Neeral Shah is founder and chief executive of YardLink
In any area of the construction supply chain, offering credit terms is an essential aspect of business planning. But as construction sector administrations stabilise and optimism rises, it’s crucial to establish ground rules within your team to mitigate risk.
“With the record number of insolvencies we saw last year, you might want to exhaust your credit checks”
Here are four practical pieces of advice for effectively managing credit risk in the construction industry during a potential recovery phase.
1. Do things that don’t scale
“Drive growth and scale” is founder 101 for many. But where does this mindset leave you if customers can’t pay? Let’s not forget how common this situation was last year, when we saw more companies go bust in construction than any other sector.
To mitigate the risks of unpaid credit, start doing the things that don’t necessarily scale. Speak with your customers’ finance teams regularly and on a personal level. Understand first-hand how they’re really doing – and even reach out to people in their network who might be trading with them.
These are highly valuable trade references that can build a structure for growth. And this will help later on to build better processes and greater efficiency in these checks.
2. ‘Too big to fail’ isn’t really a thing
January marked the sixth anniversary of Carillion’s collapse. We all know the story. The government’s biggest contractor went bust while having £6.6bn in liabilities. One year after Carillion went under, Interserve, the contractor with £3bn in turnover, went into administration.
What happened next was predictable – construction firms and contractors that relied on them went out of business, forcing the industry’s supply chain to collapse in debt.
When it comes to managing credit risk, particularly in a volatile economic climate, the concept of ‘safety’ doesn’t really exist. If you are speaking with bigger customers, keep your feet on the ground. You haven’t necessarily ‘made it’. Do your homework.
For example, in investment banking, analysts consider how current macro trends affect markets and companies to evaluate the strength of a business. The construction industry should be doing the same to mitigate credit risk, considering factors such as industry restrictions, companies’ competitiveness, labour shortages and inflation.
3. Check, check, check
With the record number of insolvencies we saw last year, you might want to exhaust your credit checks. Time and time again, I’ve learnt that it’s better to anticipate the worst by rolling your sleeves up and getting into the nitty-gritty details of customers’ credit profiles.
Apart from working with large credit agencies that provide automated references, to really get a picture of our industry, you should also consider working with what some might consider ‘low-tech’ solutions. Medium-sized reference agencies can focus on your specific industry, and sometimes they can be even more aligned with your company’s views on credit.
These solutions tend to have very focused, extensive networks and even richer information that is more tailored to your field. Think of things like tracking payment and trade references from other vendors in your field and checking director profiles.
4. Rethink that ‘aggressive’ customer acquisition strategy
During volatile economic conditions, more companies become stricter about giving credit – reducing credit lines or even cutting off credit limits and stopping trade with certain customers. I would advise taking a preventative approach and anticipating difficult conversations.
You might want to be prudent and consider opening credit accounts with companies that have been trading for more than two years. Longevity doesn’t necessarily guarantee that a big company will pay, but at least it provides a trackable history to do the appropriate checks.
As we navigate the complexities of credit management in construction, it is imperative to build financial rigour to mitigate risk.
To build financial resilience in business, firms need good customer relationships, meticulous checks, and thoughtful decision-making. Through these actions, businesses can build financial rigour and adapt to evolving economic landscapes with greater confidence and agility.
