Tom Bourne of law firm Cripps shares some top tips to avoid problems with insolvent suppliers and customers
There have been some high profile insolvencies in the Food and Drink industry in recent months – Palmer & Harvey among them – and with rising food costs and Brexit it is more important than ever to review your contracts with suppliers and customers and consider what would happen if they got into financial difficulties.
The rights of an unsecured creditor are limited and once a company has entered into an insolvency process (such as liquidation or administration) it is often too late to do anything to manage your risk, so it is important to put appropriate measures in place now, to ensure your business is protected.
Know who you are dealing with
It seems obvious, but good due diligence is important in any industry. The more you know, the easier it can be to anticipate, and hopefully avoid, any problems. As a bare minimum you should check what information is available online (e.g. at Companies House) or do a credit check.
Keeping in contact with your customers / suppliers can also help minimise risk. Often there are clues about how a company is doing – are they becoming difficult to contact or have some payments been missed? Regular contact and good customer relationships will help you have those difficult conversations that might be necessary if you do become aware of any issues.
Review your contractual terms
The right terms can make all the difference. It is important they are tailored to your circumstances, but some key points to consider are:
- Can you terminate (or suspend) your purchase / supply obligations if the other party misses a payment / supply date, or becomes insolvent?
- Are you able to recover goods that have been supplied if payment is not made? This may not be practical for fresh produce, but can be considered for packaged goods or items with a longer shelf life.
- Is it appropriate to ask for a director’s guarantee or a guarantee from another group company?
- Do you charge interest (and costs) for late payment?
- What law applies? This is especially important for international agreements.
Diversify your customer and supply chain
There may be very good business reasons for having one key supplier or a main customer, but do you have a contingency plan if things go wrong? It is important to ask what would happen if your main supplier or customer went bust?
Deadline for payment
Cash is king. Larger customers often insist on elongated payment terms, but could you incentivise early payment, for example by offering a discount if payment is made early? How resilient are your cash flow forecasts? Could you withstand the immediate shock caused if a customer became insolvent?
Can you minimise your own risk?
Invoice financing is not for everyone, but one of the positives is that this can help minimise the risk in the event of non-payment. Alternatively, insurance may help mitigate this risk.
The key to protecting your business is advance preparation and having a contingency plan in place if things do go wrong so you can take steps to protect your position as soon as you become aware of any issues.