Credit applications used by dealers in our industry are nearly identical in what they ask for: company and principal info, trade and bank references, and usually requests for a personal guarantee. This information plus a statement of terms is pretty standard fare.
What is far from standard, however, is how dealers manage the credit process to protect themselves from risk.
First, experienced dealers ensure that all of the information is filled out completely, the application is signed, and they get completed references prior to making a credit decision. Many other dealers, however, are content to rely on their credit pull and their personal relationship to make calls. I’m always surprised how often we need to follow up to get a signature or ask for the full complement of references.
Second, savvy dealers call the references. All of them. And they wait for the responses. It takes time – usually a day or two -- but the information gleaned is a treasure trove of information that is material to whether that customer will be a profitable one.
Here’s what I mean. The credit process is not just about uncovering the risk of someone not paying you back. That’s certainly the most acute risk but there are others to screen out or mitigate too: slow pay, dispute risk, and fraud. Experienced dealers use all of the information at their disposal to uncover what kind of customer they are getting.
Dealers often make pricing decisions independent of how promptly they are going to get paid. The cost of providing credit to someone who pays promptly and someone who is chronically 60 days late (but always good for it) can be 2-4% depending on a dealer’s cost of money and how much resource they use to collect that money. That can literally make the difference between a profitable and unprofitable customer.
Pull the customer commercial and consumer credit bureau. Call the references. Ask not just generally how they got paid but how consistently that occurred, especially in the winter months. How that customer has paid other dealers is how they are going to pay you. Count on it. And price for it, too.
It’s not all about when you’ll get paid. A lot of margin—not to mention time and frustration--gets burned up in resolving disputes. This is where dealer references are invaluable. In addition to asking about payment trends, be sure to ask about how many complaints the contractor made and how often they needed to do something to make it right (regardless of fault). It’s just a fact that some people are more prone to complain than others. Make sure you know who you are dealing with.
It’s especially helpful to pull the Better Business Bureau report on contractors applying for credit from you. What type of complaints are their customers making about them? How frequently are they getting made and how are they resolved? There is a direct correlation between how many complaints your contractors get and how many they will make up the chain to dealers like you.
Fortunately, many dealers have the benefit of knowing everyone that buys from them. The larger you get, though, the more problematic fraud risk can be. Is the applicant really who they say they are?
An application perfectly filled out, combined with a super-prompt reference, is a warning sign that something may not be right. We find that bank and trade references come back in their own time and rarely instantaneously.
Another helpful tool, especially if you don’t know a particular contractor well, is to check Google Maps to verify a business address or to confirm that the delivery address and the bureau actually match. Usually you can figure out if they are real or not.
While the information on a credit application is nearly the same across all dealers, the rigor of what happens afterward differs widely. The extra effort and discipline that sophisticated dealers invest ensures they get the full picture of the customer and helps protect them from risks beyond just bad debt. Make sure you are investing enough and getting the most out of your process, or give us a call if you want to consider how we can do it for you. We’ll be happy to help.