Commercial relationship risk poses a growing challenge for businesses – but who creates the bigger exposure, your customers or your suppliers?
Picture this: you've delivered a major order, but your biggest customer hasn't paid. Meanwhile, a key supplier has missed their delivery deadline, and now you can't fulfil your other commitments. Suddenly, you're caught in the middle with cash running low, relationships strained, and your business under pressure.
It's a scenario no business owner wants to face, but it happens more often than you might think. The good news? With the right approach to contracts and a few practical habits, you can significantly reduce these risks before they become crises.
This article will help you identify warning signs early and take control of your commercial relationships. If you'd like to review your current position, our commercial law solicitors are here to help.
Jump to:
- What actually happens when a supplier or customer defaults?
- Working out where you're most exposed
- Spotting trouble before it arrives
- Keeping your contracts relevant (especially when markets tighten)
- If insolvency or administration becomes a possibility
- Strengthen your position before someone tests it
What actually happens when a supplier or customer defaults?
When someone doesn't deliver on their commitments, the most obvious problem is the immediate cash flow gap. But the ripple effects can be much worse, potentially triggering a chain reaction through your supply chain, claims from your own creditors, and even enforcement against any assets you've secured loans against.
- If a customer defaults: They've received your goods or services but haven't paid. You've already covered wages, materials, and all your running costs, so you're left with a very real hole in your finances.
- If a supplier defaults: Late or missing deliveries can put you in breach of your own customer contracts. Your customer might refuse to pay or even claim damages, leaving you out of pocket and facing potential liability.
Either way, your cash flow takes a hit, and your bottom line suffers. In severe situations, you might struggle to make loan repayments, lenders could enforce their security, and if you've given personal guarantees, those could come into play too. Less easy to quantify is the potential damage to your reputation.
Working out where you're most exposed
Start by asking yourself a simple question: which single failure (or combination of failures) would hurt your business most?
Think about the size of individual orders, how much of your revenue comes from just a few customers, whether you're dependent on specific suppliers, and how quickly you could find alternatives. This shouldn't be a one-time exercise. Business relationships shift, people move on, and companies change hands. Make it a habit to review your exposure regularly, so you can make changes before you're under pressure.
Spotting trouble before it arrives
Many businesses treat their contracts as the ultimate safety net. Contracts absolutely matter, but your best protection is a warning that gives you time to act.
Stay in regular contact
When you maintain ongoing dialogue with customers and suppliers, it's much easier to notice when something changes. Delayed responses, vague reassurances about payments or shipments, new people saying "we're just getting up to speed" – individually, these might seem minor. Still, together they form a pattern worth paying attention to.
Do some light-touch checking
You don't need to launch a full investigation, but keep an eye on the basics:
- Check news and company announcements for signs like store closures, asset sales, or redundancies. For larger companies within scope, please review their statutory Payment Practices and Performance reports. This reporting regime has been extended to at least 6 April 2031 and strengthened, with additional requirements for financial years starting on or after 1 January 2025. If a company consistently pays late, seek legal advice and consider your options: this may be an indicator of a much larger problem.
- Use Companies House to check what charges are registered against a business. If they're heavily secured to multiple lenders, you'd likely be far down the queue if things went wrong.
Pay attention to your own data
Your credit control team often spots problems first. Are any customers taking longer to pay, requesting extensions, or approaching their credit limits? On the supplier side, watch for unexplained delays, changes in product quality or packaging, or reduced customer support. Each of these might justify tightening your terms or asking for additional security.
Understanding your rights when payments are late
If your contract doesn't specify what happens in the event of late payment, UK law steps in. You're entitled to statutory interest at 8% above the Bank of England base rate, plus a fixed sum toward your recovery costs (£40, £70 or £100 depending on the debt size). Use these rights consistently – they exist to discourage late payment in the first place.
Unsure about any of your current rights?
If you are unsure about any of your current rights and remedies and whether they are sufficiently robust to protect you please contact our friendly, expert commercial solicitors.Commercial relationship risk poses a growing challenge for businesses — but who creates the bigger exposure, your customers or your suppliers?
Keeping your contracts relevant (especially when markets tighten)
Having a set of standard terms sitting in a file isn't enough. Contracts become outdated. Markets evolve. Your paperwork should keep pace.
Make sure everything's properly documented
You need signed contracts and any related security (like guarantees or charges) in place and easy to find. If security creates a registrable charge, register it at Companies House promptly to protect your position.
Know what your contracts actually say
Make sure the rights you need are included in your agreements.
When you're the seller (customer contracts)
- Retention of title: A well-written retention of title clause can allow you to keep ownership of goods until you're paid, meaning those goods might fall outside the buyer's estate if they become insolvent. But it only works if it's adequately incorporated into your terms, the goods remain identifiable and separate, and you can practically recover them.
- Proceeds of sale: Clauses that seek to control what happens when goods are resold or to capture the "proceeds of sale" can be problematic. They risk being treated as registrable charges if they go beyond mere reservation of title. It's worth getting these clauses professionally reviewed.
- "All-monies" wording: This extends your protection (you retain title until all outstanding sums are paid, not just for that specific order). However, it attracts closer scrutiny and might be characterised as a charge depending on how it's drafted.
- If goods get mixed or processed: Simple retention of title usually fails once goods are no longer separately identifiable. For this reason, clauses covering manufactured goods rarely help and may again be treated as a charge.
When you're the buyer (supplier contracts)
- Termination and cover: Include express rights to terminate for non-delivery or late delivery, and to "cover" by buying from elsewhere and recovering the cost difference from your supplier. This is particularly crucial if you operate within a “just in time” model. While statute law lets you claim damages for non-delivery anyway, precise drafting makes recovery much more straightforward.
- Instalments and partial delivery: Be clear about whether you must accept delivery in instalments (you don't have to, unless you've agreed to it) and what happens if one instalment is faulty or short. Specify whether a breach of one instalment allows you to terminate the entire contract.
- Set off and withholding: If you want the ability to withhold or deduct from payments when deliveries are late or fail, state it expressly. Many supplier terms include "no set-off" clauses, and without precise drafting, common-law set-off is quite limited.
- Liquidated damages for delay: If price adjustments matter to you, agree on them upfront. Price reduction isn't a default remedy in business-to-business sales. Use clear liquidated damages or service credits for delays or non-performance.
Quick adjustments when you see warning signs
When a customer or supplier starts to look shaky, consider focused, short-term adjustments to your processes: shorter credit periods, requiring deposits or using escrow, obtaining alternative security (such as parent company guarantees), or taking out credit insurance to cover residual non-payment risk that contracts alone can't fully address.
If insolvency or administration becomes a possibility
Two things matter most here: the legal tests and the timing:
- The tests: A company is deemed unable to pay its debts if (among other grounds) it fails to satisfy a statutory demand for £750 or more within 21 days. For individuals, a creditor can petition for bankruptcy only if the debt is at least £5,000.
- Timing and the moratorium: If administrators are appointed (or a notice of intention to appoint is filed), a statutory moratorium generally prevents legal processes or repossession of goods without the administrator's consent or court permission. That includes attempting to recover goods under retention of title. If administration is on the horizon, move quickly and get advice.
Strengthen your position before someone tests it
Managing your commercial relationships isn't just about protecting yourself. Remember, your own customers and suppliers are assessing you too. Robust contracts, disciplined credit control, and early action demonstrate that you're a low-risk, commercially reliable partner.
If you'd like a focused review of your highest-exposure relationships – including tightening retention of title clauses, building in robust contractual remedies, or aligning your credit control with statutory rights – our commercial law solicitors can help you develop a practical plan that works for your business.
