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Almost nobody carries cash anymore. Credit has become so ubiquitous in our daily lives that we take it for granted. From credit cards, to extended payment plans on big box items or flexible online payment options, we’re using credit every single day of our lives.

Of course, that doesn’t mean that business transactions don’t rely on credit. In reality, it’s quite the opposite. B2Bs are often required to act like banks, extending credit terms (usually net-30- 60- or 90-day payment options) to keep revenue flowing and serve customers who don’t have sufficient cash to pay for construction costs upfront. In the United States, 43 percent of the total B2B sales value is transacted on credit.

This practice is known as trade credit or net terms. Extending credit brings several challenges to contractors and construction business owners.

Extending credit affects cash flow

Extending credit on large construction projects can be risky. After all, projects require a large upfront injection of cash to procure labor and materials months before payments start to roll in. Such projects can span years and can quickly erode cash flow. Having a significant amount of money trapped in accounts receivables is a big risk. A survey by Fundbox, which included an analysis of 20 million small business invoices, found 64 percent of small businesses are forced to wait on late payments due to net terms or delinquent payers.

The consequences for a construction business are significant. A lack of cash flow compromises its ability to pay bills, make payroll and, even worse, a study by U.S. Bank found 82 percent of small businesses fail due to poor cash flow management.

Extending credit is a time drain

Extending credit is also a time drain. Setting a realistic credit policy and making credit decisions is no small task. Credit checking (contacting trade references, banks, etc.), past payment review, credit bureau membership and fees, and costs of collection all fall on the business owner’s shoulders.

Trade credit programs complicate A/R management

When extending credit, contractors must pay very close attention to their books. Tracking payments made against credit terms, making calls for late payment, resolving invoice disputes, and other administrative hassles all add up to lost time and revenue.

Trade credit terms change customer relationships. Smaller independent contractors can often feel like they’re forced into accepting terms just to win business. As a small business, it’s not always easy to push back and negotiate the most favorable terms, especially when customers rely on having extra time to pay. 

The credit arrangement that contractors negotiate with customers can have a serious impact on the tone of the relationship. Many customers delay payment until the last moment possible, even beyond the due date. Research indicates more than half of small businesses routinely deal with late payments.

With terms already extended and costs incurred, any customer’s failure to abide by the terms of credit can make it extremely difficult to work with that customer going forward. In these situations, contractors have a tough choice to make: stop working with that customer or grin and bear the wait.

Help is on the way in the form of data-driven credit

One of the main reasons buyers in the construction sector rely so heavily on credit terms is they are often financially underserved. Small businesses frequently hit obstacles when attempting to access credit through conventional channels, such as major banks. Since they can’t always rely on banks to approve their loans or credit lines, they turn to their suppliers in search of friendly credit terms.

But the pitfalls of offering credit have real consequences for vendors. To remain solvent, contractors and suppliers need their invoices paid promptly. By extending credit, their cash flow is compromised. Where can they turn?

Traditionally, they knocked on the doors of Main Street banks, only to face the same obstacles that all small business owners do. Banks decline many loan applications because the business owner’s personal credit doesn’t meet a minimum threshold.

Banks look at personal and business credit scores to make lending decisions. A lot of factors affect these scores, such as insufficient credit history and late or missed payments to vendors, credit card companies and more. All of these factors may or may not be a true reflection of the fiscal health and potential of a business.

For a long time, this has been the requirement for doing business. Thanks for innovations in technology in the finance sector, this won’t be the case much longer.

New developments in big data analytics and machine learning mean small business borrowers no longer need to remain at the mercy of personal credit scores and other consumer lending criteria. Nontraditional financial technology (fintech) lenders, using artificial intelligence and sophisticated risk models, can now rely on data sources such as accounting software and business bank accounts to achieve a more complete and realistic understanding of the health and performance of a small business.

This gives independent construction businesses, previously shut out of access to credit, speedier access to financing—often in one business day—thanks to reliable data-driven lending decisions and modern underwriting.

While extending credit and net-30-, 60- or 90-day payment terms have long been the norm in the construction industry, innovations in fintech offer alternatives that allow contractors and suppliers to get paid right away, while buyers still get the convenient 60-day terms they want.