Protect Yourself
In addition to following through on mechanic’s liens, when and where allowed, dealers have increased their internal debt reserves and/or leveraged existing lines of credit to help cover accounts they’ve closed or written off as unrecoverable.
In ProSales’ survey, 42% of the LBM dealers responding (nearly all of which extend credit to their customers) increased their bad debt reserves in 2008 by an average of 30.6%.
Another line of defense against lost accounts–and part of an overall risk management strategy–is credit insurance, a property and casualty policy that covers assets (including receivables) at risk if an account holder falls into default, insolvency, or bankruptcy.
Porter’s efforts to collect on and stem late-paying accounts have so far relieved him of tapping the company’s line of credit to pay its bills. He’s also intolerant of contractors who use the current market conditions as an excuse. “The excuse that ‘they haven’t been paid so they can’t pay us’ doesn’t work with me,” he says. “We always pay our bills on time because we manage our receivables and get loans to pay them if we have to.”
That said, getting a line of credit these days is decreasingly likely for dealers or contractors who don’t have such measures already in place. “Now is the time for dealers and contractors to do everything they can to preserve their credit lines and loans that are open,” says Richardson-Newton.
Of course, the first line of defense is establishing and enforcing payment terms on credit accounts. Nearly half of all dealers who responded to ProSales’ survey require 100% of the bill due immediately, and 41% demand full payment by a certain date, usually within 30 days. These days, however, the average days outstanding among those dealers is nearly 50 days, requiring new tactics to collect.
Off-Load the Task
Just as they’ve done with payroll and perhaps other administrative tasks, dealers tired of managing their credit accounts and risking financial exposure themselves are considering independent credit providers like BlueTarp Financial to handle the task.
“We did the best we could on our own,” says Bruce Gove, president of Gove Lumber Co., a single-location dealer in Beverly, Mass., that contracted with BlueTarp three years ago to eventually manage all of its credit accounts. “It was a risk-management decision.”
The pitch to switch is fairly simple: BlueTarp, or one of its contemporaries, manages the entire process of applying for, granting, extending, and collecting on loans to pros who want to buy on credit from a dealer. The service also assumes the risk of late and delinquent accounts but also reaps the recourse, applying a greater pool of resources (both people and technology) to keep contractors in line ? for a modest percentage of the sale, of course, that adjusts to the amount of volume it manages for a dealer. “It puts discipline behind the process, which is something most dealers don’t like to do or don’t do at all,” says Bond Isaacson, BlueTarp’s CEO. “Dealers are tired of getting burned.”
For Gove, the cost to engage BlueTarp is a wash and perhaps puts him slightly ahead of the costs and potential losses he’d suffer without the service. His credit manager now focuses on Gove Lumber’s payables and leverages a more reliable cash flow to earn early-pay discounts upstream.
In addition, Gove Lumber has no bad debt on its books (no interest payments, either), has lowered the expenses associated with managing its receivables and especially past-due accounts, and has relieved Gove from being the bad guy with late-paying pros. “There are now no emotional confrontations [with customers],” he says. “If they have an issue or a problem [with BlueTarp], I can be the hero by promising to make a phone call and see what I can do to solve it.”
If not engaging a trade credit service, dealers have also off-loaded the task of at least recouping late or delinquent account balances to attorneys, lien specialists, and collections agencies, though the latter is sometimes seen as a last resort. “We’ve never discussed or considered that as an option,” says Czaplewski, who does retain a law firm for extreme cases. “We’d rather control the relationship than have customers get a call from a collections agency.”
Dealers responding to our survey last fall, however, don’t agree. While fewer than 4% of them engage a firm like BlueTarp, 41% reported hiring a collections agency, and the vast majority hired that firm within the previous 18 months.
Assess Your Risks
Among several tactics, Richardson-Newton promotes getting credit reports; dissecting customer account history to look for patterns and opportunities to alter terms; and asking for money owed before allowable terms are breached. “You need to know what’s going on with an account while it is still current at 30 days, not just when it gets to 60 or 90 days,” she says. “One of the most critical points in ensuring that you get paid is before the money is due–making sure you clearly understand the customer’s expectations and billing requirements, and reaching an agreement on payment terms. In short, ensure that there are no barriers to receiving payment before there is one.”
To that end, Barker Lumber developed a New Project Worksheet for every sold job that lists and verifies the name of the property owner (either the customer or his client); the funding sources, such as bank loans; and whether credit (and how much of it) is being extended by the dealer for that job.
Other practices to determining a customer’s credit worthiness and chain of funding include checking bank and trade references, the state contractor’s licensing board and Secretary of State’s office, and financial statements and recent tax returns. It also pays to watch for and follow-up on red flags, such as a sudden surge in orders, a slower payment pace, and changes in the customer’s ability to access existing or new loans from lenders. “If there’s no construction loan involved, we’ll check his credit rating and bank for available funds,” says Porter, who uses such information as evidence to turn down a credit application.
The process not only tightens credit policies and reduces a dealer’s risk, but also can strengthen relationships with customers. “We’re now talking to our customers about credit as part of the sales process,” says Buz Gileau, operations manager for Coventry (R.I.) Lumber, a single-location dealer that’s another BlueTarp client. “We’ve found that it’s okay to limit credit and cut them off instead of taking a ‘don’t ask, don’t tell’ approach,” which he says customers respect more so than resent.
