No financials, no problem! 

When a new customer applies for credit, there is a lot to consider. Only after carefully parsing through financials, credit reports and just about every other piece of information available can a credit manager make a concrete decision on how much credit to extend, or if to extend credit at all.

Why it matters: In construction credit, customers often do not share their financial statements, even when asked by creditors. As a result, construction credit managers find other ways to learn about their customers and gauge risk, from outside credit reports to leaning on industry credit groups, while keeping their eye on the account early on.

“When we have a newer customer without financial statements, we typically monitor them more closely and give them a lower credit limit to start with,” said Sara Riddle, credit and collections manager for Empire Pipe and Supply Co. (Birmingham, AL). “We may only sell strictly for jobs until we can get an idea of how well they pay before we extend unsecured credit.” 

When working without a detailed understanding of a customer’s financial situation, altering the starting credit limit to minimize risk exposure can add a degree of safety. “Be conservative when assigning a credit limit,” said Elizabeth Moneypenny, CCRA, AR coordinator for Simpson Strong-Tie Company (Columbus, OH). “If something seems off when reviewing the credit reports, it probably is. A credit limit may be low to start, but with good payment history, they can be increased.” 

Without an understanding of a company’s viability, whether that’s because credit reports are scant or the business is fairly new, credit managers might be tasked with finding creative ways to sell to customers without extending credit. 

“Find as many facts as you can so that you are comfortable with the credit limit,” Moneypenny said. “Sometimes an account cannot be set up if there is a lack of information or unfavorable credit reports. At times customers can pay cash in advance and then be granted a credit line after they establish a history of prompt payments and good communication.” 

Gauging risk means taking the time to get to know a customer, making it a great opportunity to lean on the sales team. “When there is a brand-new customer requesting credit, we’ll try to work with our sales team to better understand how that relationship came about,” said Riddle. “That way we can best determine the right credit limit.”

The task of assessing a customer’s credit risk without financials is ultimately about finding a careful balance between minimizing losses and maximizing sales. “As much as we need sales, don’t allow yourself to get backed into a corner,” said Moneypenny. “If you need more info on the customer, be sure to ask.” 

One reason extending credit without seeing financial statements is more common in the construction industry is the widespread use of mechanic’s liens and bonds. “When we extend credit it is secured through liens and bonds” said Riddle. “So we have to pay attention to the laws in the state we are working in and stay on top of invoices and deadlines. Even with protections in place, we will still have customers who like to pay in lump sums or from oldest to newest, which we might not realize until we are already working with them.”

The bottom line: When a customer isn’t forthcoming with financial statements, it doesn’t have to mean they won’t get a credit line. Instead, lean on credit reports, industry credit groups and online presence to find as much information on a customer as you can to determine an appropriate credit limit, all while protecting your company from risk using liens and bonds to secure credit.