In the building materials and construction supply industry, offering credit to contractor customers is often essential to winning business—but it comes with risk. Payment delays, defaults, and project-based cash flow issues can expose distributors to serious financial strain.
A well-structured credit risk management framework can protect your margins while maintaining strong customer relationships. Here’s a step-by-step guide to managing credit risk effectively with contractor customers.
Step 1: Establish Clear Credit Policies
Before extending credit, define the rules of engagement.
Key Elements:
Minimum requirements for credit eligibility
Standard credit limits by customer type or size
Payment terms (e.g., Net 30, Net 45)
Interest or penalties for late payments
Red flags that trigger account review
✅ Tip: Document these policies and train your sales and credit teams on consistent enforcement.
Step 2: Perform Thorough Credit Evaluations
Don’t rely solely on customer relationships or word of mouth. Evaluate every contractor’s financial health before extending terms.
What to Review:
Business credit reports (e.g., Dun & Bradstreet, Experian)
Trade references and payment history
Bank statements or financial statements (for large accounts)
Legal records for liens, lawsuits, or bankruptcies
✅ Risk Tool: Use a credit scoring model to assign a risk tier and set an appropriate credit limit.
Step 3: Use Tiered Credit Limits and Terms
Not every contractor deserves the same credit terms. Match credit exposure to the risk level and payment behavior.
Examples:
Low-risk contractors: Higher limits, Net 45–60 terms
Medium-risk contractors: Moderate limits, Net 30 terms
High-risk or new accounts: Limited credit, Net 15 or COD until history is established
✅ Pro tip: Use performance-based limits that grow as the contractor builds a good track record.
Step 4: Secure Credit with Additional Protections
To further reduce exposure, secure your receivables wherever possible.
Options to Consider:
Personal guarantees from business owners
Joint check agreements with GCs or property owners
Materialmen’s lien rights to secure claims against the jobsite
Credit insurance for large or high-risk accounts
✅ Legal note: Ensure your team understands and complies with state-specific lien laws and notice deadlines.
Step 5: Monitor and Review Credit Accounts Regularly
Credit risk isn’t static. Contractors’ financial health can shift quickly—especially in volatile markets.
How to Monitor:
Set up alerts for past-due accounts or returned checks
Review aging reports weekly or biweekly
Reevaluate credit limits quarterly or based on project size
Track Days Sales Outstanding (DSO) by customer
✅ KPI to Watch: Watch for changes in average payment days or sudden large orders that exceed credit norms.
Step 6: Integrate Credit Management into Sales Workflows
Sales teams are often the first to know when a contractor is in financial trouble—but they also want to close the deal.
Best Practices:
Give sales access to real-time credit status and limits
Create escalation paths for limit increases or exceptions
Encourage sales to collect updated financials for key accounts
✅ Balance: Empower sales, but keep credit approvals centralized for consistency and control.
Step 7: Proactively Manage Collections
Delinquent accounts can spiral quickly. Have a structured collections process in place.
Process Steps:
Friendly reminder at 5–7 days past due
Formal past due notice at 15–30 days
Phone call or sales rep involvement after 30 days
Payment plan or hold on account after 45–60 days
Escalation to legal or collections at 90+ days
✅ Tone matters: Be firm, professional, and proactive—not reactive or combative.
Step 8: Leverage Technology and Automation
Modern credit management tools help streamline and standardize risk control.
Tools to Use:
ERP systems with credit limit alerts and real-time AR visibility
CRM systems that integrate credit data for sales teams
Automated dunning and reminder emails
Dashboards to monitor risk exposure by customer, job, or region
✅ Result: Faster decision-making, fewer surprises, and improved cash flow.
Step 9: Collaborate with Finance, Sales, and Legal Teams
Credit risk is not just a finance problem—it’s a cross-functional responsibility.
Keys to Success:
Regular alignment meetings between AR, sales, and operations
Clear communication on credit status and collection risks
Fast response to disputes or project issues that delay payment
✅ Bonus: Share success metrics (like DSO improvements or collections recovered) to show team impact.
Step 10: Learn and Adapt
Track what works and continuously refine your credit strategy as your customer base evolves.
What to Review:
Top delinquent accounts and patterns
High-risk customer segments or project types
Collection rates by sales rep or branch
Credit-related write-offs vs. recoveries
✅ Final thought: Use these insights to prevent future exposure and tighten your credit processes without stifling growth.
Final Thoughts: Protect Margin, Preserve Relationships
Managing credit risk with contractor customers isn’t about saying “no”—it’s about saying yes, with confidence and control. A structured, data-driven framework allows you to offer flexible terms, support your customers, and grow safely—without leaving your margins at risk.
