How-to guide: How to manage the risk of contracting with a company in financial difficulty (UK)

Introduction

This guide provides an overview of the risks to consider and key contractual clauses to include when negotiating and drafting a contract with a company in financial difficulty and steps to take to try and futureproof contracts from the consequences of the other party going into financial difficulty. It is drafted from the perspective of both the supplier and the customer.

This guide covers:

Risks of contracting with a company in financial difficulty
Managing suppliers in financial difficulty
Managing customers in financial difficulty
Strategies for avoiding risk: how to try to futureproof supplier arrangements
Strategies for securing prompt payment from customers

This guide can used in conjunction with the following How-to guides: How to draft a business continuity plan and How to create a supplier code of conduct and Checklists: What to consider when terminating a contract and Supplier contracts and unforeseen events.

Section 1 - Risks of contracting with a company in financial difficulty

1.1 Risks to suppliers

The most obvious risk to a supplier when contracting with a customer in financial difficulty is that the customer will be unable to pay for the products or services supplied. While large suppliers can often continue to operate with several debtors, for small suppliers, failure by just a single customer to pay for a significant contract could lead to the supplier ending up in insolvency.

1.2 Risks to customers

Customers will be concerned as to whether the supplier can deliver the products, or perform the services, required to meet its ongoing obligations under the contract. For example, if the supplier has its own cash flow issues but uses sub-contractors for the products it sells or services it performs, this can have a knock-on effect and may lead to late onward payment of those subcontractors/suppliers. This in turn may influence production and the subsequent delivery of orders or performance of services. A key indicator that a supplier might be experiencing financial difficulties is failure to deliver orders on time, or failure to perform the services.

Risks associated with a supplier failing to deliver include delays to a project if the supplier is providing services or products that form part of a programme of work or specific project. This has the potential to lead to the customer suffering financial losses due to the need to demobilise its existing supply chain and to seek alternative resources, reputational damage if the customer is prevented from fulfilling its own obligations, as well as the time and cost of internal resources in order to more closely and more frequently monitor the supplier’s activities, as well as general disruption to the customer’s business as a whole and to its other operations.

Section 2 - Managing suppliers in financial difficulty

Unless a supplier is contractually required to provide financial reporting, the customer may often be unaware of any financial distress that its supplier may be experiencing until it is too late. Performance issues are normally indicative that a supplier may be in financial distress, for example, failure to deliver goods either on time or at all, failure to show up to perform services or only to partially perform the services, as well as if the supplier is forced into insolvency proceedings. It is important to prepare strategies in advance to deal with such situations to minimise the potential risks.

2.1 Reviewing the contractual rights

Financial difficulties are often discovered through an investigation into a performance and/or delivery issue. If a supplier is failing to reach an expected level of service or delivery, the first step for the customer is likely to involve reviewing the terms of the contract to determine what its potential remedies are and/or seeking adjustments, if appropriate. A typical review might include consideration of the following:

2.1.1 Term and termination clauses

Whilst termination is unlikely to be the first course of action chosen by the customer, it is worth considering upfront what the options are in case other courses of action prove unsuccessful. One of the most extreme courses of action is likely to be terminating the contract altogether.

The parties to a contract will typically have the right to immediately terminate the contract if the counterparty experiences an insolvency event and/or breaches the contract (for example, failing to deliver goods or to perform services in accordance with the contract). However, this may not be a helpful remedy for a customer suddenly left without a supplier for a particular product or service – especially if there are few alternative suppliers and/or the product or service is critical to the customer’s ongoing operations. In such circumstances, the customer may wish to consider alternative options that enable the supplier the opportunity to fulfil its obligations, for example, extending the time by which a product is to be delivered or a service performed, and a provision for the parties to be able to jointly discuss and develop a remediation plan to address issues the supplier may be encountering and how the parties may be able to continue working with each other. In the short term, this may require additional financial outlay and time on the customer’s part but could potentially result in the best outcome for its business if it is still able to continue to function and to provide goods/services in accordance with its own commitments to its customers.

2.1.2 Payment terms

To minimise risk, the customer should check whether the payment terms are particularly onerous for the supplier. Adjustments to the payment terms may assist in mitigating risk to the supply chain. For example, onerous payment terms of up to 180 days can present challenges for a supplier if they are experiencing difficulties managing cash flow. Therefore, agreeing terms that are more favourable to the supplier (but that still work from an operational perspective for the customer) may reduce the risk of lack of supply.

2.1.3 Liquidated damages provisions

Consider whether the contract provides the right to impose liquidated damages for late or non-delivery of goods/services and check whether these have been claimed or whether there are any contractual provisions which provide that the supplier is relieved from its obligations in certain circumstances. For example, specific circumstances deemed to be beyond the supplier’s control may have been excluded from the obligation to pay liquidated damages. Even if the customer is entitled to claim liquidated damages from the supplier, as a gesture of goodwill the customer may decide not to do so as, in some cases, financial hardship could further affect the delivery of the goods/services. If this is the case, it is advisable to set out in writing what specific rights are being waived (and any conditions that apply to the giving of such a waiver), as well as reserving all other rights. Be careful to ensure that rights are not being waived generally across the entirety of the contract, but are specific to the relevant performance issue, as well as to clearly state that no waiver should be deemed to apply as a general waiver if the same issue occurs in the future.

In Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Ltd v Beavis [2015] UKSC 67, [2016] AC 1172, the UK Supreme Court ruled that liquidated damages must not be out of proportion to the legitimate interest of the party claiming them. If the amount is more like a penalty rather than fair compensation, the court will likely strike it down. Specific legal advice should be obtained, particularly where the contract is unclear on the basis for calculation of liquidated damages. See also the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015.

2.1.4 Service credit entitlement

If the contract provides for the customer to have the right to apply service credits against any payments due to the supplier, or for the supplier to provide a refund for any service credits, check whether they have been applied. As with liquidated damages, the customer may decide to waive its rights to claim service credits (or to extend an existing grace period) if it feels that such sanctions will have a further negative impact on the supplier’s performance. However, it is advisable to ensure that, in return, the supplier has committed to restoring performance to the customer’s expected levels.

2.1.5 Limits of liability and exclusions

Check whether there are any financial caps on liability (or other exclusions) in relation to financial remedies that the customer may have for delays by the supplier in performance. If the customer has made provision for liquidated damages in the contract, there may be a cap on the maximum amount of liquidated damages that the supplier is required to pay. It may also be possible that liquidated damages are expressed in the contract to be the customer’s sole remedy for the supplier’s delay, which could limit the customer’s ability to recover compensation for any losses it has incurred due to the supplier’s delay. In Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, the court confirmed that such caps and exclusions will generally be upheld if clearly drafted and reasonable under the law.

2.1.6 Step-in rights

If the contract provides for step-in rights, check whether it would be beneficial to exercise such rights. As set out in section 4.6 below, different step-in rights may be available depending on the nature of the contract and the potential risks that the customer has sought to mitigate through step-in rights. The customer may feel it necessary to take full control of the performance of the services and to take the place of the supplier. Alternatively, it may be appropriate simply to manage the supplier’s performance more closely by requesting regular updates on progress.

2.2 Practical ways to relieve financial pressure on suppliers

2.2.1 Granting relief from financial remedies

If the reason for the supplier’s failing performance is financial difficulty, the customer exercising rights such as the imposition of service credits and claiming liquidated damages is likely to place further financial strain on the supplier. If the customer does not have ready access to an alternative supplier, consider practical ways to alleviate the situation. For example, temporarily waiving the right to impose financial sanctions on the supplier, or rescheduling payments due to the supplier so that payment is paid more promptly for goods supplied or services completed in order to help their cash flow. If there has been an agreement on a payment schedule based on a series of milestones, consider whether it may be appropriate to introduce interim payment milestones to the original schedule.

2.2.2 Taking charge of sub-suppliers

In extreme circumstances – for example, where sub-suppliers are threatening to cease work on a project or have made clear that they are not being paid on time, the customer may need to request agreement from the supplier so that the customer can take control of onward payments to sub-suppliers or be able to contract with them directly. In practice, this scenario is unlikely to arise very often in relation to established suppliers. It is more likely to arise where a supplier is experiencing an unforeseen event. For guidance, see Checklist: Supplier contracts and unforeseen events.

2.3 Monitoring key suppliers

Keep up to date with the business pages of the national press and follow market reports online to monitor key suppliers to be able to be in a better position to get an early warning of possible financial difficulty. If the customer suspects that a supplier is experiencing financial difficulty, it can sometimes be helpful to check the company register on the Companies House website to see whether there are any notices concerning its financial status.

If the supplier’s performance is not yet affected by its financial circumstances, consider taking the following steps to safeguard the customer’s business:

ensuring more regular (but perhaps smaller) deliveries of goods or perhaps temporarily reduced requirements for services so that at least the arrangements are partially fulfilled, if not all;
putting in place alternative or back-up supplier arrangements;
developing a financial distress continuity plan setting out in detail how the supplier will continue to perform its obligations under the contract. This might include temporary changes to contractual terms concerning payment and the application of service credits in return for an agreed set of actions on the part of the supplier;
introducing additional measures to monitor the supplier’s financial status, such as increased frequency of financial reporting; and
exercising any enhanced monitoring or audit rights the customer may have.

While it may not be possible to renegotiate the terms of the existing agreement, the supplier should comply with reasonable requests for information to enable the customer to the situation. Further details as to how to futureproof supplier arrangements to manage the risks of contracting with a company in financial difficulty are set out in section 4 below.

Section 3 - Managing customers in financial difficulty

From a supplier’s perspective, when contracting with new customers it knows to be in financial difficulty, it is advisable to adopt a cautious approach from the outset.

When a longstanding or key customer experiences financial difficulty, a supplier may take a commercial decision to alleviate the difficulty to maintain the relationship. For example, the supplier may consider extending payment terms or waiving interest on late payments on an interim basis, to ease cash flow for its customer.

Issues to consider as a supplier include the following:

3.1 Term and Termination clauses

Similarly to the position for the customer (as set out above at section 2.1.1), whilst termination is unlikely to be the first course of action chosen by the supplier, the supplier may want to consider what options it has to terminate alongside or instead of its other remedies (or other possible means of recourse).

Commercial contracts typically contain mutual termination rights, for example, for a party’s insolvency and/or breach of contract (such as, from the supplier’s perspective, failure to pay). However, this may not be a helpful remedy for a supplier suddenly left without payment and/or without customers. As a result, the supplier may wish to consider alternative options that afford the customer the chance to rectify the position, for example, extending the time by which payment must be made for the product/service before the supplier will exercise its right to terminate, or developing a plan with the customer that seeks to address any issues the customer may be experiencing. This may encourage customer loyalty which is useful if the customer does not then enter insolvency and becomes financially buoyant.

In addition, the ability to terminate for insolvency has been altered by the Corporate Insolvency and Governance Act 2020 (CIGA). Where CIGA applies, any supplier of ‘essential supplies’ (such as gas, electricity, water, IT goods and services, and communications, set out in more detail in CIGA) to an insolvent entity is restricted from terminating the contract, refusing to supply or making unfavourable changes to the relevant supply contract once the entity has entered insolvency proceedings. CIGA does not apply to certain categories of entities (mainly financial services entities) because restrictions on actions that can be taken by those entities in insolvency situations as service providers or as customers of third-party suppliers are set out in their own regulatory obligations.

CIGA does however contain provisions enabling suppliers restricted from terminating contracts for insolvency to be paid for the goods and services they supply during the insolvency process.

In case of uncertainty as to whether CIGA applies, seek advice from suitably qualified legal counsel.

3.2 Payment terms

Ensure that payment terms agreed with customers do not create a cash flow burden for the supplier’s business. For some services, such as software, it is common for the supplier to receive annual payment upfront in advance of a subscription year. However, for some other services (and for software that is used on a consumption basis, as many SaaS services are), payment is typically made in arrears based on actual use during the relevant period.

If a customer insists on payment terms that place a cash flow burden on the supplier’s business (eg, requiring a long period of time to settle payment), ensure that the cost to the supplier of managing its cash flow is considered in its pricing arrangements for that customer. The cost of any cash flow management tools may already be included in the supplier’s general overhead costs, but the supplier may need to calculate the cost of any short-term financing arrangements in support of significant value contracts where it is not possible to negotiate ideal payment terms to suit its cash flow needs.

Some customers offer factoring arrangements whereby a third-party provider settles the supplier’s invoice on their behalf, to enable the supplier to receive payment sooner than the contracted payment terms would allow. However, there is a cost for receiving payment in this way, which should be factored into the supplier’s pricing. A factoring arrangement works as follows:

The supplier provides goods or services to customers
The supplier invoices its customers for the goods or services
The supplier ‘sells’ the raised invoices to a factoring company
The factoring company pays the invoices minus a fee for its services
The factoring company proceeds to obtain payment for the invoices from the customers

To reflect the cost of this arrangement, the supplier will need to calculate the fee of the factoring company and increase its pricing accordingly. Depending on the nature of the factoring agreement, the supplier may receive the majority but not all the amount of the invoice when submitted and/or within the supplier’s preferred timeframe. However, for smaller companies, receiving most of the payment due (if not all) can make a significant difference to their ability to manage cash flow efficiently, and a factoring service often costs less than a commercial loan arrangement, particularly if it is a short-term requirement.

Separately, the supplier may also include a right to charge interest on late payments. In practice, such rights are often waived as a gesture of goodwill if the delay is relatively short, to preserve the relationship with the customer. Any interest rate stipulated in the agreement will override any statutory rate of interest on late payments which would otherwise be claimable under the Late Payment of Commercial Debts (Interest) Act 1998 which currently stands at 8% plus the Bank of England base rate. It is common for the parties to a contract (particularly the customer or paying party) to agree on a rate that is significantly lower than the statutory rate.

3.3 Debt recovery

If the customer fails to pay the supplier’s invoices and there is no justification for withholding payment, there may come a point at which the supplier decides to issue a formal demand for payment. If the debtor is a limited company, consider issuing a statutory demand for payment pursuant to the Insolvency Act 1986.

This process is suitable only where the debt is a known and undisputed amount. It is not advisable to use this process where there is a genuine dispute about the amount owed, as the customer could apply to have the demand set aside; if it succeeds, not only is the supplier left without having recovered the debt from the customer, this may also result in the supplier having to pay the costs of the application.

A statutory demand for payment notice has serious consequences for the customer and is not a step to be taken lightly, as it is likely to create difficulties in the relationship with the customer.

The customer must respond to the notice by a set deadline. If it fails to do so, the supplier has the right to make an application to have the customer entity wound up.

Depending on the amount owed, the supplier may decide against incurring the cost of engaging debt recovery agents and instead choose to write off the debt, deciding instead to terminate its contract with the customer. The choice will normally be based on all relevant factors at the time including the strategic (or other) value of a continuing relationship with the customer, the supplier’s cash flow, and any reputational considerations.

3.4 Limits of liability and exclusions

Check whether there are any financial caps on liability (or other exclusions) in relation to financial remedies that the supplier may have for delays by the customer in performance or payment for goods/services. Typically for delay in payment (and general liabilities), it is common for a customer to limit their liability to the annual value of the contract.

3.5 Suspension rights

Consider whether the supplier has the ability to suspend performance of certain of its obligations pending payment by the customer. If this is the case, it may be helpful to either suspend the performance or to remind the customer of this beforehand as it may encourage them to make prompt payment, depending on the circumstances and their ability to pay.

3.6 Retention of title clauses

It is common for suppliers to include a retention of title clause in their customer contracts; this type of clause provides that title (or ownership) to the goods is retained by the supplier until it has received payment for the goods. If there is such a clause in the contract, the supplier may have the right to repossess the goods (possibly also with a right to enter the customer’s premises in order to be able to repossess the goods). Specific legal advice should be sought on this point before exercising any right of entry or repossession.

Section 4 - Strategies for avoiding risk: how to try to futureproof supplier arrangements

The measures that a customer chooses to put in place to safeguard its business when contracting with new companies will depend on the nature of the product/service provision and the consequences of disruption to the delivery of those products or performance of those services if the supplier subsequently experiences financial difficulties. For guidance on drafting a business continuity plan see How-to guide: How to draft a business continuity plan.

Companies often conduct a competitive procurement process to procure the supply of goods and/or services, which usually involves issuing a request for proposal (RFP).

If the potential customer or buyer of goods and/or services (in a private sector organisation not subject to public sector procurement rules) is conducting an RFP process, it is at liberty to request general information which may include details of the financial status of potential suppliers.

As part of its due diligence, a customer should consider requesting information from potential suppliers on turnover and capital investment, key customers and associated revenue figures, and corporate group structure, as well as testimonials or references from reliable sources. A customer can also request details of recent audited accounts or financial ratios, or, where appropriate, the provision of a parent company guarantee if the supplier is part of a larger group of companies.

For suppliers that have not been used before, it is sensible to obtain a credit report from a reputable credit rating agency as part of any supplier due diligence process. Do not just rely on the information provided by the supplier.

Where the customer’s business depends on the provision of certain support services, such as delivery services, it is advisable to have more than one supplier for those services where possible. While this may mean that the customer may not benefit from the volume discounts if it had used a single supplier, it ensures continuity of service should one supplier suddenly experience an insolvency or other financial distress event.

Effective from 18 November 2025 (with some provisions coming into force in 2026), the UK’s Economic Crime and Corporate Transparency Act 2023 (‘ECCTA 2023’) introduces several new obligations for businesses. These include stricter identity verification measures and expanded reporting duties (applicable even to micro-entities and small businesses) to ensure that key information, such as turnover, is publicly accessible via the Companies House register. ECCTA 2023 also establishes new criminal offences for non-compliance (including a failure to prevent fraud offence) and enhances the powers and responsibilities of the Registrar of Companies. While the primary objective is to combat fraud and deter the concealment of information, these reforms are also expected to reduce risks linked to financially distressed companies (who may be more inclined to conceal information that could potentially expose them to be in any kind of difficulty). See How-to guide: Understanding the failure to prevent fraud offence.

The following is a checklist of points for consideration when drafting the terms and conditions of contracts for the supply of goods or services:

4.1 Exclusivity of supply

Ensure that there is no exclusivity of supply so that if the supplier is unable to deliver the services, the customer can source them from an alternative supplier without breaching the contract. The contract may be silent on exclusivity. Alternatively, the customer might consider including a ‘no exclusivity’ clause expressly stating that neither party is bound to contract solely with the other for the provision of the services. For example:

‘The Parties agree that the Supplier shall provide the Services on a non-exclusive basis and that the Customer shall be entitled to procure similar or equivalent services from alternative Suppliers at the Customer’s sole discretion’

4.2 Payment terms

Consider whether the customer’s payment terms are likely to create cash flow challenges for the supplier. If the customer is bound by corporate policy (whether as a result of general group policy or due to financial systems for example) to impose payment terms on its suppliers that result in a period of more than a certain number of days until a supplier is paid, the customer may want to consider whether it is appropriate to put in place an arrangement with a factoring provider. Suppliers can then receive payment within a timeframe that enables them to easily manage their own financial commitments.

4.3 Termination rights

The customer should ensure that it can terminate its contract with the supplier for convenience. This will allow the customer to easily exit the contract for any reason, including if the supplier is underperforming due to financial difficulty, by including a clause such as the following:

‘The Customer may terminate this Agreement at any time without cause by giving the Supplier not less than thirty (30) days' prior written notice’

If the customer requires the supplier to assist in the transfer of the services to another supplier, include a reference to any exit management obligations. These are often contained in a schedule to the agreement, using a simple provision such as the following:

‘If this Agreement is terminated or for any reason expires:
the provisions of Schedule [x] (Exit Management) shall come into effect with regard to the Services, or the particular Services so terminated (as the case may be), and each Party shall co-operate fully with the other and any future supplier to ensure an orderly migration of the Services’

4.4 Exit provisions

The customer should take into account any relevant obligations it will require from a supplier if and when the contract between them ends, for example, should the supplier be required to cooperate in terms of providing any necessary data (and, if so, in what format), information or assistance in relation to the transfer of the services to a new supplier. The decision to include exit provisions will depend on the nature of the services. For example, a complex outsourcing arrangement may involve the transfer of assets, contracts and personnel, and require the incumbent supplier’s assistance over a period of months following termination so as to ensure a smooth transition to the new incoming supplier and/or customer, whereas a less complex service arrangement may simply require a straightforward transfer of information from the incumbent supplier to the incoming supplier and/or customer. Take care to ensure that an appropriate period is specified during which the outgoing supplier is required to provide exit services relevant to the services.

Be aware of the limitations of such provisions however, as a company in financial difficulty may lay off staff who have the operational knowledge that needs to be transferred, or may otherwise decline to co-operate at all, as, once the company has gone into insolvency, there is little that can be done legally to force their compliance with the contract. The insolvent supplier may also have its hands tied by the insolvency practitioner in terms of what it can and cannot do and how it can operate under insolvency conditions. This is outside the scope of this How-to guide.

4.5 Reporting requirements

Where there are potential concerns about a supplier’s financial status, include financial reporting requirements in the contract to ensure that the customer is alerted to any change in financial status. Depending on the extent of these concerns, the customer may include a requirement to report on a quarterly, biannual or annual basis.

In addition to the submission of financial accounts, consider whether to require the supplier to provide financial ratio certificates to enable the customer to test its financial ratios over a specific accounting reference period. You may need to exercise a degree of flexibility in the financial ratios to allow for different accounting methods. Especially when dealing with companies that must comply with the accounting methods of an overseas parent entity.

Sometimes a supplier is reluctant to provide any financial reporting over and above publicly available account information. Instead, the customer may want to consider establishing a list of financial distress trigger events which must be promptly notified to the customer in writing by the supplier. Such events might include:

a certain financial ratio falling below an agreed level;
the issue of a profit warning to the stock exchange;
a downgrading by a credit rating agency; or
the commencement of a public investigation into the supplier’s accounting practices.

4.6 Step-in rights

Step-in rights are usually exercised as a last resort either prior to or as well as exercising any rights of termination. Depending on the nature of the products/services, there may be practical reasons why it may not be possible for the customer’s organisation to step in and take control of the delivery of the products and/or performance of the services. However, step-in rights can cover a broad range of aspects, such as:

management of the services;
direct payment of sub-suppliers; or
replacement of a team of resources with a team of the customer’s own or of a third party of the customer’s choosing.

Bear in mind the additional cost of exercising step-in rights however; as well as incurring the costs of a service provider to step-in for the original supplier, if the original supplier then becomes insolvent, a customer may not then be able to recover any fees or costs it has paid to the original supplier for goods which have not been delivered or services that have not been performed.

4.7 Escrow arrangements

If the customer has concerns about the financial security of its supplier, and the service provision entails the supply of software (in particular software that is business critical to the customer) owned by the supplier, the customer may want to consider whether to request that an escrow agreement with a reputable escrow agent be put in place upfront to enable the customer to access the source code to the software if the supplier ceases to trade. This does not change ownership of the source code, but enables the customer to be able to use that source code in order to be able to continue to use the software as it had been doing prior to the supplier’s cessation of trading.

4.8 Guarantees

Consider whether it is necessary to request a parent company guarantee. Some parent companies will only guarantee financial obligations, as opposed to all of the supplier’s obligations, as they may not have the resources or knowledge to be able to guarantee the delivery of the products or performance of the services. The customer may also find that some suppliers do not provide parent company guarantees as a matter of corporate policy.

Sometimes it may be possible for a customer to obtain a bank guarantee so that the bank pays the relevant amount to the supplier. This is unusual however and only likely to be available to large and well-established customer organisations.

4.9 Customer proportion provisions

A supplier that is suffering financial detriment may see its customers start to bring their relationships with it to an end. This may mean that, whilst at the time of contracting the customer may be one of many customers, as a supplier’s organisation begins to decline, the customer may inadvertently and unintentionally become one of its biggest customers. This can be a very early warning sign that there is an issue with the customer pipeline of that company, which may later lead to financial difficulties. To protect against this happening without the customer’s knowledge, it is possible to include a clause which states that the company has to notify the customer if the customer’s contract with them comprises more than a specific percentage of their turnover or if the customer becomes a major customer. An example is as follows:

‘At any time during the term of this Agreement, should the annual value of this Agreement comprise [x%] or greater of [Company’s] turnover in any financial year, or should [Customer] become one of the ten largest customers of [Company] by contractual value, [Company] will promptly notify [Customer] of the same in writing’

Having been notified, and in combination with the possibility of termination without cause, such a provision can be a useful trigger to open discussions between the parties as to what is happening at the company. It is arguable as to whether a supplier in financial difficulty would see complying with this clause as a priority if it had other pressing matters to deal with, such as its impending insolvency, but may be a useful discussion tool during contract negotiations.

It is obviously of limited value when contracting with large, well-established suppliers, but can be useful when contracting with smaller suppliers, start-ups or new businesses.

Section 5 - Strategies for securing prompt payment from customers

If the supplier concerned that its customer is unlikely to be able to make timely payment or that they are having cash flow issues, consider the following measures when agreeing terms of supply to that customer:

5.1 Payment terms

Request the ability to invoice on a monthly basis. This will alert the supplier more promptly if there are likely to be any problems with the customer settling payment. This also allows the supplier the opportunity to communicate with the customer to address continued failure by the customer to settle the supplier’s invoices on time.

Consider whether it is appropriate to ask the customer to pay an upfront advance. This is particularly helpful where the supplier has initial upfront costs so that it has money in the bank to be able to at least cover those initial costs.

Another option is to consider preferential terms for early payment by the customer, eg, discounts on pricing, exclusivity, or free samples, if they pay early in order to give them an incentive to pay promptly.

5.2 Interest on late payments

Include a right to charge interest on late payments with a reference point for calculation of interest. This allows for a clear process for claiming such interest from the customer. This may include service of notice on the customer that payment is overdue and a grace period in which payment can be made without incurring interest on the overdue amount. Include the right to charge the customer for any costs associated with recovery of sums that are overdue.

5.3 Suspension rights

Consider whether it might be necessary to make provision in the contract for the right to suspend the delivery of the products or performance of the services if the customer fails to make timely payment of the invoice either on the due date for payment or upon service of reasonable notice following the due date becoming overdue.

5.4 Credit checks

When dealing with a customer for the first time, carry out credit checks on that customer with a reputable third party credit reference agency to flag any potential risks before agreeing to supply services.

5.5 Guarantees

Consider whether it would be appropriate to request a parent company guarantee (or bank guarantee if possible) to guarantee the financial obligations of the customer.

5.6 Termination rights

If the supplier has concerns over the customer’s financial stability, the supplier should allow for its terms of supply to provide that repeated failure to settle invoices on time will amount to a material breach giving rise to termination. This will enable the supplier to terminate the contract in the circumstances where termination is the preferred option.

However, if there is only one annual payment in the contract, a termination right to allow termination for repeated failure is not appropriate; the supplier may simply want to have the ability to terminate for the customer’s failure to pay at all (subject to perhaps a further reasonable notice period given to the customer reminding it of the overdue payment date).

5.7 Retention of title clauses

Consider whether it is appropriate (based on the nature of the goods concerned) to include a retention of title clause in the contract so that title (or ownership) to the goods is retained by the supplier until it has received payment for the goods, as well as a right to repossess the goods (possibly also with a right to enter the customer’s premises in order to be able to repossess the goods).

Additional Resources:

Unfair Contract Terms Act 1977
Consumer Rights Act 2015
Late Payment of Commercial Debts (Interest) Act 1998
Insolvency Act 1986
Economic Crime and Corporate Transparency Act 2023