1. Payment Agreement Basics
2. Beginning the Payment Agreement
3. Explaining the Terms of the Loan: Loan Amount and Rates

A payment contract is essentially a buyer-seller agreement that protects both parties. Once agreed upon, the buyer is obligated to pay the seller, contingent on whether or not the goods or services were delivered as promised. Payment contracts can also cover loan terms, ensuring that both parties have an understanding of what's expected of them. Clearly defining all expectations and terms is imperative to avoid future complications.

Payment Agreement Basics

If you hire subcontractors within your business, it is critical that you create a subcontractor agreement in regards to payment. These payment contracts will be handled differently than regular salary payments. Once a contract is created, this will help protect both parties in that the work agreed upon will be completed and the contractor will be paid.

Beginning any work without a legal contract is not recommended, as a client could potentially request your services and then not pay you in full. In contrast, by creating a legally binding document, you can outline everything from payment rates to deadlines. When everyone is on the same page, this helps to ensure that everything runs smoothly.

If you plan to borrow or lend money, you will require a payment agreement. This will act as a receipt of the loan and helps to prevent any disputes down the road. A payment agreement will be required if:

  • You plan on borrowing money.
  • You are thinking about lending money.
  • You wish to prepare an amortization table.
  • You would like to determine monthly payments and applicable interest.

Although loans contain a vast amount of information, there is no reason why they cannot be simple. When all of the details and terms are organized in one centralized place, this can help reduce the risk of future complications. So, whether you are the lender or borrower, having your terms documented in writing can give you the assurance you need moving forward. After all, agreements can fall apart — so protect yourself!

Beginning the Payment Agreement

When you first create a payment agreement, you should refer to a sample. Use this as a guide to draft your own and make sure that you refer to an industry-specific payment agreement sample. Here are a few steps to follow:

  • Step one: Format your document — Begin drafting your agreement by opening a blank word document. Consider a legible font style and size.
  • Step two: Add a Title — Center your title, either "Loan Agreement" or "Payment Agreement."
  • Step three: Identify the parties — Clarify who is the lender and who is the borrower. The date of the loan should also be stated.
  • Step four: Include your consideration — A loan isn't valid until an agreement is made between the lender and the borrower. State what is expected of each party.
  • Step five: Clarify what services or goods will be included — What is it that you will be providing your client? Once again, this will outline each party's expectations.

Explaining the Terms of the Loan: Loan Amount and Rates

When creating a contract, you and your client will need to agree on a rate. Based on the work you'll provide, will you be paid hourly? Monthly? Per project? If you have this discussion from the start and the clients agree to the payment terms, it is much less likely that you will experience any dispute in the future.

When preparing documentation for a loan, you will first need to identify the loan amount and associated interest rate. If you would like to charge interest on a loan, it is important to research both state and federal laws. For example, you may need to charge a minimum interest rate or else the IRS could interpret the loan as a "gift" in terms of taxation. When writing these terms, make sure to use the appropriate language. For example, "The lender agrees to loan $10,000 to the borrower. The borrower agrees to pay this amount back to the lender in addition to interest payable on the unpaid principal at a rate of 4 percent per annum."

Before you enter any type of agreement that involves finances, it is important that you create a payment contract. Take a proactive approach and practice due diligence. This will ensure that everything runs as expected and that both parties understand their responsibilities.

If you need help with payment contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.