The Trickle Up Effect: How Uncertainty Impacts LBM Dealers
Help protect your business from an economic downturn and other unexpected events
December 8, 2023
When the US construction industry faces economic uncertainty, lumber and building materials (LBM) dealers may find that their contractors are not able to pay their bills due to stalled or canceled projects.
While contractors are looking at the next 12 months with some positivity — 88% of those surveyed in Q4 2021 reported a moderate-to-high level of confidence in sufficient new business opportunities in the next 12 months — they are still facing material shortages (95%), project delays due to COVID-19 (66%), and difficulties finding skilled workers (62%).
Any of these issues can lead to a “trickle up” effect for LBM dealers. Contractors’ financial issues can ripple outward, disrupting your cash flow, slowing your growth, and restricting your ability to procure inventory. What can you do now to protect your business from an economic downturn or other unexpected events?
6 Ways to Beat Back Uncertainty Through Trade Credit
One of the best ways to build more business resilience is by strengthening your trade credit program. Here are six ways you can limit your risks, build in more resiliency, and continue to grow your business.
- Extend the right level of credit to the right customers. Onboarding a new credit customer requires a significant amount of due diligence. You need to have a clear-cut process for evaluating customers’ ability to pay. This starts with pulling their credit reports, but it also involves understanding their financials, including assets, liabilities, profitability, and cash flow. You should also discuss their expected needs regarding upcoming business.
- Create clear expectations, A credit agreement should be a legal contract, not a handshake deal. Make sure your credit agreement outlines the rights and responsibilities of each party. It must cover all eventualities, including overdue payment penalties, venue for resolving disputes, and more. For that reason, you should vet your agreement with an attorney before rolling it out to customers.
- Communicate constantly. If you are managing your own credit program, staying in touch with your customers is the best way to keep things on track. Follow up on missed payments immediately and discuss options with your customers. Proactive communication offers another significant benefit — often, the customer you rarely hear from is the one you should worry about the most.
- Follow through. Delinquent accounts and debt collection aren’t fun, but they are a necessary part of offering trade credit. When dealing with customers in default, it’s key to have a consistent process where certain measures, such as reminder emails and collections warnings, are triggered at specific stages of delinquency. Many companies outsource collections to a third party, but this can be costly.
- Make it easy to pay. With the rapid rise of mobile technology, we’ve all become used to conducting business wherever and whenever it’s convenient. Providing a portal where customers can review their account, see transactions, and make payments can save your staff valuable time while making it easier for your customers to remain current.
- Stay on top of things. Managing a credit program is an ongoing process, particularly in these uncertain times. To keep risk under control, you should be actively monitoring customer credit accounts, updating your credit bureau records, and assessing customers’ credit performance at least twice a year. Run an aging report on a regular basis, identify unused credit lines, and monitor transactions for fraudulent activity.
It's Challenging to Manage Trade Credit on Your Own
As you can see, there’s a lot riding on your trade credit program — and a lot of effort required to make sure you get it right. In fact, it may well be more effort than it’s worth.
Many independent LBM dealers may have only a single person managing credit, including approvals and servicing. They may not have the tools and resources to perform due diligence or properly monitor accounts, especially if your business is growing quickly. This can lead to a looser adherence to their own internal credit rules, which can increase risk. Fraud is another danger, as few LBM businesses running their own trade credit program have the systems needed to protect against today’s rampant fraudulent activity.
How a Best-in-Class Trade Credit Partner Can Relieve the Burden
An effective trade credit program can improve cash flow and fuel growth, but it can be a tall order if you have limited resources to maintain it. Working with a best-in-class trade credit partner can be the answer to this dilemma. Here are just some of the benefits you can expect when working with a trade credit partner:
- More predictable cash flow. Make business decisions with certainty, knowing that you’ll be paid at the frequency you choose.
- Lower risk. Reduce risk from nonpayment and fraud, while retaining full sales control with recourse options. A best-in-class trade credit partner performs all the necessary due diligence to make credit decisions and continually monitors accounts.
- More time for your own business. When your credit partner manages credit lines, billing, payments, collections, and customer service, your teams can focus on building your business.
- Happier customers. Customers benefit from access to online applications, instant credit decisioning for near real-time purchasing, extended payment terms, and a portal to make payments, download invoices and statements, and set preferences.
Capital One Trade Credit allows you to increase cash flow and grow your business while maintaining your ideal level of trade credit risk. You decide on the terms, billing, and servicing that work best for your customers, and then choose the funding and risk protection that work best for your business.
 U.S. Chamber of Commerce, Q4 2021 Commercial Construction Index