Scott Simpson gets paid to be nervous. As CEO of BlueTarp Financial, he in effect serves as credit manager for 2,000 dealers nationwide that collectively hold 120,000 pro accounts. Of all the LBM experts I talk to, he consistently frets the most. And now that the economy shows signs of slowing, his views about where things stand and what to do matter more than ever.
“I am more bearish than bullish about what’s ahead,” he told Webb Analytics in a Dec. 10 interview. “Delinquencies continue to be elevated. While bad debt isn’t high, there are a lot of vulnerable contractors who can squeak by, sometimes with creditors who are letting them. … If consumer confidence palls, if people put off that new car or renovation, big-ticket things, you’re going to start to see businesses feel that pitch and credit markets tighten.
“I equate this with sailing,” he adds. “It’s clear the wind is picking up and the storm clouds are out there. It’s pretty easy to see choppier water out there. You have to decide whether to put the boat out.”
What to do? Simpson suggests you engage in what he calls “healthy paranoia.” These four tips are examples.
Prepare for the Worst
How big a drop in revenue and/or loss in profitability can your company suffer before it creates severe problems, such as a violation of bank covenants? What would happen if a key customer—one that accounts. for, say, 25% of total revenue—were to fail. “Assuming you know those numbers, then you have to take the worst case off the table,” Simpson says. “One example would be to think about credit insurance policies, where someone would backstop you.”
Pull More Credit Reports
Dealers rarely get credit reports on customers after the initial application, Simpson says. As a result, they may not be aware of changes in that pro’s ability to pay. These days, it’s increasingly important to avoid surprises. At the same time, keep in mind that credit reports are lagging indicators—they’re never completely up to date.
Enforce Your Speed Limits
“Every dealer has customers that make them nervous,” Simpson says. “Figure out how to lower the risk.” This doesn’t mean you should start by cutting off customers. Often, your credit agreements already give you the means to do so through late fees, limits on credit lines, and refusal to deliver more product until past bills are paid. You just need to be able to resist complaints when you exercise your authority. In fact, Simpson says, complaints are a good thing, because “People who have an outsize reaction to fees and such often are the ones who deserve a credit check.”
Review—and Expand—Your Liquidity
“If anyone is offering a bigger credit line now, take it,” Simpson advises. “Paying on unused line fees is an ounce of prevention that might come in handy.” More generally, this is a good time for dealers to check the depth in their well of funds. “When times get tough, banks contract and do things that are averse to what dealers need,” Simpson says. “They might prevent you from drawing on your line of credit. They might be quicker to reprice you. I would push people to both understand what their banks have rights to do and what their rights are.”