Industry Analysis: Trade Credit In The Construction Industry

Trade credit is an essential tool in the construction industry. It enables suppliers to extend credit to their customers, allowing them to purchase the necessary materials and equipment without paying upfront. For sellers, trade credit is often used to increase B2B sales and customer loyalty.

However, offering payment terms can be risky and comes with its own set of problems. Late payments, damaged reputations, and credit risk can have a disastrous impact on both the supplier and buyer.

In this article, we’ll be looking at what trade credit currently looks like in the construction and building materials industry, as well as how Two’s B2B Buy Now Pay Later (BNPL) solutions can resolve these pain points.

Trade credit in the construction industry

Trade credit, also known as supplier’s credit or mercantile credit, essentially works as a 0% interest short-term loan for buyers. 

The process of offering trade credit in the construction industry will vary, but in its simplest form it looks something like this:

‍Assessment: The construction company evaluates the creditworthiness of the contractor, considering factors like financial stability, payment history, references, and legal obligations.

Credit Limit: Based on the evaluation, the construction company determines the maximum credit amount they are willing to extend to the contractor.

Terms: The construction company establishes specific payment terms and conditions, including the payment period (e.g., 30 days, 60 days).

Payment: The contractor receives goods or services on credit and is expected to make payments within the specified payment period. The construction company sends invoices and follows up on collections if needed.

This is a lengthy process that until now, has been one of the only viable options for suppliers.

The impact of late payments in construction

While it’s no secret that offering trade credit provides many benefits to suppliers like higher sales and increased customer loyalty, the industry is feeling the pinch of late payments. In fact, construction is widely acknowledged as having the worst payment records in the United Kingdom.

• In 2022, more than half of all invoices sent to construction firms were paid late. 
• The impact of late payments becomes glaringly obvious when you consider that a quarter of SMEs see survival as their main goal in 2023. 
• Industries hit the hardest with late payment issues (construction, financial services, and IT) spend the most amount of time chasing them with an average 7 hours a week spent managing accounts receivable tasks.
• In the US, late payments cost the construction industry $208B last year.
• ‍23 UK construction firms went into administration in December 2022 alone.

It’s stats like these that paint a bleak picture of trade credit within the construction industry and highlight how bad things have gotten.

Assessing credit risk

Part of offering trade credit in the first place involves assessing the credit risk of a contractor. Knowing how likely they are to pay you back (and on time) forms an integral part of whether they secure that funding.

But identifying this is easier said than done. It’s a lengthy process that involves assessing the contractor’s active loans and payment history, trade references, bank statements, business financials, business credit score and ratings…the list goes on.

Larger construction companies tend to do this in-house, but it can be a time-consuming and costly process. Suppliers may need to invest in systems to manage credit limits and monitor payments. This can add to the administrative burden and expenses associated with offering trade credit.

It’s more common for smaller firms to leverage credit specialists instead of managing credit tasks themselves. This of course removes some of the administrative work but still often takes days to come to a decision. And in a deadline-focused industry, every second counts.

Two’s B2B BNPL solutions for the construction Industry‍

Given the pitfalls of traditional trade credit in the construction industry, it’s clear the process is far from optimal. But can B2B BNPL offer a simpler way of improving cash flow and securing new customers?

The short answer is yes! Here’s how Two can help:

Improved cash flow

‍With Two, you get paid upfront regardless of payment terms. Two absorbs the cash burden of offering trade credit so you can focus on doing your job. That means you can say goodbye to late payments and hello to a healthy balance sheet.

On top of that, payment reconciliation and invoice management are all handled by Two. And for direct invoices, dynamic credit limits for each customer are accessible and can be modified from the Two Merchant Portal. 

Instant credit decisions

Using a B2B BNPL provider like Two speeds up the checkout experience considerably. What would usually take a couple of days can now be done almost instantly.

Any B2B BNPL provider worth their salt offers integrated ID-verification and credit/fraud assessment. By integrating this process directly into the checkout experience, buyers simply choose what they need, plug in their details, and are given the option to check out with terms if they’re approved.

What that means for you is lightning-fast decisions and less manual work.

Frictionless onboarding‍

Two’s Trade Account makes time-consuming customer onboarding a thing of the past. Onboarding takes place in just 30 seconds to provide your buyer with a fully-funded trade account. 

The Trade Account also integrates directly into your customer sign up flow for easy recurring orders and true one-click purchasing. In fact, companies who offer Two see an 18x increase in retention rate and 11x more orders when using the Two Trade Account!

Increased B2B sales‍

B2B BNPL solutions like Two’s E-Commerce Checkout allows you to increase B2B sales by making it simple for buyers to purchase. No additional phone calls or communication is needed because decisions are made there and then, making trade credit purchases simple.

To learn more about how Two can help your construction company grow B2B sales, improve cash flow, and offset credit risk, make sure to speak to one of our experts!