, and other critical deadlines. This helps ensure that you never miss a crucial date, maintaining compliance and avoiding potential breaches due to oversight
  
  
• Enhance collaboration. CLM systems facilitate collaboration between legal teams, stakeholders, and external parties. With SpotDraft, multiple users can collaborate on drafting and reviewing payment agreements in real-time, streamlining the approval process and ensuring that all relevant input is considered
  
  
• Ensure security and confidentiality. Protecting the confidentiality of your payment agreements is crucial. CLM systems like SpotDraft provide advanced security features, including encryption and access controls, to safeguard your documents. This ensures that only authorized personnel can access sensitive information, maintaining the integrity and confidentiality of your payment agreements

Interested in giving SpotDraft a shot? 

Book a demo!

Start your payment agreements with ease

Having a solid payment agreement in place is crucial for ensuring smooth financial transactions and protecting the interests of all parties involved. It sets clear expectations, outlines responsibilities, and provides a legal framework that can help prevent disputes.

Feel free to download and customize the free template provided in this post to create your own payment agreements. This template will help you establish clear, enforceable terms that are easy to understand and follow.

Download the template

For more detailed assistance and legal advice, don’t hesitate to reach out to us. Our platform can help streamline your contract management process, ensuring your agreements are always compliant and up-to-date. Happy drafting!