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In the construction industry, where credit is an integral part of companies’ processes, credit teams have to assess the creditworthiness of their customers individually, and it’s neither a straightforward nor simple process. In fact, many contractors and credit managers alike may come up against a number of challenges when it comes to figuring out a business’ creditworthiness. Read on to learn about those challenges — plus, four key strategies the pros use for determining creditworthiness that you can adopt.

Common credit issues for those in the construction industry

Long-time credit manager and construction consultant Thea Dudley noted what she sees as some common challenges people run into when trying to ascertain a company’s credit situation.

Thea Dudley

Thea Dudley

33 years experience
5 articles
26 answers

For contractors, the issues often start with a lack of credit applications: “Most [contractors] rely on the proposal or contract, which does not provide all the information necessary to assess the customers,” Dudley says.

Additionally, Dudley notes that she sees an issue with companies lacking credit approval policies and processes as well as failing to take advantage of credit reports, saying that, often, many companies are not proactive enough: “They have no idea who they are doing business with until something goes wrong.”

Assessing the creditworthiness of suppliers is a whole other process, and one that poses a new set of problems. Dudley points out that the high volume of work for many suppliers due to widespread industry labor shortages has made it hard to get credit assessed properly, as many teams don’t have the staffing capabilities necessary to handle their needs. 

Limited tools and lack of information also play large parts in the difficulties that suppliers face in assessing credit.

“Suppliers’ credit teams may not have access to credit reporting agencies and rely on trade references for information — which causes delays in getting that information. And many small-to-medium companies may not have enough data available to give a credit manager any insight,” Dudley says.

Learn more: How Trade References Improve Credit Decisions — and Why They’re Overrated

How construction credit experts assess credit

Credit managers and financial institutions often use the “5 Cs of Credit” — character, capacity, condition, capital, and collateral — as a basis with which to assess a customer’s creditworthiness, but long-time credit manager and construction consultant Thea Dudley maintains that “the 5 Cs really are another way to say ‘Know your customer.'”

Deep dive: The 5 Cs of Credit – How Construction Pros Make Credit Decisions

Here are four ways to go about discerning creditworthiness before you start work on a project — even if you aren’t a seasoned credit manager yourself.

1. Use the credit application & get to know the customer

“I start with the credit application,” Dudley says about her process. “I want to know who I am doing business with. I can’t get that off a contract. I need emails, contact for AP, or ownership information. Where do they bank? Who is authorized to place orders/work? Where do they currently purchase?”

When you’re getting to know your customer, it’s also beneficial to talk to your sales team. “Talk to sales reps,” Dudley emphasizes. “What do they know about the customer? What is their main business? Where does their work come from?”

2. Take advantage of everything on the credit report

It is possible to purchase credit reports from credit bureaus within the industry, which may say if the company has a history of paying its bill on time or not — as well as if the company has any active negative filings on its record, like mechanics liens.

“I want to see all the underwriter information that a commercial credit report can provide: Financial information (lines of credit, credit cards, leasing, trade payments and performance), UCC filings (with who and for what), any legal issues like judgments, liens, or collection items,” Dudley says.

Though not all contractors will have a report available with a bureau — most small or mid-size contractors are unlikely to have business credit — if a company does have a report, this can be a helpful way to assess a company’s financial situation from the outside.

It’s important to avoid discounting anything for its simplicity, Dudley adds. “I can still email out trade references if I choose to, but I can pull a credit report in under a minute and have a wealth of information immediately.”

3. Ask the contractor for evidence

You can ask for proof of creditworthiness directly from a contractor as part of any prequalification process — finances, work history, and litigation history are all pieces of information that can be obtained directly from a company and can serve as invaluable to assessing their credit.

“Don’t be afraid to reach out to the applicant,” Dudley maintains. “Talk to them. Ask questions. If something is a red flag to you on their credit report, ask them about it.  The way they respond will tell you volumes about how they will be to work with.”

4. Research, research, research

“Never underestimate the power of a simple Google search,” Dudley says. “Plug in the company name and/or the ownership and see what pops up. Google reviews, street view of the business — I can always look at Zillow for more data on their property.”

It’s also beneficial to do your own searches into a contractor’s payment history and the status of their licenses, as well as contacting companies who have worked with them in the past. 

“Look at their website,” Dudley adds. “Everyone can build one, but what is out there?” 

Deep dive: Prequalification – How to Avoid Bad Contractors, Subs, and Suppliers Before They Become Your Problem

No matter how it’s being done, adding to your knowledge of a company’s recent history is always a good idea when trying to assess their financial situation and how likely they are to make payments on time.

“Ask questions, get answers and use your experience and logic,” Dudley says. “Balance that against the risk/reward philosophy of your company.”

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