Most construction contractors don’t consider how the creditworthiness and cash flow of their customers can impact their bottom line. But they should. More than 40 percent of small businesses have customers that are more than 90 days late on a payment, according to a survey by RocketLawyer.
For contractors and construction companies looking to take on new jobs to maintain and grow their businesses, winning the bid can often make them forget to worry about the possible risks. When contractors extend payment terms and are not paid in advance, they could be taking on the financial challenges of the new client without even knowing it. This applies to existing clients as well—any company’s financial standing can change at any time for various reasons.
Clients’ creditworthiness directly impacts their ability to pay, but many contractors and construction companies often overlook that fact. It’s easy to find a client’s creditworthiness using a credit report, which provides information on the business’s trading, credit and financial histories. It also provides a credit rating and suggested credit limit. This information can prove to be invaluable when assessing whether to work with a client and the payment terms that should be extended.
How long clients take to pay impacts contractors’ bottom lines, because it impacts their cash flow. Since there are many expenses, such as materials and payroll, that contractors and construction companies have to cover in advance of being paid by clients, it’s important to manage cash flow closely. When your clients stretch out the payment terms and don’t pay for 45, 60, 90 or more days, contractors are stuck having to cover those expenses and stress their cash flow.
Protect your business
One way to protect your business and find information necessary to ensure clients and potential clients are creditworthy (and to get paid more quickly) is to partner with a factoring company. Factoring companies handle all the due diligence needed on an ongoing basis by conducting credit checks to give contractors information needed to make decisions about potential clients. They will also provide immediate access to funds from unpaid invoices to help contractors more easily manage their cash flow.