Aim To estimate the incidence of falls in individuals with type 2 diabetes compared to healthy controls and to describe the characteristics of fallers with type 2 diabetes in relation to motor dysfunction, postural instability and diabetic polyneuropathy (DPN). Methods This is a cross‐sectional study of individuals with type 2 diabetes with DPN (n = 54), without DPN (n = 38) and healthy controls (n = 39). Falls were recorded within the preceding year. DPN was defined by clinical scores and nerve conduction studies. Motor function was assessed by a 6‐min walk test (6 MWT), five‐time sit‐to‐stand test (FTSST) and isokinetic dynamometry at the non‐dominant ankle and knee. An instability index (ST) was measured using static posturography. Univariate and bivariate descriptive statistics were used for group comparisons. Results Compared with healthy controls, individuals with diabetes had a higher incidence of falls 36%, (n = 33) versus 15%, (n = 6), p = 0.02. There were no differences in falls when comparing individuals with and without DPN. Fallers had an impaired 6 MWT versus non‐fallers (450 ± 153 m vs. 523 ± 97 m respectively), a slower FTSST (11.9 ± 4.2 s vs. 10.3 ± 2.9 s respectively) and a higher ST (53 ± 29 vs. 41 ± 17 respectively), p < 0.02 for all. Conclusion Individuals with type 2 diabetes reported a higher number of falls within the preceding year compared to healthy controls, irrespective of the presence of DPN. The main factors associated with falls were increased postural instability, lower walking capacity and slower sit‐to‐stand movements. The 6 MWT, FTSST and posturography should be considered in future screening programs in identification of individuals at risk for falls.