If you’re the owner of a small construction business, you are likely familiar with the all too common cash flow issues experienced by many contractors. According to research, a fourth of small construction businesses have trouble collecting payments from their clients. This doesn’t have to be the case. In this two-part series, our Tampa construction attorneys will discuss the importance of evaluating client creditworthiness. Feel free to skip ahead to part two.
What is Creditworthiness?
Creditworthiness is an estimation of someone’s monetary worth to determine how well they handle their debt obligations. To assess creditworthiness, factors such as payment history and credit scores are reviewed to determine how much to lend someone and on what terms. Although creditworthiness doesn’t necessarily guarantee payment, it does increase your likelihood of payment.
How to Evaluate Someone’s Creditworthiness
Although the construction industry is extremely competitive, you still need to do your due diligence before extending credit to new clients. Examine the following traits in each client:
- Character: What is the client’s financial track-record like? Their credit history will do a good job of telling their integrity.
- Capacity: Is their cash flow in the red? If they struggle to repay their current debts, they will become a problem to you down the line.
- Capital: A positive net worth will enable them to pay down any debts they incur.
- Collateral: Do they have any property that can be used to secure their debts?
No one is free of credit-related risks; however, whenever possible, you can decrease your risks by pulling their credit report. Pulling multiple bureau reports will give a more balanced overview of a potential client’s credit history. With their credit report, you can get a track record of their payment history and habits to better manage your financial risk.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.