Construction Market Growing – But Credit Policies Still Tight
The construction industry as a whole seems to have stabilized, and appears to be poised for moderate growth in 2013 – paced by the newly resurgent housing market. The Dodge Construction Report predicts a 6% growth in total U.S. construction starts, slightly ahead of the pace of growth last year. This moderate pace of growth, however, does little to ease fears of non-payment or loosen the purse strings like one might see in a booming market. Clearly the fears of non-payment are, at least to some extent, realistic. Providing materials on credit always has some danger – even if the danger in reality is much less than the danger lurking in the back of your mind.
A good credit policy is not merely a restrictive credit policy. The goal should be better security, not more restrictions.
The question is how to manage the market’s recovery. Scott recently posted an article outlining Accounts Receivable Management for Construction Industry Controllers, in which he emphasized the need to have a clear and well though out credit policy. This could not be more true; a good credit policy is essential to navigating the recovery like you navigated the downturn. It is important to note, however, that a good credit policy is not merely a restrictive credit policy – despite what may seem like common sense.
Ultra-Restrictive Credit Policies May Cost You Money – Not Save It
A very restrictive credit policy may indeed lower the amount of risky credit extensions, but it also lowers the potential amount of total business. Depending on your company’s level of risk-aversion, this statement probably either sounds counter-intuitive, or completely obvious. A very restrictive credit policy results in less material being extended on credit, obviously, because fewer parties will qualify. While this, in turn, results in lower payment defaults, it also results in less total business. By being very restrictive in the determination of extending materials on credit, there are necessarily jobs that must be turned down, and potential business that is not considered.
This give-and-take between trying to get as much business as possible, and trying to make sure you get paid for the business that you do take on, and where that balances, is the backbone of determining a sound credit policy for your business, and maximizing your business revenue.
Properly Manage Lien and Bond Claim Notices to Secure Your Extensions of Credit
So what if I told you that your could relax your credit policy so that you could accept more business, but still retain the security (and likelihood of payment) provided by a more restrictive policy? It’s the best of both worlds, and it can be accessed by properly managing the lien (and/or bond claim) and notice requirements of the state in which your projects occur.
A good lien management policy is essential to incorporate into a good credit management policy.
The mechanic’s lien instrument, when properly used, transforms the debt incurred from extending credit on construction projects to secured debt. We have written before on the ways mechanic’s liens get you paid, and those reasons hold true. A good lien management policy is essential to incorporate into a good credit management policy. Availing yourself of the protections provided by the mechanic’s lien instrument allows a good credit policy to not be a completely restrictive credit policy – and that means more business.