A poorly drafted contract is more than a legal headache. For a small business, it is a direct threat to cash flow and operational survival.
Many African founders sign agreements based on trust or the urgency to secure a large client. This often leads to terms that favour the stronger party and leave the SME vulnerable.
Payment terms and cash flow
The most immediate risk for an SME is the payment cycle. Large corporate clients often insist on “Net 60” or “Net 90” payment terms.
For a small team, this creates a dangerous gap. You pay for labour, materials and overheads today, but receive payment three months later.
This mismatch can trigger a liquidity crisis even when the business is growing. It forces founders to seek expensive short-term loans to cover operating costs.
To mitigate this, negotiate milestone payments. Break the project into phases where payment is triggered by a specific delivery rather than a calendar date.
Scope creep and margin erosion
Vague descriptions of deliverables lead to scope creep. This happens when a client requests “small additions” that were not in the original price.
Consider a Nigerian digital agency hired to build a website. If the contract says “website development” without listing specific pages and features, the client may demand endless revisions.
Each unplanned hour of work erodes the profit margin. Eventually, the SME may find it is paying to work for the client.
Ensure every contract includes a specific “Out of Scope” section. State clearly that any work outside the defined deliverables will be billed at a predetermined hourly rate.
Liability and termination traps
Liability clauses determine who pays when things go wrong. A common mistake is agreeing to “uncapped liability.”
This means the SME could be held responsible for damages that exceed the total value of the contract. One mistake could potentially bankrupt the company.
SMEs should push for a liability cap, typically limited to the total fees paid under the contract or the limit of their professional indemnity insurance.
Termination clauses are equally critical. Avoid contracts that allow a client to terminate “for convenience” without a notice period or a kill fee.
Without these protections, a business can lose its primary revenue stream overnight with no time to pivot or recover costs.
Action for SME owners: Review your three largest active contracts today. Identify any uncapped liability clauses or payment terms exceeding 30 days and prepare a request for an amendment or a new service level agreement.
