Credit management in the construction industry is a delicate balance of risk and reward. Extending credit can enable growth and solidify long-term relationships, but it can expose your company to significant financial risk without the proper safeguards.
With the right strategies, you can confidently approach credit extension, knowing your company is protected while encouraging successful partnerships.
To help credit professionals achieve this, industry veteran and credit leader Toby Brutsman offers five essential building blocks for extending credit with confidence, as shared in a BuildingBlocks webinar hosted by Handle.com’s Lori J Drake, CBA.
Watch the full webinar here
Extending Credit with Confidence: Five Building Blocks to Know
From setting up solid contracts to leveraging industry knowledge, these strategies provide a solid framework for managing credit relationships effectively.
What to Know Before You Extend Credit
Before extending credit to a customer, it’s essential to approach the relationship with a business-first mindset. Credit relationships are akin to business marriages—long-term commitments that require careful planning and trust but also realistic expectations.
As Toby Brutsman points out, credit professionals must prepare for the unexpected because not every credit decision will pan out as expected. It’s important to balance optimism with caution to protect the company’s accounts receivable, one of its largest assets.
To minimize risk, start by understanding the customer’s financial health and business history. You must thoroughly research their background, including reviewing financial statements, credit reports, and trade references. The goal is to enter the relationship with as much information as possible, ensuring you are prepared should the relationship encounter challenges. Being proactive at this stage can prevent future headaches and safeguard your company’s financial position.
Lastly, clear communication is key. Establish expectations upfront by setting out clear terms and conditions for payment and ensure both parties understand their responsibilities. By starting the relationship with transparency and clarity, you can avoid miscommunication and set the foundation for a healthier, long-lasting partnership.
Start with Credit Application/Contract
The credit application or contract is one of the most important tools in a credit professional’s arsenal. This document sets the tone for the entire business relationship, detailing the terms and conditions governing payment, delivery, and other essential aspects of the deal.
As Toby advises, it’s critical to involve an attorney in the drafting process, particularly one specializing in construction law, to ensure that your contract provides maximum legal protection. Key elements to include in your contract are clear payment terms, such as net 30 or net 60, and clauses that protect your company from late payments or legal disputes.
For instance, including interest penalties for late payments and provisions for attorney fee recovery can safeguard your company’s interests in case of a breach.
Additionally, consider adding language that dictates the city or state where any legal disputes will be settled should one surface—this “home-court advantage” can save you significant costs and time should litigation arise.
It’s also worth considering the inclusion of personal guarantees, particularly for new or less-established companies. Requiring officers to sign personal guarantees adds an extra layer of protection for your company, as it ties their personal assets to the company’s financial obligations. This step ensures that your company has recourse in the event of non-payment, providing a much-needed security blanket in uncertain times.
Balance the Wealth of Knowledge in Your Favor
No credit decision should be made in a vacuum. Leveraging all available sources of information is critical to making informed credit decisions.
Toby highlights the importance of using both traditional credit reporting tools, such as D&B and NACM, and less conventional sources like industry peers and online research. These tools offer a comprehensive picture of a potential customer’s financial stability, helping you make more informed decisions.
While trade references can provide valuable insights, it’s important to be aware that customers will often present only their best references. To get a clearer picture, consider conducting your own research.
For example, searching for news articles about the company or reviewing their financial reports on platforms like Yahoo Finance can reveal red flags that may not appear in a traditional credit report. Being thorough in your research will help you avoid customers who may be on the brink of financial trouble.
Networking with industry peers can also be incredibly beneficial. Credit professionals often share insights and experiences that might be outside of formal channels. Whether through trade groups like NACM or informal networks, connecting with others in the industry can give you access to vital knowledge that could impact your credit decisions.
Don’t hesitate to ask questions and seek advice from those who have navigated similar challenges.
Build Layers to Manage the Risk
Risk management is at the heart of extending credit confidently. Toby emphasizes the importance of building multiple layers of protection to minimize your exposure. Tools such as joint checks, maximum credit lines, and down payments can help you manage risk while still allowing the customer to do business. For instance, joint checks ensure that payments are made directly to your company, reducing the risk of non-payment by involving the general contractor in the process.
Another effective tool is setting maximum credit limits. By capping the amount of credit extended, you can control your company’s exposure and protect against large losses.
Shortening payment terms or requiring down payments can further reduce risk by ensuring that cash continues to flow through your company at a healthy rate.
Each of these tools provides a safeguard that allows you to mitigate risk while still extending credit.
At the same time, it’s essential to remain flexible and willing to negotiate terms that work for both parties. The goal is to find a balance that protects your company while maintaining a positive relationship with the customer. By building layers of protection into your credit agreements, you can minimize risk without stifling business growth.
Consult, Discuss, Document
Finally, effective credit management requires constant communication and thorough documentation. Consulting with internal departments, discussing customer concerns, and documenting every step of the credit process are critical to protecting your company’s interests.
As Toby advises, it’s essential to consult with legal teams, finance departments, and other stakeholders to ensure that all credit decisions are made with the whole picture in mind.
Open discussions with customers are equally important. Establishing clear lines of communication early on will help you address potential issues before they become problems. If there are any concerns about payment or credit terms, addressing them head-on can prevent misunderstandings and foster a stronger relationship.
By working together to find mutually beneficial solutions, you can maintain a positive partnership while protecting your company’s financial interests.
Documentation is the final, crucial step in the process. Every agreement, conversation, and credit decision should be documented and archived for future reference. Doing this protects your company in the event of disputes and ensures that all parties are held accountable.
Ultimately, consulting, discussing, and documenting every aspect of the credit process helps build a foundation of trust and security that allows both parties to thrive.
Extend Credit with Confidence
Extending credit with confidence requires preparation, careful consideration, and the right tools. Knowing what to look for before you extend credit, creating strong contracts, leveraging industry knowledge, managing risk effectively, and maintaining open communication can build stronger, more secure credit relationships.
Implement these five buildingblocks, and you’ll be well on your way to protecting your company’s financial health while fostering growth and success.