|Know who you are sleeping with|
Before bidding on a new job or starting a new project with an unfamiliar customer, ask yourself, “Who am I getting into bed with?” Another way to ask this question, in nicer terms, is “What do I really know about this potential customer?”
Many companies operate on good-faith, established relationships or are doing business to help a “friend”; however, sometimes this can come back to bite you. Just because you think you know someone doesn’t mean you know their credit and financial history.
What skeletons are in the “credit closet”?
As a credit grantor, it is important to know what is in your customer’s credit closet. Have they previously gone bankrupt? How quickly are they paying their trade suppliers? Are there any ongoing legal or collection items? Everyone starts a job with the idea they are going to be paid for the work they provide. Sorry to tell you, this doesn’t always happen! Imagine going on a blind date – how do you know what you are in for? You would probably check the person out a bit before just to get an idea of who they are. You should do the same thing in business. Check out your customer before to avoid “going on your blind date”.
The risk you are taking by not checking your potential customer can have devastating effects on your business. To help you truly understand the magnitude of this discussion, one must know a few basics about your business. Basics like: net margin (profit after tax) and cost of customer acquisition (how much does it cost you to get a new customer). Let’s look at how this would play out.
According to Home Builder Magazine*, the projected profit margin in the Canadian Residential Construction Industry in 2017 is 3.3% ** For example, if you were supplying $50,000 worth of work to a job and all of a sudden your customer cannot pay you or goes out of business, you are potentially out the full $50,000. That means you need $1.5 Million in new sales to make up for the loss if you have a 3.3% profit margin ($50,000 x 3.3% = $1.5 Million). That is a lot of ground (30 new $50,000 projects) you need to sell to cover the original loss. This doesn’t include your new client acquisition costs for the 30 new jobs!!! As you can see, even one loss can significantly impact your business.
Practicing “safe credit” to avoid surprises
There are tools you can use to protect yourself, in the beginning, to help mitigate potential payment issues in the future. As a business, you want to do anything you can to make a sale because you want to make money. A credit check on your customer before you started work could have told you how quickly they pay or if your customer has financial troubles currently or in the past. Credit Checks and tools such as Construction Project Credit Reports are a small price to pay if it means you could avoid a financial loss.
Just because they are a nice person doesn’t mean they necessarily know how to manage a checkbook.
Credit checks allow you to analyze your customer’s credit potential. What is their capacity to pay you and how quickly will you get paid? There are several credit checks available depending on how thorough you want to be. A basic credit check will determine your customers’ credit-worthiness by assessing a customer’s credit bureau, conducting a bank check, trade reference checks, and analyzing trade payment history.
If you are going to do work on a new project and do not know the parties involved, a Project Intel Report will give you a full overview. Project Intel Reports provide full credit checks on your customer. Company profile reports on both your customer and the general contractor tell you who you are working for and who is running the company. Project/property reports outline, in advance, if the project you are working on has any existing builders’ or construction liens, legal action or other registrations against it that may impact the project.
Professional credit managers know and understand the need for credit checks and project analysis. They want to do everything in their power to ensure you do not miss out on any opportunities and avoid getting burned.
Lien-Pro Inc. provides one-stop credit and collection services for the construction industry. We have the project spectrum covered:
Beginning: Credit Checks, Project Intel Reports, and searches
End: Demand Letters, Builders’ and Construction Lien Filing, and Collections (with our sister companies – Priority Credit Recovery Inc. & Account Adjustment Bureau, Inc.)