Fabricators take a dim view of extending credit to customers… sort of.
On the surface, it sure seems like a slam-dunk decision for a marine fabrication shop to not extend credit. “Let’s see, when you write off thousands and thousands of dollars—maybe even $100,000 over the 30-year life of the company—you start to think about giving anybody credit,” says Mike Erickson, owner of Canvas Designers in Riviera Beach, Fla. “That’s why one of the things we require is a 50 percent deposit. We don’t really extend credit.”
It’s not that Canvas Designers, a 35,000-square-foot shop with 68 employees, hasn’t tried to extend credit; it’s just that the company’s been burned.
“General contractors, some other canvas fabricators and boat builders are why we don’t extend credit,” Erickson says. “General contractors: When the economy changes and they get in trouble, the first thing they do is stop paying vendors. Back in ’07-’08, what did they do? Not pay their vendors. Canvas shops: They get in trouble, and they’re going to pay payroll and probably themselves before paying some vendor.
“Same with extreme one-off custom boat builders. Basically, they’re robbing Peter to pay Paul. This one company, we completed the job—it was never our issue. They delivered the boat, but they didn’t make a profit because they went over on everything. Who did they not pay? Me. They paid their employees, so I got stuck for a $30,000 bill. I understand the decisions. I’m just not going to expose myself by giving credit. It just has never been a good scenario when I extend credit for a job.”
Exceptions to the rule
As much as some companies snarl at the suggestion of extending credit, they all do it (in some form) all the time—and for good reasons, such as:
- It’s a competitive market, and extending credit might help you land or keep a key customer.
- The credit option decreases the distraction of price; customers are freer to follow their impulses and focus on the benefits of the product.
- Extending credit can enhance customer relations and has the potential to generate more sales and loyalty.
Erickson may have his line in the sand regarding extending credit, but he crosses the line for certain high-quality, long-term customers. “With Viking Yacht, an exceptional OEM boat builder, I’ve never have had an issue—economy or not,” he says. “We have them out on terms, meaning they pay whatever their billing cycle is and they always pay on time. So with some customers, I’m not really extending credit, but the terms are, ‘When you write your next checks, pay me.’ It’s no big deal. It’s not 30-day term, but I give them flexibility to billing cycles. I don’t make them have a check ready for me the day I put it on the boat—that kind of stuff—but I don’t really offer them formal credit. And with a good relationship, I won’t ask for 50 percent up front. But I monitor what kind of volume we’re running through, and if it’s a gigantic job that’s going to take place over months, then I get phased-in payments toward the bill. And when the job is done, then they get their billing cycle to pay the balance.”
Erickson says what he does in terms of extending credit is a reward for his best customers. “They’re a business, and they don’t just get out their personal checkbook and write you a check. The project manager at Rybovich isn’t going to cut you a check. He’s going to go through a corporate process that might take 10 or 15 days. That’s the amount of extension I’m giving them.”
Small shops: Just say no
Small shops especially should swear off extending credit. “Say there’s a $10,000 order. This shop’s got $6,500 worth of material and labor to pay for, and then they’ve got to wait 60 days or whatever to recoup their money,” says Carie Bores, director of sales and customer service at Great Lakes Boat Top Co. in Vonore, Tenn. “That’s a lot for a small company to handle with cash flow. If they’re not turning that dollar to put it back in, they might not have the materials for their next customer. Their money’s tied up for an extra 30 days, and they can’t purchase more because now their credit’s extended. And if you’ve got to carry that money and pay interest for 60 to 90 days until you get your payment, then you’re eating into your profit. As a small company, yeah, you have small overhead, but you don’t have a lot of cash flow.”
Bores says Great Lakes Boat Top, which has 130 employees, offers incentives to customers bringing a large amount of business. “We give a 2 percent discount if they pay before 30 days,” she says. “The only time we would extend credit is if there were a large stocking order somebody wanted to place in the slow season; this would help with production. But that’s on the Westland side of our business, our sister company that is after-market. Everything we do here is usually net 30, credit card, or discount for early pay.”
Let credit card companies assume risk
Erickson says about 80 percent of his business comes through credit card purchases. He’s all for letting credit card companies extend credit, do background checks, and track payments. “That
1 percent or 2 percent charge from the credit card company is not even worth discussing,” he says. “If I were to do it the other way and extend credit to customers, I guarantee it would cost me a lot more than that. For a $400 or $500 re-cover or canvas cover, are you going to do a credit check on them? Are you going to go through all those hassles? No. If they can’t afford to pay for what they ordered to start with and pay for it when the job’s completed, then they don’t need to be buying. They’re overextended already—and now you’re going to extend them credit?”
Noting the exceptions, the bottom line is Bores and Erickson see little to be gained—and a lot to be lost—from extending credit. Press them about the aforementioned pluses, and replies are unequivocal. Examples:
- Extending credit will be the deciding factor in landing a job. “I don’t think credit is what you should base your business on,” Bores says. “If a company is coming to you and wants you to manufacture a product, it should be willing to pay for the product in a timely manner that doesn’t cause stress for either company. If we’re talking a huge company, maybe you give an extra 45 days or offer a discount—that might trigger the deal. But if you can deliver the goods and the customer’s got the money to pay you, extending credit shouldn’t be an issue in being the deciding factor on if you get the business.”
- Extending credit will bring more business. “Yeah, you’ll get more business,” Erickson says, “but people won’t pay you.”
- Extending credit will build customers satisfaction and loyalty; you’ll be seen as a good guy. “Good guys finish last in business,” Erickson says.
- Extending credit will affect your cash flow. “Yep,” Bores says, “it surely doesn’t hurt theirs.”
- Extending credit will change your customer base. “Yes, when you have to turn customers over to collections and put them on hold,” Bores says.
- Customers will spend more money with you. “They’ll extend themselves beyond what they can afford,” Erickson says.
- Customers will trust you more. “No, by extending credit, you’re having to trust them more,” Erickson says.
A Shop’s Part in the Drama of Getting Paid
Extending credit is all part of getting paid. For shop owners drumming their fingers on the desk and waiting for the arrival of a check that’s “in the mail,” getting paid might seem like a passive pursuit. It’s not. A shop plays an active part in the drama of getting paid.
“Most consumers are not out to get you up front,” Erickson says. “But if you don’t do what you say you’re going to do and they’re unhappy in the process, they don’t want to pay. You tell them you’re going to have the job ready for the Fourth of July weekend and they’re taking their family out. Now, say on the day before the Fourth you call them up and tell them you’re not finishing their job until Aug. 1. What happens? They’re not happy and they’re not going to pay you. In the general retail business to consumers, you create the problem that they don’t want to pay you for.
“We always do what we say we’re going to do when we say we’re going to do it and for the price we say we’re going to do it. And the sad scenario is that eliminates 60 percent to 70 percent of the competition right there—doing those three things. A happy customer is going to pay you most of the time, so make your customers happy.”
Gary Legwold is a freelance writer from Minneapolis, Minn.
If You Do Extend Credit
Your eyes are wide open and you know all about the pitfalls of extending credit. But you still want to do it—perhaps on a well-researched, limited basis because it makes sense to your business. OK, what should you do? Here are five to-dos from the National Federation of Independent Business:
- Do not extend to everyone. In fact, be picky and save problems later.
- Do offer “net 30.” This is common practice; the customer pays within 30 days of receiving your invoice. You’ll need to create an accounts-receivable plan, send out invoices monthly, keep track of who has paid, and follow up.
- Do create a credit application.
- Do feed application information to a credit-reporting bureau like Equifax or TransUnion. Also, a Dun & Bradstreet credit check gives you a picture of the creditworthiness of the company, including recent trade experiences.
- Do accept credit cards. It’s proven that you’ll sell more because it allows some customers to buy on impulse and pay for their purchase when they don’t have cash on hand. To accept credit cards, establish through your bank a merchant account with each of the credit card companies whose cards you want to accept. After your merchant accounts are set up, you’ll receive a startup kit and instructions explaining how to swipe cards and get authorization.