Contracts – Red Flags to Avoid

Guest post by ​Sierra Skelly

​As a small business owner, you probably deal with business contracts on the regular. While the legal jargon can be tedious to read through, it’s essential to know exactly what you’re agreeing to when signing a contract, particularly if you don’t have the resources to have a lawyer vet it beforehand.

Seeing as contracts are legally binding, carefully reviewing the fine print before signing is crucial. A few small words in a contract can ultimately lead to huge financial damages for a small business. To help small business owners understand what’s in a contract and some warning signs to look out for, we’ve compiled a list of 6 contract red flags to watch out for.

The contracted parties refer to the basic facts within the contract such as the date, time, and parties in the agreement. Although usually resulting from a clerical error, mistakes in contracted parties can be extremely costly once the contract has been signed and is legally binding.

Automatic Renewal Clause

An automatic renewal clause automatically renews the contract unless specifically terminated by one of the parties involved. They can end up costing your business a lot of money in unintended fees and are usually hidden within the fine print of a contract. Be on the lookout for automatic renewal clauses in your business contracts, especially if the contract is for a set time frame or amount of work.

Payment Terms

It’s essential to clearly define the payment terms within a contract. Ensure your contract clearly states the amount, timeframe, and role of each party involved when agreeing on payment terms in a business contract.

Termination Clause

Termination clauses should specify exactly what the reasons for termination would be. Read through the termination clause carefully to ensure that you cannot be terminated without cause or without receiving payment for the work you completed.

Liability and Indemnity

Liability clauses dictate who is responsible in the case that something goes wrong within the contract. Indemnity clauses detail how much the responsible party must pay for the damages. Like construction bonds, the purpose of liability and indemnity bonds is to protect your business from unintended damages. Small business owners should be reading liability and indemnity clauses carefully to ensure that the terms are carefully defined. With these clauses, even a few words can make the difference between a thriving business and a business that goes under.

Non-Competition Clause

A non-compete clause is put in place to protect the intellectual property of a company or private trade secrets. When signing a non-compete clause, you are agreeing not to disclose specific information to external parties. Non-compete clauses are common in business contracts and are not always a red flag, but be sure to read the wording carefully to understand the extent of what you are agreeing to.

Although reading through the fine print of a contract can be extremely tedious, it’s an essential step to protect small business owners from legally binding mistakes. To learn more about contracts and what to watch out for before signing, check out the infographic below which highlights the anatomy of a contract and 10 contract red flags to look out for.

​Author Bio: Sierra Skelly is a creative writer and content marketer from San Diego, Ca. She writes for clients in a variety of industries ranging from personal finance to travel. 

Nancy Gaines

Nancy Gaines is CEO/Founder of Gain Advantages Inc. and has been advising small businesses and Fortune 100 companies how to increase revenues through proven systems for almost two decades. She is a best-selling author and international keynote speaker. Nancy has been named in the Top 100 Productivity Experts to follow on Twitter and has a global podcast downloaded in over 95 countries. Her main focus is creating business processes with actionable steps so her clients achieve more consistency, ease, and ultimate success.