Plastic's Extra Price

Consultant Les Cunningham has long encouraged his clients to use credit cards for materials purchases. The rewards offered by the credit card companies, says the president and CEO of Business Networks, “are like found money that's not taxable.”

Remodelers chime in with benefits of using credit cards that go beyond cash back or airline miles. “It helps with accounting,” says Rick Bruce, of Bruce Construction, in San Bruno, Calif. “At the end of the month, [the credit card statement] shows you everything you spent.” By breaking all the expenses down into overhead and direct costs, you can use your credit card bill to complete your P&L statement.

Bruce also says that when he uses a credit card, he gets a “30-day float” with no additional charges, provided he pays his credit card bill on time. Andy Todtz, president of Hawkeye Construction, in Baltimore, says that using credit cards helps him finance jobs more easily. “Rather than pay a bank 10% or 12% for a line of credit,” Todtz says, he can use his credit card with no upfront cost.

Increasingly, however, lumberyards and other suppliers are reluctant to take plastic for payment. Only a few have stopped accepting credit cards completely, but some are restricting their use in a variety of ways, while others have eliminated or severely reduced the rewards programs they offer if customers use credit cards to pay their bills.

Accepting credit cards presents challenges for lumberyards. “We don't change our price, but our profit model changes significantly,” says Dan Fesler, owner and CEO of Lamperts.

The reason is simple: A credit card transaction can cost the vendor anywhere from 1.5% to 3% of the price of the goods and services sold. Lumberyards historically work on net profits that hover around 4% (give or take as many as two points). If the yard adds a 1% “on-time” discount to a 3% transaction fee, they've lost their entire profit on that sale.

Remodelers and builders who wait to pay their bills compound the squeeze on suppliers. Using the very rough — but accurate enough for these purposes — calculation that the money owed loses 1% of its value for every month the supplier goes without being paid, even a bill that goes just 30 days before being paid off by a credit card saps a significant chunk of profit.

And it doesn't take long for that net to dissipate completely. “If you hold a job too long and don't get paid, you will lose money on it,” says Dan Fesler, owner and CEO of St. Paul, Minn.-based Lamperts, a lumber chain with 37 locations in five states.

At Lamperts, the policy is that a “credit card is the same as cash at the time of purchase,” according to Fesler. After that, the official policy is that credit cards aren't allowed, although Fesler says that as long as arrangements are made in advance, these rules are negotiable. Lamperts might accept a credit card after 60 days if the contractor agrees to fewer deliveries, for example. “You have to look at [all goods and services offered by the supplier] as a bundle,” Fesler says.

“We've probably lost customers because of our credit card policy,” admits Fesler, and he's most likely right. Todtz, of Hawkeye Construction, says that for a year or two, the 84 Lumber he uses cut its rewards for credit card purchases to about one-tenth of what they are for cash or check. Since the change, Todtz says, “we use them less as a supplier. If I have three yards where the costs are the same, I'm looking for who will compensate me the most in other ways.” Adds Cunningham, “The Home Depot hasn't turned down a credit card,” suggesting that a lumberyard's decision to stop accepting plastic will cost them business.

If policies like these catch on — and with credit card use growing rapidly, chances of this are great — it will ultimately be up to contractors to adjust.

Todtz's plumbing supply company recently changed its policy to one similar to that of Lamperts, requiring payment three weeks earlier if the contractor wants to use plastic. The policy is only a couple of months old, so it's too early to say how it will affect Todtz's business, but he concedes that he may have to adjust his draw schedules to reflect the change. “If I can't float it with my supplier for three weeks, I have to cover the cost somewhere,” he says.

What could be even more problematic are those situations when a contractor working at the edge of his territory doesn't have an account with a supplier nearby. Bruce works in the San Francisco area, and some of his jobs are in neighborhoods far from his usual lumberyards. Currently, Bruce and three of his employees use credit cards to buy items from local suppliers as the need arises. As Cunningham suggests, stores such as The Home Depot and Lowe's won't soon stop accepting credit cards for such purchases. However, if other yards did, “I'd have to arrange for a cash payment,” Bruce says. “That would be a huge hassle.”