Contract Risk Management For Small Business

Every business is exposed to a risk of customer payment default if they extend payment terms. The most significant difference between a contractor and many other businesses is that the risk exposure can be far more significant for an individual customer based on the size of the job and the extent of the contractor’s business that one customer might comprise. Managing credit risk matters more to contractors than almost any other type of business when one default can mean the end of your business.

Some active management and the assistance of professionals in managing credit risk can mean the difference between business closure or prosperity. Let’s discuss a few ways that contractors can successfully manage credit risk.


Companies that manage risk require customers on terms to sign personal guarantees, or they file UCC (uniform commercial code) statements securing debts against collateral. When working with a large client, it is crucial to perform occasional UCC searches to know who has collateralized obligations with the client and where your company might fall in the line of debt recovery in the case of company default.

Collateral can also include real estate, accounts receivable, inventory, or capital equipment.


Even if you have a long history with a client, conditions can change, and with dire situations, even long-standing working relationships can become unimportant to those struggling. Character is vital to know, and comprehensive credit checks and lien research will tell you a tremendous amount about the client’s willingness to repay debts when challenging times happen.

Don’t hesitate to ask new customers for trade references, personal financial statements, or even reviewed financial statements if the extent of the business relationship is substantial.


Make payment terms very specific, known, and ensure they are acknowledged with a signature. “The check is in the mail” or “we weren’t sure of the credit agreement” are statements that compromise your cash flow and your ability to do business. Spell out the terms, and an agreement can include ways to seek a remedy for past due debts.

Do not hesitate to specify a considerable interest rate for past due payments. Some may worry it is off-putting to a new customer, but it is essential to your company’s survival. Every day payment is past due is, costing you money and potentially jeopardizing your standing with suppliers that you might be late in paying.


Capital will commonly look like a percentage upfront payment for the work to cover the contractor’s material costs. If jobs are exceptionally long and costly, many contracting arrangements should include a progress payment plan that ensures the contractor can keep employees paid and materials coming as needed. Bear in mind, your client also has a vested interest in you being able to complete a long and complex job and needs to understand your ability to maintain cash flow. Do not hesitate to pause working if a progress payment becomes overdue.


As previously mentioned, don’t hesitate to ask for financial statements that have been certified or reviewed by a CPA. It’s important to know that your client can pay for the work they’ve asked you to perform. A financial professional should review quarter-over-quarter statements to identify trends that might identify a future inability to pay.

Always be Assessing Customers

It’s usually not new customers that are your most significant threat of default but existing customers. A periodic reevaluation of a financial relationship is a crucial risk management tool, and if the customer comprises an ever-larger proportion of your income, that reassessment needs to happen.

Use the Many Tools Available

The Internet has made excellent risk management tools available. UCC lien filing can be searched, credit reports pulled, and legal actions identified. Know the tools available and use them. Many credit tools are available on a subscription basis.

Require Insurance

Suppose a customer has a tremendous job to be performed that requires a considerable investment in time and resources from their contractors. In that case, they need to have an insurance policy in place to mitigate credit risk. If they do not, don’t hesitate to require that they cover premiums for your policy for the specific job.

Have a Great Business Attorney

A great attorney is essential for every business. Knowing you have rock-solid contracts and other legal documentation isn’t just good risk management but a huge stress reliever. If a debt needs to be collected, a letter from your attorney will often be much more motivational for the debtor than one from your desk. The cost of an attorney is nothing compared to reducing what can be an existential risk for your business.

Have Financial Pro as a Partner

An industry-specific fractional CFO like Daaxit will know how to manage contractor risk and execute to keep your risk to a minimum. They head off problems before they come about, saving your contracting business time, headache, and money. A financial pro fosters longevity and profitability for contractors by helping them monitor and mitigate risk. Your fractional CFO can make sure all of the above points are executed and continue to happen throughout the life of your business.

Click Here for a Free Financial Health Assessment

You’re on your way to successful risk management. Never fear risk; manage it. Risk is the very cornerstone of business, and you wouldn’t be where you are if you hadn’t taken one in the first place. Successful contractors acknowledge risk, partner with those that can help them manage it, and prosper.