How to survive the credit crunch: check up on customers and suppliers

They should also check the financial health of their suppliers to ensure that they can continue to provide services and equipment needed to carry on trading, said Iain Monaghan, a partner with Pinsent Masons, the law firm behind OUT-LAW.COM.

"There are things that you can check, and first among those is probably looking at exactly who your customers are and how their credit-worthiness has been affected by the recent changes," said Monaghan. "If there are reasons for concern, the next thing is to look hard at the agreements you have with them."

Over the past 12 months many businesses have found it increasingly difficult to gain access to cash and capital as banks refuse to lend – even to other banks. In the past 10 days some financial institutions have faced plunging share prices and have been unable to secure enough capital to continue trading.

US investment bank Lehman Brothers collapsed, while Halifax Bank of Scotland will be bought in an emergency deal by Lloyds TSB. Merrill Lynch was bought in a similarly hastily-arranged deal with Bank of America, while the world's biggest insurer, AIG, has been the subject of a $85 billion US government bale-out.

Surviving 2008 unscathed does not just mean that you need to look after your own financial position, though. You need to look at the position of your significant customers and suppliers, according to Monaghan. "It is not just about whether you have Lehman Brothers as a customer – do you have a contract with someone who depends heavily on their trade with Lehman Brothers?" he said.

Once you have looked at who you are doing business with you need to remind yourself of the terms on which you are doing business with them. "Termination for insolvency is the extreme example, but contracts may also provide for additional security, or termination, in the event of financial distress," he said.

Consolidation may also provide options. "If you're a customer it may be that your contract allows you to terminate a contract if there is a change of control of the supplier," said Monaghan. "However, in a difficult market, you need to consider carefully whether you really need the services being supplied under the contract. While change of control clauses can often provide an opening for renegotiation, they are a dangerous weapon if consolidation has removed all credible alternatives to your current supplier."

Normal good business practice becomes even more important in difficult times. "You should try to make sure that you are not overly reliant on a small number of customers and that you follow very closely when bills are paid and make sure you operate tight credit control," he said.

Monaghan also said that companies should put themselves in their clients' shoes and realise that cost savings will be expected.

"I think suppliers have to assume that customers are going to look for ways of saving money," he said. "If you can present them with ways of cutting costs, getting savings, you have a chance of pre-empting the customer's demands and gaining some control over the direction of the discussion. At the least you may persuade them not to consider more drastic options, such as changing to a lower-priced rival."

Five tips for businesses

Monaghan and other specialists at Pinsent Masons advise that companies should:

• Ensure you have robust agreements in place with important customers and suppliers. Review your contracts with these customers and suppliers to ensure they are clear about each party's obligations and liabilities. Consider whether contractual terms can be improved in relation to financial distress.
• Check contract compliance – make sure that your paperwork is in order for when the other party starts to look for ways to get out of the contract.
• Don't rely on an understanding or gentleman's agreement. If an issue is important to your business, make sure you have a proper contract.
• Ensure that your contract managers monitor both your and the other party's contractual performance carefully. Your customers or suppliers may be slow to pay – or may try to wriggle out of commitments.
• Plan for the worst. If your business is reliant on suppliers, you need realistic contingency plans. The potential cost, even to multi-national businesses, of supplier default can extend beyond immediate and dramatic financial losses to potential damage to reputation, brand and wasted management time.