August, 2008

Remodelers and Credit

A careful credit plan will help you earn the business.

By Steve Easley

This particular story from the beginning of Bob’s construction career illustrates how financing plays a part in building relationships. In one town, Bob’s first visit to get materials from a supplier resulted in a handshake deal to set up an account (ah, rural America in the 70s) and a truck loaded with lumber. In a neighboring town, he had to badger the owner, who was concerned about losing money on “deadbeat remodelers,” to get on their books. The first company is still supplying the local contractors, while the latter has been put out to pasture.

There are risks and there are opportunities in serving remodelers, and the difficulty is in understanding how to respond to them.

In the early years of remodeling, a pickup truck, a tool belt, and a dog were the signature of the novice remodeler. A good year left money in the bank for surviving the winter doldrums. Even the better- run of these companies would be satisfied with a supplier that gave them 30 days to settle up.

The increase in professionalism within the remodeling industry has changed the profile of startup companies. It’s not at all unusual to find an MBA as the owner of a remodeling firm, with financing in place and a business plan in hand. Couple this with the many professional remodelers who have been in business for more than 15 years, and you find that their expectations on financial arrangements with lumberyards have been rising.

LBM dealers have to offer these companies financial services that present opportunities, as well as protection.

With the large number of remodelers in the industry, the first challenge is in choosing the best prospects.

Evaluating a small, one-person shop is straightforward. A completed credit application, along with a list of references, provides enough information to satisfy the minimal risks involved. As your smaller remodeling accounts grow, or when an established remodeler approaches you, your opportunities and risks increase. This is where membership in the local remodeler or builder association is beneficial. The relationships you establish there can be far more helpful in understanding a new account than what you find in a credit application or report.

Accounts receivable is another testy area in supplier/contractor relations. Remodeling companies typically receive progress payments over the course of a project. While it doesn’t mean that they will always be current on their lumber account, it isn’t as big of an issue as it is with homebuilders waiting for a unit to sell.

An incentive to keep remodelers current is the “prompt pay discount”—bill out on the 1st, receive payment by the 10th where a remodeler receives a discount for early payment. (This is in addition to the volume discount that they receive as a professional client.) Don’t use the homebuilder’s discount formula as a benchmark for volume buying; the size of the accounts and their margins aren’t comparable to remodelers. This discount can be set up on a sliding scale, increasing as the account size grows. Your customers will be rewarded for their loyalty, while you show dedication to earning their patronage.

The ebb and flow of home sales may determine how long you carry a homebuilder on the books. With the usual progress payments from homeowners, the same shouldn’t be true for your remodeler accounts. Even 60 days may be a signal that they are having cash flow problems. A prompt call to see what’s up can either clear up a simple issue or provide early warning to future problems. And unanswered calls rarely portend good news.

Keep in mind that remodeling contractors have a continuing relationship with your finance department. With smaller companies, it’s often the owner who has to straighten out some billing snafu. Being consistent about whom they deal with and what they’re told will help them keep any financial issues in perspective.

Creating a clear financial landscape is one more opportunity for your company to roll out the welcome mat and make the contractor feel (and be!) appreciated.

DAVE KLUN and BOB BUCK have extensive experience in the remodeling industry— Buck as a pro remodeler, and Klun as an LBM dealer focusing exclusively on this category.