In 2025, managing credit risk in the building materials industry is more complex—and more critical—than ever. With continued interest rate volatility, fluctuating project timelines, and a mix of new and established contractors in the market, extending credit isn’t just a sales enabler—it’s a strategic risk decision.
For distributors, extending the right credit to the right contractors at the right time can fuel growth. But getting it wrong can lead to cash flow issues, bad debt, and damaged relationships.
Here’s a step-by-step guide to executing a smarter, data-driven approach to managing credit risk with contractor customers in today’s environment.
✅ Step 1: Establish a Clear Credit Policy (and Stick to It)
Why it matters:
Credit risk increases when terms are vague, flexible, or inconsistently applied.
What to Include:
Credit limits by contractor type or risk tier
Payment terms and escalation procedures
Required documentation (financials, references, licenses)
Terms for revoking or modifying limits
🧾 A clear policy protects your team from pressure and protects your business from exposure.
✅ Step 2: Automate Credit Evaluations With Data and Technology
Why it matters:
Manual reviews are slow, inconsistent, and miss key risk signals.
What to Do:
Use a credit risk management platform or integrate with your ERP
Pull data from multiple sources: trade payment history, public records, jobsite size
Automate alerts for red flags (e.g., overdue balances, sudden payment changes)
Tools to Explore:
Experian BusinessIQ
Creditsafe
CRF Scorecards
ERP-integrated dashboards
📊 Faster decisions mean faster onboarding—and earlier risk detection.
✅ Step 3: Tier Customers by Risk and Tailor Your Terms
Why it matters:
Not all contractors should be treated the same when it comes to credit exposure.
Example Tiers:
Tier 1: Large, long-term customers with clean payment history → Higher limits, longer terms
Tier 2: Growing accounts with moderate history → Moderate limits, shorter terms
Tier 3: New or high-risk contractors → COD, deposit required, or credit insurance
🎯 Precision protects margin and builds trust.
✅ Step 4: Monitor Behavior Continuously—Not Just at Setup
Why it matters:
Contractor risk changes constantly based on project pipelines, seasonality, and external market forces.
What to Watch:
Days Sales Outstanding (DSO) trends
Payment frequency vs. past behavior
Credit limit usage (over-reliance on float)
Alerts from supplier or bank partners
Pro Tip:
Set automated monthly reviews for accounts over a certain balance or aging threshold.
🕵️ Credit management is a real-time function—not a one-time task.
✅ Step 5: Align Sales and Finance on Credit Risk Strategy
Why it matters:
Sales teams want to grow accounts; finance wants to protect assets. Misalignment creates conflict—and risk.
What to Do:
Train sales teams on your credit tiers and escalation process
Include credit KPIs in sales dashboards (e.g., % on-time payment by rep’s book)
Set shared goals (e.g., growth and clean aging reports)
🤝 When everyone owns the outcome, risk management gets proactive—not reactive.
✅ Step 6: Use Job-Level Controls to Limit Exposure
Why it matters:
In 2025, large projects can stall or fail suddenly—job-specific controls reduce your risk.
Smart Practices:
Tie credit approvals to specific projects or phases
Use lien rights and pre-lien notifications consistently
Break large orders into phased approvals or partial releases
🏗️ Control credit at the job level, not just the account level.
✅ Step 7: Act Early on Warning Signs—With a Playbook
Why it matters:
Delays in action increase your likelihood of non-payment.
Red Flags to Watch:
Repeated promise-to-pay extensions
Sudden change in ordering volume
Missed communication or avoidance
Your Playbook Should Include:
Escalation steps (internal and external)
Legal and lien process triggers
Communication templates for tough conversations
🚨 Proactive follow-up preserves options and shows professionalism.
✅ Step 8: Track and Report Credit Risk KPIs
Why it matters:
What gets measured gets managed—and improved.
Key Credit Risk KPIs:
% of accounts current vs. overdue
Average DSO by customer type
% of revenue under secured vs. unsecured terms
Bad debt as % of total revenue
Credit limit utilization
📈 A data-driven credit strategy drives smart growth—not risky growth.
🧠 Conclusion: Credit Risk Management Is a Strategic Capability in 2025
Contractor credit isn’t just about protecting against loss—it’s about enabling scalable, confident growth. When executed with discipline, data, and cross-functional alignment, credit becomes a tool that fuels customer relationships without exposing your business to unnecessary risk.
