Tough Call: Weighing the credit risk

A small builder can grow his business (and his purchases from you) exponentially—if you’re willing to risk expanding his credit limit into dangerous territory. What would you do?

IT’S A STORY your parents share that never gets old. Once you were old enough to go to school, your parents decided to put all their savings, and every penny they could borrow, into opening a lumberyard. The early days were tough, they explain, but stocking and selling quality products and lis- tening to their customers challenges paid dividends. Now in its 30th year, the company your parents birthed and built is the go-to choice for the leading builders and remodelers in your small market. And after working through a well thought-out succession plan, you’re now the general manager and majority owner of a solid business.

When you sat down with the attorneys to formally transfer ownership, your dad said, “your mom and I worked hard to build something for you to take and make your own. As long as you work hard, listen to your customers, and make smart decisions, I’ve no doubt you can grow this and leave an even stronger company to your kids.”

In one of your first days in your new role, a builder customer said he had something to discuss with you. “I’m working with a developer, and I can be the exclusive builder in a new subdivision. An opportunity like this doesn’t come around everyday, and I’m confident that I now have the right team in place to make it work. The main obstacle is my less-than-perfect credit history,” he explained.

You knew this story well. He was a rising star in the local building scene and found himself overextended when the Great Recession hit. He filed for bankruptcy and has strug- gled ever since. A few years ago, your parents decided to roll the dice. They extended him a small line of credit, which is all he needed to pick up where he left off. The line of credit is frequently maxed out, but he has yet to be late on his payments.

“This is my chance to rebuild my reputation and make a real positive difference for our community,” he continued. “You are without question my LBM dealer of choice—so if you’ll work with me on this, you can plan on supplying the lion’s share of materials for these homes.”

As it turned out, “work with me” equated to radically expanding his line of credit. You congratulated him on the opportunity, asked him to complete a new credit form, and said you’d take a serious look at what you could do. Your credit manager didn’t have encouraging news. “He has few assets, a poor but improving credit score, and no history of doing anything near this scale. If he successfully manages a project of this magnitude, it could be very good for us. But if he fails, our losses would be enormous. I’m comfortable approving a 20% increase in his credit line,” she concluded. “That’s it.”

The way you see it, if you roll the dice and he succeeds, you’ll have started off your ownership tenure with a deci- sion that acts as rocket fuel for your company’s slow, steady growth. On the other hand, if he fails, you’ll instantly turn your bottom line from black to red. If you say no, and he goes to a competitor and succeeds, you’ll have lost a loyal customer and turned away a golden opportunity.

What would you do?