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The construction and building material supply industries have significant credit challenges, as we’ve explored here on the Construction Payment Blog over the past few months. If you’re a credit manager or director of credit in these industries you’re constantly balancing the need to accept more revenue with the job of mitigating financial risk. It’s a very difficult job.
I have substantial experience in this space.
I’m a licensed attorney in six states (CA, AZ, WA, OR, GA, LA), and focused my entire law practice representing those in the construction and building material supply industries. In this capacity I’ve worked with large material supply companies to improve their credit and collection issues. I have a particular interest in the use of security instruments to eliminate – yes eliminate – non-paying or aging receivables.
So, that is my background. It sets up this particular blog post, where I impart some wisdom about the top features of a successful ARM (accounts receivable management) program. A previous post that is similar focused on the traits of great credit managers, and that post is worth a read as well.
1) Have / Stick To Your Credit Policy and Lien Policy
The first thing you need to do is set out a credit policy and a lien policy. This means your company should put pen to paper and come up with their policies for when they extend credit, who qualifies for credit, what to do when an account is aging, when lien rights will be preserve and when lien rights will be enforced.
The second thing you need to do is stick to your policies. Know them, make sure everyone in the company knows them, update them routinely, and follow them.
2) Send Preliminary Notices
Sending preliminary notices has two effects: (1) It prioritizes your invoices; and (2) It preserves your right to file a mechanics lien or bond claim.
First, with respect to prioritization, it is proven that sending a preliminary notice will prioritize your company’s invoices regardless of whether a preliminary notice is or is not required. This means that by just sending these notices – which are legally required anyway – you can significantly impact the volume of receivables that age. Spread across all of your accounts this can make a big difference to your available capital and bottom line.
Second, with respect to right preservation, most states require you deliver a preliminary notice to preserve your ability to later file a mechanics lien or bond claim on the project. Sending your preliminary notices makes certain that you always have the right to lien or make a bond claim if the account is unpaid.
3) Don’t Be Afraid Of Your Lien and Bond Claim Rights
Please, please, please take this to heart, and not just because we’re in the business of helping people with these lien and bond claims. Let me address two issues with this.
[pullquote style=”left” quote=”dark”]proper use of these lien rights virtually guarantees fast payment on absolutely every account. Every single one.[/pullquote]#1) Fear. Many fear that sending preliminary notices will cost your company precious business, and many fear that the lien or bond claim process is too complicated to be worth anything. Both of these fears are extraordinarily untrue.
First, we sent out thousands upon thousands and thousands of notices. I’ve never had a client lose a penny of business because they sent off a preliminary notice.
Second, while the mechanics lien and bond claim process is definitely complicated, there are tools and services (likeLevelset) that can help you manage this compliance framework. It’s wroth it. Which leads me to the next point…
#2) It’s Worth It! The mechanics lien and bond claim laws were created to help the construction and building material supply industries reduce their credit risk. You should take advantage of this. There is no reason not too, and any compliance required is completely worth the payoff, because proper use of these lien rights virtually guarantees fast payment on absolutely every account. Every single one.