Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at

Dear Thea,
With many contractors leaving our industry during the recession, we're beginning to see new contractors appear as the market continues to grow. Some of these will undoubtedly develop into very good accounts and some will fail taking small suppliers with them. Most have few assets and their credit application looks like a fast food employment application. If I decide to take a risk with some of these newcomers how can I improve my odds of picking the winners and not the losers?
Gun Shy in Cincinnati

Dear Gun Shy,

When I was a kid, my dad would take me to the track. He told me the secret to picking winners was to watch the horses before the race. If one of them pooped, that was the horse to put your money on. I’m not suggesting that method for picking the winning contractors, but wouldn't it be great if it were that simple?

The lesson I took away from those afternoons was this: Investigate BEFORE you put your money down. Take that sketchy credit application and put it through its credit investigation paces.

What do you know about the prospective customer? The bank and trade reference information will be light to non existent. Trades will come back, if there are any, saying the infamous "too new to rate" and the bank will have scant info that’s useful.

You will have to dig deeper and ask more and upgraded questions. Did you ask the bank if there were any loans or lines of credit for this customer? What kind of financial backing does this customer have? Does he have "seed money"? Or is he one job gone tragically wrong away from bankruptcy?

If it is just his good name, what does that really look like? Did you get a personal guarantee? If you did, did you actually pull a personal credit report to see what that told you? Is it a solid score—good enough for you to risk your company's working capital? Perhaps he’s giving out personal guarantees like chips and salsa at a Mexican restaurant. In that case, know this: Everyone gets them. Just sit down.

Does the applicant have any assets? How do you know? Heresy? Rumor? Sales rep innuendo? Have you run an asset check? Ask for personal financials or last year’s tax returns.

I can hear sales reps everywhere lamenting "But everyone else is giving him credit, if we push too hard he will take his business somewhere else," or "Geez Thea, we might as well shut the whole company down the way you look at things".

BUT IF you let your credit department do its job, we can help you separate the wheat from the chaff and build loyalty. Your credit manager can have this seemingly difficult conversation with your potential customer AND find out how that person is going to market on all fronts. In other words, credit can find out the who, what, where, when, and how.

What is the potential credit recipient’s core business and customer base? Credit can teach them about use of mechanic lien laws, preliminary lien notices, joint checks, and contract clauses that can kill their business or safeguard it.

Credit also can show how credit candidates can use suppliers to their advantage. Most suppliers have credit departments that house at least one extremely knowledgeable credit professional who, given the chance, would love to help a new customer grow. A potential customer who is open to partnering is a much better risk then ego, pride, and sole reliance on past industry experience.

Today's financial landscape is a far cry from 10 years ago. Laying the groundwork up front for all parties limits the potential for issues on the backside and allows a true partnership.

And for the record, the poop trick worked about two-thirds of the time. There are no guarantees when you are taking risk. You can tip the odds substantially in your favor by assessing and taking calculated risks based on your up-front homework.