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TOUGH CALL: Stretching Credit

Online Poll – Read the scenario below then place your vote at the bottom of the page.

Oct Tough Call

Like anyone who’s worked in the same industry their whole life, you occasionally wonder what life would be like if you’d pursued a career in an entirely different industry. Then, after spending time with friends who work in banking, manufacturing, transportation, or other areas, you remember exactly why you work in the LBM business. More than anything else, it’s the people. Many of the people on your team have been with your company for decades and, in some cases, they’ve worked with the same builder and remodeler customers for most of their tenure. For you, it’s the people that make this industry what it is. As with any positive, there’s a negative side to balance it out. Here’s the story.

Stretched to the Max Homes is not your biggest customer, nor are they your smallest, but they are among your longest-standing. They do good work, and have established a solid reputation in your market for building affordable starter homes. Having grown up together in the same neighborhood, you and Max (who owns the company), have a personal connection as well. He has always bought the bulk of his materials from you, and doesn’t bother beating your salespeople up on price. In many ways, Max is an ideal customer. Except when it comes to paying on time.

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Max has never failed to pay an invoice. But, to your knowledge, you don’t recall him ever paying on time. He is consistently the latest payer of all of your customers. He always has a reason, and it’s always reasonable, as reasons should be. You’ve been understanding, and made exceptions to allow him to pay late on many occasions.

Meanwhile, you’re working to grow your business, and the biggest thing holding you back is the cash flow needed to finance that growth. Your CPA recently pointed out to you exactly how much it costs you to extend credit to your customers. It ain’t cheap. And it’s even worse when it comes to Max. The reasonable margins you earn from his business are effectively counteracted by your cost to provide him with extended credit terms. After this eye-opening conversation, you decided that it’s time to sit down with Max and have a frank discussion about timely payments.

Max was very open to a meeting. In fact, there’s something he wanted to discuss with you, too. “First, I want to thank you for working with us on our payment terms,” he said. “That’s enabled us to get to where we are now. In fact, we have an opportunity to build 44 homes in a new subdivision—but to do that, I’m going to need to increase my credit line with you, and to discuss longer payment terms.”

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You congratulated Max on the opportunity, but said the reason you wanted to meet was to tighten up his payments, to get him more on track with your other customers. Max replied that he understood your position, and would definitely be in a position to do that moving forward—after they complete and sell these 44 new homes.

Instead of tightening Max’s credit, he’s asking you to increase it and extend his payment terms for now. Your CPA advises against it.

What would you do?

1. JUST DO IT. Max has never failed to pay, and this 44 home project could be a real game-changer. Say yes, then agree on tighter terms beyond this project.

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2. SAY NO. Tell Max that you appreciate his business, but your business can’t afford to extend that much additional credit on an extended basis.

3. NEGOTIATE. Work with Max to get him the credit he needs to complete this project, while ensuring that his growth doesn’t come at your expense.

4. PARTNER. It’s highly unlikely that Max could do this project without you. Agree to partner with him to share the risk and the eventual rewards.

What would you do?

Something else?

If you’d take a different plan of attack, email your suggested solution to

See how your judgment compares with others in the industry at
Final results will appear in The Buzz section of the January 2017 issue.

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