When the Cash Stops Flowing, the Concrete Stops Pouring

Building contractors have recently discovered that obtaining credit from banks is just one step in the obstacle course involved with building a project. Another step is concrete manufacturers, which conduct in-depth credit checks on customers. Sometimes, after being closely scrutinized, new construction companies are denied supply contracts and veteran companies do not have their contracts renewed. Cement factories are actually determining which construction companies will continue to operate and which will be paralyzed.

In the past six months, concrete manufacturers have stiffened credit terms to contractors. Some contractors have had their concrete supply cut off due to late payments, even of a few days. The manufacturers are also making stricter demands on new customers and are choosing them carefully. All business dealings with new companies are conducted only after a thorough investigation of the customer's profile, including its financial status. In some cases, supply contracts have been signed only after the receipt of financial guarantees or collateral from customers.

The general manager of one concrete company told Ha'aretz that concrete manufacturers often determine the payment ethics of building contractors by probing other companies that supply such contractors with building materials. In some cases, the concrete companies even ask potential customers for their bank account information to determine whether the account is restricted (i.e. checks will not be honored).

There are six large concrete manufacturers - Readymix Industries, Hanson Cement, Even & Sid Quarries, Isra-Beton, Roichman and Kfar Giladi Quarries - and a few dozen small and medium-sized manufacturers. The large companies usually dictate credit policy in the industry, though small and medium-sized companies often offer more flexible payment terms to increase clientele.

Boaz Nehmad, a consultant who advises several concrete manufacturers on payment collections, confirms that the concrete manufacturers influence contractors, and that it is based on a coordinated decision. "This is a process that the manufacturers have undertaken in order to protect themselves," he says.

30 percent drop in demand

Sources at the concrete companies say they had to tighten credit terms due to the status of the real estate industry. They say that the industry's prolonged recession and disturbances in the territories that have led to a workforce reduction at construction sites, have made it difficult for contractors to meet their commitments.

Concrete manufacturers note that in the past year, there has been a sudden increase in the number of contracting companies experiencing difficulties - including Gazit and Shaham, Dan Rolider and V. Moskovitz - leaving the former group with heavy losses amounting to tens of millions of shekels. As a result, the manufacturers have had to increase their provisions for doubtful debts by as much as 100 percent and are being more vigilant.

In addition, the concrete manufacturers say the general economic situation and sharp rise in the price of sand have eroded profits, and the condition of the entire industry has deteriorated. The manufacturers report a 30 percent decline in demand for pre-mixed concrete leading to the closure of many plants and layoffs at other facilities due to the reduced activity.

Yitzhak Bejerano, CEO of Readymix Israel, notes that the company recently has had to become more aware of the status of its clients. "Any problem, even the smallest one, triggers a warning light and is fully investigated," he says.

In the past year, Readymix set up a credit approvals committee that decides the terms extended to each contractor and then follows the activity of such recipients to identify problems. Bejerano explains that the committee, in which both he and the credit manager are members, determines the requirements for each contracting company interested in dealing with Readymix. In some cases, Readymix asks for personal guarantees from a company's owners or guarantees backed by real estate or other assets. "These are things that we never dreamed of demanding in the past, and which we certainly never thought we would receive," he says.

Nachum Shimshony, CEO of Isra-Beton, says he often asks a company for post-dated checks to be held on deposit and other guarantees. He says that he decides to sign a contract with a new company only after checking its credit rating, which is set by survey companies such as BDI. Shimshony confirms that Isra-Beton has also increased its provision for bad debts. "This is a difficult period and the company is doing everything to survive," he says.

Eliezer Priel, CEO of Hanson, says that the payment ethic among contractors has eroded considerably over the past year. If, for example, terms of payment a year ago were current plus 45 days, most contractors now ask for extended credit - current plus 60 days. In some cases, when a client is well known, the extension is approved. In other cases, the supply of materials is suspended until payments are made. Priel adds that some factors taken into consideration when signing a contract with a new client include the company's financial condition and the expected profitability of a building project. In the past year, Hanson has doubled its provision for doubtful debts.

Nehmad says that any payment delay by contractors substantially reduces concrete manufacturers' profit. The manufacturers are also afraid that if their clients' businesses fail, they will be left with heavy losses. "Receiving payment from a company whose business is failing can take a long time and involves an expensive collections process, and the payment often is not obtained in full," he says. "The [concrete] companies, therefore, have to do everything to minimize risks."