5 Common Mistakes Entrepreneurs Make When Entering into a Contract

Entrepreneurs are bound to form various relationships in the process of creating products, offering services, and establishing a strong customer base.

Thus, they often negotiate contracts to secure favorable terms for both sides, which, when done well, can help the business grow.

However, entering into contracts can be tricky. If you're not careful, it may lead to unfair terms, costly mistakes, legal issues, or even substantial losses.

In this article, we will explore 5 common mistakes entrepreneurs make when entering into business contracts and how to avoid them:

Mistake #1: Not Reading the Contract Thoroughly. 

Some business owners sign contracts without fully understanding them. This can lead to unfavorable payment terms, hidden fees, or penalties that drain resources.

Moreover, this oversight could result in losing important rights, such as intellectual property ownership or agreeing to restrictions that limit your business.

Hence, it’s important to read the fine print carefully before signing. Highlight vague terms, consult a lawyer, and ask questions to ensure fair and reasonable terms for all parties.

Mistake #2: Using Generic Contracts. 

Many people rely on online templates for sales contracts, loan agreements, or business transactions.

While generic contracts can save time, it may also cause issues with mindless use. For instance, copying them as-is can lead to misunderstandings, disputes, or losses, especially if key details like quantities, amounts, or item descriptions are incorrect.

As such, it’s important to tailor each contract to the specific situation. While templates can serve as a guide, it's best to have a legal professional still draft or review each contract before signing.

Mistake #3: Failing to Define Key Terms. 

A single word can have different meanings for different people, especially in contract terms.

For example, "reasonable" may mean different things to different people. If a contract states that goods will be delivered within a "reasonable time" after payment, this could mean a day, a week, or even a month.

Thus, use clear and precise language throughout the contract. Specify complete dates, including time and delivery address. Define key terms upfront to ensure all parties share the same understanding.

Mistake #4: Neglecting to Address Potential Risks and Contingencies. 

Problems are a constant in business, just like change. Ironically, failing to anticipate challenges can lead to serious issues. Yet, some business owners overlook contingency planning in their contracts.

For example, if a contract lacks clear terms on late payment penalties or non-payment procedures, it could lead to cash flow issues or disputes over outstanding amounts.

Therefore, a clear and comprehensive contract is essential. It should outline all terms, including steps to take if a party fails to meet obligations or if unforeseen circumstances lead to a breach.

Mistake #5: Not Seeking Legal Counsel. 

Many entrepreneurs want to do things fast, especially when closing deals. 

However, successful business owners understand that careful planning and legal clarity are key to success. Conversely, rushing into deals can lead to financial losses, bad agreements, or even legal liability.

This is where lawyers come in. They review contracts to ensure transactions are legal and involve legitimate businesses and investors. With their guidance, you can protect your interests and support smooth business growth.

Dealing with Contracts Moving Forward 

Entering contracts can be daunting, but it doesn't have to be. Just ensure everything is clear and defined before signing.

If you encounter vague terms or sentences, consult a trusted legal expert, like a lawyer, to help you understand what you're agreeing to.

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