Cash Flow Problems: The True Reason Contractors Take Deposits?

Michigan Contractor Down Payment

We can all agree it is scary to hand over money to someone without getting something in return immediately. Modern times have given us the luxury of instant gratification and it is something we have grown to expect everywhere that we do business. The home improvement industry at least has a good reason to ask for money upfront, the contractors need to purchase the material for the job. It is not like a car dealership that is just asking for a deposit to "hold" the vehicle for you. However, this is a dying practice that is now seen as a weakness by the customer more then anything else. Bigger companies are more then capable of floating the material costs without jeopardizing their overall cash flow. The little guys cant do this, they are using the down payment from Sally's job to buy the material for John's. Not a good way to do business, and from out research this is often what leads the contractors down the road towards committing fraud. The same story plays over and over again, the swindler gets in over his head and doesn't initially intend to defraud people but has to in the end in order to keep his business alive. You can see examples of this behavior endlessly on shows like American Greed on CNBC. The bottom line is that this is all very Darwinian, the strong will survive and either kill off or absorb the competition. This inevitability will be a good thing for the homeowner in the end, as larger corporations will have more resources to provide better service to their customers. When you really think about it, this evolution will also be better for the contractors as well since, in all honesty, many of them are not capable of properly running a business in the first place. 

 

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