As featured in ProSales: Money Management
To the Editor: In the January/February ProSales article “The Prodigal Builder,” dealers shared their approaches for managing the credit risk of contractors who formerly went bankrupt or accrued bad debts.
While the suggestions offered are thoughtful loss-mitigation techniques (e.g., start them low and file pre-lien notices), they don’t address what can be the most important protection: determining who is actually a good credit risk and who is still a bad bet. By putting a few best practices in place, you can ensure that you won’t get burned again.
For screening prodigal builders, you should be pulling both commercial and consumer credit bureaus, securing personal guarantees, and not be shy about asking for financials or job contracts if the credit request is higher than your comfort level. Trust what the information is telling you. Look for high-risk indicators like multiple credit inquiries, active unpaid trades, outstanding loans, or incomplete information on the credit application.
Be clear that you will report back to the bureaus so that if the builders are good with you, you can help them rebuild a solid payment history. If they’re not, they’ll get dinged. Your approach shouldn’t be rigid—you want to preserve the relationships that you’ve built over time—but don’t let those factors overwhelm your good judgment.
Is this more work than normal? You bet, but so is the risk. The secret: The ones who balk at your requests are flashing a neon danger sign. Move on and sleep well at night.