The Great Recession ended in 2009, but many homebuilders still find credit availability a challenge. Contractors need up-front money to purchase land and materials but banks continue to keep their distance from an industry that left behind defaulted loans and late payments.
Our current political climate may also be contributing to the uncertainty, including speculation on what will happen to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has made it difficult for builders to obtain solid financing, according to Dena Cordova Jack, executive vice president for the Mountain States Lumber and Building Material Dealers Association. She estimates that less than one-quarter of banks in the U.S. today can handle lines of credit of $1 million or more.
“The small community banks have their hands somewhat tied to what they can provide,” she said.
Thea Dudley, vice president of financial services at SRS Distribution, in McKinney, TX, agrees. “Banks are loosening up a bit now from where they were,” she said, “but I don’t think things will ever go back to the way they were pre-recession, so they’re still cautious today.”
Yet demand for housing continues to grow and many builders are finding themselves scrambling for funding to help them keep up. Turning to credit lines for financing is not a new practice for homebuilders, but today some dealers are looking for ways to be more competitive when serving as the banker – which may mean handing the job to third-party credit providers.
Managing credit risk in-house
Suppliers who provide credit to customers face increasing constraints. For one, they are somewhat limited in the amount of credit they can offer and how much risk they can take on, according to James Nielsen, CEO of CreditSuppliers, a construction-focused third-party credit provider based in Scottsdale, AZ.
Another challenge is that the cost of money is the same for dealers as it is for a bank, yet they serve a market that views the two differently. “Customers often will choose not to pay a dealer on time or not pay a late fee, but they understand they have to meet the strict covenants of a bank,” Dudley said.
Beyond offering discounts or negotiating prices where margins allow, the ability to deliver deep credit options most often depends on the size of the supplier’s pockets. That doesn’t leave local or regional dealers out of the game completely. Cordova Jack said some dealers have begun to offer types of financing that could make them more competitive with big-box stores like Home Depot and Lowe’s, which offer branded credit cards for their pro customers.
Smaller operations can work with outside financing sources to provide similar services as national chains. McCoy’s Building Supply, headquartered in San Marcos, TX, is one example of a regional supplier providing more credit choices.
“McCoy’s recognizes the availability of financing is an important factor for pros to purchase the products they need and wanted to offer our customers payment options and flexibility to meet those business needs,” said MJ Toops, a digital marketing-communications specialist at McCoy’s who runs the credit card program for the company’s consumer and commercial accounts. Synchrony Bank issues the company’s credit card.
Outsourcing the job
Other suppliers are stepping back from directly financing their customer’s projects, which doesn’t surprise Kelley Marko, vice president of marketing at BlueTarp, a business-to-business credit management company in Portland, ME. “If anything, suppliers want to be less involved in both the financing and the risk,” she said.
Although traditional lumber yards have long acted as banks for their professional customers by establishing lines of credit, outsourcing the task to a credit-management company can allow them to offer extended terms, such as 90 days same-as-cash, Cordova Jack said. Some suppliers are going beyond outsourcing invoicing and are opting for the entire credit process to be handled out-of-house, she said.
BlueTarp is one company that provides such a service. It pays suppliers up front for their sale, reducing the risk that comes when dealers become a de facto bank for their customers. “It’s an end-to-end solution, so the supplier is no longer providing the cash or taking the risk for non-payment,” she said.
Such a move can impact both builders and their suppliers. The ability to offer increased credit limits can help contractors compete in a hot housing market by taking on more work. CreditSuppliers, for example, provides builders with revolving lines of trade credit with limits from $50,000 to $5 million, Nielsen said. With this program, contractors no longer have to manage multiple supplier payments, and it can lower their cost of capital.
This type of business bridges the gap between necessary upfront material costs and when the draw becomes available, Nielsen said. Not only is CreditSuppliers taking on the risk, but the suppliers are also paid within 10 days, which can position the builder to get available discounts.
The homebuilding industry is poised for growth as millennials continue to enter the market. But supply-side issues including lot and labor availability and a tight lending environment are making it difficult for builders in many markets to keep up. Limited new and existing inventory is causing home prices to increase faster than already-stagnant incomes.
The need for creative ways to finance up-front costs will also persist as the outlook for housing demand remains solid.
Home-price growth is expected to slow somewhat through 2017, according to the latest CoreLogic Home Price Index, though average increases of nearly 5% are expected through January 2018 with higher rates projected in some markets. A rollback of Dodd-Frank — so far, Trump has issued an executive order to review and revise the Obama-era legislation — could give more lending power to small and mid-sized community banks.
Builders are hopeful that would make it easier for them to access credit, but the additional legwork required to prove to lenders a project or business is worth the risk will likely remain.