Payment issues in commercial contracts

• Don’t be a Bank

  Agreeing to excessive credit terms can turn an SME into its customer’s financier. Research highlights that wholesale SMEs are frequently left carrying invoices unpaid for 75–90 days or longer- a nightmare scenario for a restaurant supplier who still has to pay staff and food costs weekly.

  Suppliers should benchmark terms against industry practice and push for 30 days or less. If longer terms are unavoidable (as with large chains), consider partial upfront payments or higher contractual interest on sums outstanding beyond 30 days. Always be clear on when the payment period starts — invoice receipt or delivery — to avoid disputes.

  

• Pay As You Go

  Waiting until the end of a contract to be paid is risky. In hospitality, upfront costs can be steep — caterers may need to buy ingredients in bulk, hire temporary staff, or rent equipment long before an event takes place.

  Deposits, staged payments, or milestone billing spread that risk.

  For example, caterers often secure a 50% deposit at booking, with the balance due a week before the event. This ensures they recover costs early and are not left chasing bills after the champagne has been drunk. SMEs in other sectors can adopt the same model by linking invoices to project stages or delivery milestones. The lesson is clear: SMEs should align their billing with actual costs.

• Get a safety net

  When dealing with new or thinly capitalised customers, additional credit protection is essential. One recommended option is a retention of title (ROT) clause, which prevents ownership of goods passing until payment is received in full. There are a number of benefits to ROT clauses – as helpfully set out by Rich in his article Retention of Title.

  Other safeguards include parent company guarantees, performance bonds, or letters of credit. These can be especially valuable where the contracting entity is a subsidiary or start-up with limited assets. For example, if a customer insists on long credit terms, a guarantee from the parent company can ensure the supplier isn’t left exposed if the customer itself fails.

• Spot trouble early

  Payment issues rarely happen overnight. They are often foreshadowed by late filing of accounts, covenant breaches, or sudden restructuring. For hospitality suppliers, practical red flags may also include sudden changes in ordering patterns, requests to defer deposits, or frequent staff turnover at a venue.

  Suppliers can build in protection by requiring customers to share management accounts or audited financials at agreed intervals, and to notify them of material adverse events. This creates visibility before invoices go unpaid and helps SMEs act early — tightening credit or pausing supply until matters stabilise.

• Increase the pressure

  The Late Payment of Commercial Debts (Interest) Act 1998 already gives suppliers a powerful tool: statutory interest at 8% above base rate, plus recovery costs. For many SMEs this is a stronger sanction than they would negotiate contractually. The challenge is not whether the law has teeth, but whether businesses feel able to use it against important customers.

  To reduce reliance on statutory claims — which can strain commercial relationships if invoked late — SMEs should also include clear remedies in their contracts. Setting out when interest will accrue, and reserving the right to suspend supply or terminate for persistent non-payment, helps bring the issue to the surface earlier and encourages customers to pay on time.

  For a hotel linen supplier, this might mean stopping deliveries if bills aren’t cleared within 14 days of due date. Having these terms agreed upfront makes it easier to enforce without damaging goodwill too much.

• Trade, don’t just concede

  SMEs often feel pressure to concede on payment terms when negotiating with larger players — for instance, a small brewery negotiating with a national pub chain. But concessions should never be free. If you agree to 60-day payment terms, consider asking for something in return: better pricing, a guaranteed volume of orders, or exclusivity in certain outlets.

  Negotiation records are also valuable. Documenting these trade-offs shows that concessions were deliberate, not careless, and provides helpful evidence if disputes later arise.

• Set your red lines

  Preparation is everything. SMEs should set internal policies covering maximum acceptable credit terms, mandatory deposits for high-value projects, and minimum credit checks for risky counterparties. By agreeing “red lines” in advance, businesses avoid caving in when under pressure.

Conclusion

For all SMEs — and especially those in hospitality, where margins are thin and working capital is tight — payment provisions are not mere technicalities. They are a core safeguard of financial survival.
By keeping terms realistic, aligning payment with supply, securing safety nets, monitoring for early warning signs, enforcing remedies, trading concessions wisely, and setting internal red lines, SMEs can protect their working capital and strengthen their bargaining position.

And with late payments costing the UK’s SMEs billions annually, the message is clear: protect your business at the contract stage. Once the invoice is overdue, the leverage is already gone.

If you’re in the hospitality sector or would like to get ahead of payment issues, please feel free to get in touch.