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How To Reduce the Risk of Non-Payment Under A Contract

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Receiving prompt payments for your goods and services is crucial for maintaining a healthy cash flow. However, it is not guaranteed that your customers will pay on time. While there are uncertainties around when customers will pay, there are specific actions your business can take to mitigate the risk of non-payment. This article will explore how your business can reduce non-payment risks under a contract. 

Why Should Your Business Reduce the Risk of Non-Payment?

Several events have led to customers needing help paying their bills. For example, the global pandemic brought financial difficulties to most businesses. If you do not take steps to reduce non-payment risk, your business could be at risk of cash flow issues which can lead to insolvency

For example, what happens if you agree to deliver a large project to a customer, deliver it and then they fail to pay? Your business could suffer severe financial losses. Taking active steps to reduce non-payment risks will increase your chance of getting paid on time and help you maintain good customer relationships. 

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How To Reduce Non-Payment Risks 

The following are key action points to help reduce the risk of non-payment.

1. Be Proactive

It is vital to research new customers before you proceed to work with them. For example, before entering a contract with a new customer, it is sensible to consider:

  • how long they have been running their business;
  • conducting credit checks to check their creditworthiness; and
  • whether they have suffered from financial difficulties. 

When working with new customers, watch out for signs of financial difficulties. For example, whether their behaviour changes or they fall late paying initial deposit payments to start a project off. If so, you may decide not to work with them, depending on how much risk you are willing to take on. 

If you experience customer issues or spot any potential risks, you should engage in constructive dialogue with your customers. Being open and understanding any problems could help resolve these issues and prevent non-payment issues later. 

2. Negotiate Payment Terms

As a supplier of products or services, you should have a bespoke and robust commercial contract that your customers must correctly sign. Several vital contract terms can protect your business from non-payment risk. For example, you should:

  • ask your customer to pay a sum of money upfront so you have some security before you start work;
  • add interest clauses stating that the customer must pay interest for late payments, which invariably encourages customers to pay on time;  
  • consider early payment discounts for early payments the customer settles;
  • include a procedure for resolving problems regarding invoices; and
  • clearly state the consequences for non-payment. 

An invoice dispute resolution clause should state the process to follow if the customer has a problem with an invoice you have sent them. This can help speed up the resolution of payment problems. Additionally, you can include clauses enabling you to end the contract if the customer’s financial position declines or the customer is likely to go insolvent. 

3. Implement Credit Control Procedures

Every business should have a robust credit control procedure to manage non-payment risks. You should regularly monitor whether customers are keeping up with their payment obligations. You should also issue regular reminders to customers who have not paid on time. 

Additionally, you should understand what you can offer if a customer needs help to afford to pay your invoices. Ideally, negotiating a payment plan with your customers can ensure you receive the funds customers owe you. For example, you may offer customers a more extended payment deadline or allow them to pay what they owe in instalments. 

4. Take Formal Action

The above are practical and legal steps you can take to reduce the risk of your customers failing to pay. In the worst case, if all else fails and your customer does not pay you, you have more formal options to help recover unpaid sums. 

Some options include:

  • working with lawyers or debt collection agencies to recover your payment; 
  • undertaking mediation with the customer by involving an independent third party to help resolve the non-payment problem; 
  • issuing a formal written statutory demand requesting that the customer repay the debt within 21 days; and 
  • issuing court proceedings to recover the payment as a final resort. 

The route you pursue will depend on many factors, such as your relationship with the customer and how much debt they owe. As such, you should take advice from experienced debt recovery lawyers who can guide you on the most sensible and straightforward option to recover payment. 

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Key Takeaways

Although the risk of non-payment can be worrying, there are several steps your business can take to reduce the risk of non-payments under contracts. For example, you can research new customers and watch out for warning signs indicating a non-payment risk. You should also ensure that you enter into a robust contract with stringent payment terms and implement a credit control procedure to help recover payments more efficiently. Try to be open and work with your customers to reach resolutions if they cannot pay. In the worst case, take legal advice on formal action you can take to recover the sums you are owed. 

If you need help managing non-payment risks, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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