Long-term contracts lure signing parties as such contracts provide a stable flow of income to one party and supplementary benefits to the other party. Long-term contracts usually feel more beneficial to the parties. But that’s not the case for every situation. Long-term contracts and short-term contracts have their pros & cons, and one may sign a deal according to the business nature.
In this article, we will help you to differentiate between long-term and short-term contracts and let you choose the best one for your business.
Difference between Short-term contracts and Long-term Contracts
A contract of up to six months is known as a short-term contract, while a contract of up to twelve or more months is understood as a long-term contract. But there are many other factors to differentiate these two contracts besides the time scale.
Long-term contracts are signed between two parties for a project which needs time, consistent attention, and standardized working strategies for a specific period for conversions, quality, and successful completion.
Setting up a social media campaign strategy for a global company, designing a new green city, or becoming part of the supply chain for a multinational tech company are a few examples of projects that need long-term contracts for their successful completion.
While, short-term contracts provide flexibility to the signing parties overtime duration, terms, and liberty to leave. An agreement for logo designing, auditing, and movie making are some examples of short-term contracts from varying fields.
Pros of Long-term Contracts
Long-term contracts are an opportunity for both signing parties to get strategic benefits from the specific circumstances and instance in time. We have listed a few notable benefits for signing a long-term contract,
- Time – Time is money, and time is key to success. Long-term contracts get plenty of time for your company, time to study and understand your client’s needs, pinpoints, and goals for long-term strategy. No matter how experienced your company is, it needs time to decipher the needs and long-term goals of the client’s company.
- Money – Money is what we need to run a business to earn money. Long-term contracts provide you with a stable flow of income for years. Long-term contracts enable businesses to survive, earn, learn and grow.
- Business-friendly environment- Long-term contracts empower you to build a trustworthy and long-lasting relationship with your clients. Such warm relations provide you with a pressure-free environment to enjoy the work. Besides that, such clients recommend your company to their colleagues and ultimately increase your business.
- Multiply revenue – Long-term deals enable you to identify the client’s needs and pain points. You can cash your warm relation with clients by offering your services to solve their crucial problems. Ultimately, this lets you earn extra money and increase your revenue.
Cons of Long-term Contracts
There are downfalls too for entering into a long-term contract. You may need to thoroughly read the client proposal and agreement terms before signing a long-term contract. Otherwise, a misfit client can waste your time and resources.
We have listed down a few of the vital downfalls of entering into a long-term contract.
- Immature Clients – You may stick in an agreement with an immature client. Who always expects more than what is agreed between two parties. Such clients waste your time bargaining on prices each time. And the bad news is that you have to work in such an unfriendly and hectic environment for years because of the long-term contract.
- Shrinking- If the client’s proposal doesn’t click you, then keep your company away from the long-term contract as such contracts can be brutal for your company. Such deals will take your all resources and time, and ultimately your company will not be able to sign more contracts and grow. Singing a long-term contract with a misfit client will shrink your company revenue.
Pros of Short-term contracts
Short-term contracts are not bad. There are situations where short-term contracts can be more beneficial. We have listed down a few vital short-term contracts benefits below,
- Competition – The renegotiation opportunity and the increasing number of tenders create high competition for short-term contracts. This competitive environment gets you lower costs as compared to long-term contracts.
- Flexibility – Short-term contracts are way more flexible than long-term contracts. Short-term contracts provide you the privilege to leave a client after one bad experience and the liberty to renegotiate the prices according to varying conditions.
- Learn & Grow – Short-term contracts earn you time to learn new skills and experience unique strategies to grow your company faster than ever.
- Lower Transactional Cost – Short-term contracts have simple legislation, smaller period & tasks, and reviewed prices mechanism. All these scenarios cause much lower transactional costs as compared to long-term costs.
Cons of Short-term Contracts
There are some drawbacks to signing short-term contracts as listed below,
- Short period – Short-term contracts generally need fast-paced work routines to meet the deadlines. Sometimes you may fall into a time trap where it may be impossible to complete the provided tasks in such a short time duration.
- Time to re-evaluate contracts – Short-term contracts need to be renewed after specific time intervals. To bid for the renewal, companies need to spend plenty of time with multiple vendors for getting the best prices to design a winning bid. Such unproductive activities waste companies’ precious time and resources for each renewal.
- Smaller Scope – Short-term contracts have a smaller scope and force you to put catchy offers off the table. Short-term contracts’ strict time routines do not allow you to focus on new opportunities, and ultimately a company rounds in a circle instead of growing its financial worth.
Are you still confused to go with long-term or short-term contracts? You may compare the weight of pros & cons of both contracts for your company to choose the best one.
For instance, we suggest you go for a short-term contract with new clients. Short-term contracts’ lets you understand clients’ need and working strategies. This will ultimately help you win clients’ trust for a healthy working relationship.
After the successful completion of a short-term contract, you can go for a long-term contract without any hesitation. While signing a long-term contract, prepare a thoroughly described agreement with clear milestones payments to avoid any misunderstandings.
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