Minimising the risk of customer non-payment

What matters

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The recent shock collapse of a number of organisations highlights the risk of non-payment in the current business landscape. It also demonstrates the importance of suppliers proactively protecting their interests and mitigating potential risks so that they are not vulnerable to financial losses as a result of a customer’s non-payment.

There are a number of practical steps a supplier can take to minimise the risk: 

Credit control 

Excellent credit control is at the heart of managing any potential risks of non-payment. This involves the regular monitoring of customer accounts and outstanding invoices and taking proactive steps to recover overdue payments, whether that be through regular conversations with customers or taking more ‘demanding’ steps. Credit controllers will often be able to identify where unusual or unexpected payment patterns are emerging in relation to a particular customer and therefore ring those important initial alarm bells. 

Where a customer is consistently failing to make payment on time or at all, a supplier should consider what options it has to encourage payment or protect its position and discuss this with their credit controllers to ensure that they are working together in a co-ordinated fashion. Contracts often provide important rights such as suspending further supplies until all outstanding payments are settled, charging late payment interest or terminating the contract where there is persistent non-payment, each of which are touched on below. 

Due diligence on customers

Before even entering into a new contract with a customer, a supplier should carry out due diligence to satisfy itself that the customer is not currently suffering any financial difficulty. This could include obtaining financial statements, audit reports, forecasts or recent financial presentations from the customer or using credit checks to analyse a customer’s historic financial performance. This is particularly important where credit facilities or extended payment terms are offered. 

If the customer has over £36 million in turnover, £18 million on its balance sheet or over 250 employees then it is also obliged to publish reports twice a year on when it pays its suppliers. This may also give a helpful insight in their payment terms and may also flag where a customer is starting to fall behind its average payment terms. The report can be found here - Check when large businesses pay their suppliers - GOV.UK (

Where the outcome of due diligence throws up some red flags, it could be an indication that a lower amount of credit should be offered or for the supplier to ask for deposits or upfront payments.

Identifying early warning signs 

Suppliers should look out for any early signs that a customer may be in financial difficulty. This could include:

  • a customer being late making payments
  • unexplained changes in payment patterns
  • an overall decline in communication

Where any of these circumstances arise, the supplier should engage in open dialogue with the customers and try to ascertain the customer’s reasons for their changed behaviour so that it can deal with any potential problems before they escalate. Remember this may be handled by a credit control team so internal communication is key.

As well as carrying out due diligence at the outset of the relationship, periodic routine checks on customers throughout the relationship is also advised to ensure that any new circumstances or issues can be managed. Where credit is offered, it is important to have clear credit terms in place to ensure that the amount of any credit can be varied or withdrawn and to determine, amongst other things, the basis on which further orders should be accepted, if at all.

Negotiating payment plans

Suppliers should consider proactive negotiations with customers facing financial difficulties. Offering a flexible payment plan may help customers manage their payment obligations whilst also ensuring that the supplier receives a steady flow of funds. These negotiations may involve extending the payment deadline, offering payment by instalments or agreeing milestone-based payments.

This is also perhaps a good time to mention that if you have insurance against bad debts or factoring/invoice discounting facilities in place, you should ensure that you are familiar with their terms and follow them carefully, especially when agreeing differing contract terms and payment provisions.

Applying interest to late payments

Suppliers should check the contract it has in place with its customers and utilise any right to charge interest on late payments. Under the Late Payment of Commercial Debts (Interest) Act 1998, if an agreement is silent on the level of interest a supplier can charge on late payments, the Act provides for interest at 8% above the Bank of England base rate.

If the contract includes a right to charge interest below the statutory rate above, a supplier should seek to utilise this. Informing the customer that you will be charging interest on the late payment may act as an incentive to may payment on any overdue fees and also deter late payments in the future.

Repossess goods which have not been paid for

Suppliers should also seek to include retention of title clauses in their contracts. These clauses grant a supplier the legal right to repossess goods that have not been paid for by the customer. This clause can act as a safeguard, particularly in cases where insolvency is predicted, or a customer becomes insolvent before fulfilling their payment obligations, although they do have to be carefully drafted in order to be effective as against an insolvency practitioner.

Termination rights

Even where a contract contains rights for a supplier to terminate in the event of a customer’s insolvency, there are various statutory controls that may apply to prevent a supplier from exercising its right of termination if a customer undergoes certain insolvency events. Such controls will not prevent termination for non-payment, just for reasons of insolvency.

From a supplier perspective, it is best practice to ensure that contracts contain a right of termination that applies when a customer’s financial position deteriorates, or it reasonably believes that the customer is about to undergo an insolvency event, rather than only applying where a formal insolvency event has arisen.

As ever, it is important to carefully read the termination provisions of a contract before serving a termination notice and to follow the terms carefully. For example, contracts often allow a defaulting party a remedy period before termination can take place. Ideally this should only be a very short period in the event of non-payment to ensure that a supplier can take swift action to deal with any concerns. Customers will, however, often want a short period to investigate any non-payment and remedy it where, for example, there has been an administrative oversight.

Project Bank Accounts (PBAs)

Suppliers should also consider the use of PBAs which are ring-fenced accounts from which payments are made directly and simultaneously by the client to all parties in the supply chain, typically used in large public sector construction projects. This helps to provide protection to smaller suppliers that are lower down the supplier chain, particularly in the event that the main contractor becomes insolvent.

Various campaigners, trade bodies and politicians have called for the government to increase the usage of PBAs following the collapse of the construction giant Carillion in January 2018 which left many sub-contractors in financial difficulty.

As technology-led solutions such as digital payment wallets and smart contracts develop, it is likely that flexible payment solutions designed to protect the entire supply chain will be available for customers and suppliers in both the construction industry and beyond.


As insolvencies rise, it is vital that organisations feel empowered to raise concerns with their counterparts if there are warning signs and a risk of non-payment, including where those concerns are heard ‘on the grapevine’. Where there are close credit control relationships, then these conversations may already be happening. However, understanding your rights and obligations in respect of the payment of invoices and the termination of contracts is an important part of the overall picture. There are various practical measures that a savvy business can take to ensure that it is aware of the risk of non-payment by its customers and it should use those where appropriate to mitigate that risk as soon as an issue arises. 


This information is for general information purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. Please contact us for specific advice on your circumstances. © Shoosmiths LLP 2024.



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