Construction spending between August and October 2016 saw the highest average spend since May to July of 2006, and it looks like spending will still be on the rise in Q4. All good news for your contracting business, right?
Not exactly.
Research shows that three times as many construction companies actually fail during recoveries than during downturns. Three times as many!
Here are some important steps you can take to help protect your business.
Know your customer’s credit profile
Construction is a credit-driven business. When orders pick up, most builders have little choice but to put all or most their expenses on their client’s tab. But what happens if your client misses a few payments? Could you survive?
Before getting into business agreements, you should review your client’s credit profile to make sure they pay their bills. The law allows you to pull the credit report of another business without its permission or knowledge.
You can look up a summary report of companies you are interested in doing business with using Nav’s Business Search tool. For a closer look at the business credit reports of your clients or competitors, check out our Premium Plus subscription, where you can track the credit of up to five other businesses.
Manage your own credit
You can be sure that lenders, suppliers, customers, and competitors will be looking up the credit health of your company. What they find will have a huge impact on your business.
Good news, though: You can easily monitor your company’s credit scores. Creditors or business partners may assess your creditworthiness on a continual basis. If you work with the federal government or large companies, they may regularly check your company’s credit to make sure you are meeting a minimum score. Your D&B PAYDEX score in particular may come into question, and that minimum score may be 80/100. In order to meet that minimum score, you have to consistently pay your debts on time.
When you’re looking at your reports, keep an eye out for red flags or any misinformation that may be bringing down your score. Check to see which of your suppliers and vendors are reporting, and if your reports are lacking payment information it may be worth asking some of your suppliers if they can report.
How Credit Can Impact Your Business
1. Better trade terms.
This is a big one for construction companies. Your vendors and suppliers may be willing to give you more time to pay outstanding invoices if you have a solid relationship with them. But your business credit will likely be called into question to determine if you’re a credible borrower. If your business credit profile shows that you regularly pay your bills on time, you’ll be in a better position to secure net-30, 60, or even 90-day payment schedules.
(Learn more about the D&B PAYDEX Score, which is the primary score used by vendors and suppliers to inspect your business when determining trade terms.)
2. Better rates and repayment terms on financing.
Say you need new equipment and you need help financing that equipment purchase. Lenders and creditors can consider your business credit score before extending a loan or line of credit to your business. Getting your credit in shape now will make the process of finding a good lender quicker, and you may be offered better rates and terms.
3. Better premiums on business insurance.
Here’s how this works: Construction companies need to be insured. Business insurance providers, when determining what rate to quote for a business, will take into account a number of factors to create a score of their own that will determine your rate. Your business’s credit score is one of those score factors. Business insurance providers want to see that your business is financially healthy and not likely to fail and stop making payments on their insurance.
Getting your business credit in shape is a great way to be prepared for any unexpected opportunities or crises that may arise in 2017.
This article was originally written on December 14, 2016 and updated on August 10, 2017.
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