Small businesses use contracts to protect themselves as they work with other businesses. These documents outline the responsibilities of both parties and set the standards for what happens if the contract isn’t followed.
When one party doesn’t meet its obligations, the wronged party can have significant negative impacts.
Financial losses and operational disruptions
The most immediate effect a small business may feel when a contract breach occurs is the financial impact. When vendors don’t deliver goods or clients don’t pay, the business could be left with a strained cash flow. The company’s deliverables could be delayed because of that lack of cash flow, which can damage relations with customers.
Breaches can throw off project timelines, reduce productivity and force you to redirect staff or resources. For small businesses that run lean, even a brief delay or added cost can have an outsized effect.
Damage to reputation and client trust
Breached contracts can lead to a damaged relationship for both businesses. A broken contract can leave the wronged business unable to meet customer expectations. Word travels fast, so what begins as someone else’s failure to perform ends with the company being recognized as unreliable.
Legal and administrative burdens
Contract breaches often mean diving into legal processes that can take time and money. The effort can refocus the owner’s focus away from growing the company. This can lead to immediate and long-term harm to the company. In some cases, this can lead to the company having to turn to litigation to resolve the contract breach.