Credit Management - Construction

Good Accounts Receivable Management Boils Down to Your Credit Policy

Everyone in the construction and building materials supply industries should have a clear and well-thought-out credit policy. While this term may seem fancy at first it’s a simple concept.

A credit policy is just a set of written guidelines to:

  • “set [1] customer qualification criteria,
  • [2] the terms and conditions for supplying goods [or services] on credit,
  • [3] procedure for making collections; and
  • [4] steps to be taken in the case of customer delinquency”

There’s another component to credit policies in the construction and building material supply industries: a lien policy. We’ve discussed the Lien Policy concept in the past, and it is simply a set of written guidelines to dictate how the company will preserve its lien and bond claim rights and under what circumstances they will execute them.

Part I: Make Good Credit Decisions

The first thing a credit policy should do is set forth the customer qualification criteria. If you’re extending credit to everyone that comes through the door your company is making a huge mistake.

Standard Business Rules for Credit Decisions:  Standard business rules apply to the construction and building material supply industries because companies in these industries are…businesses. Generally speaking, you need to review a company’s credit history and worth when deciding on a line.

Further, you need to monitor that company’s credit because it can change during your relationship with them – sometimes quite surprisingly.

Trade Specific Rules for Credit Decisions: Most businesses have to be concerned about their customer’s credit health. In the construction and building material supply trades, however, there must be a concern for the credit health of the underlying construction project and other parties on the project (i.e. the lenders, the sureties, the general contractors and owners).

Part II: Preserve Your Lien or Bond Claim Rights

This second part applies only to those in the construction and building material supply industries. It is a step required at the onset of a credit decision or construction project, and it involves taking the necessary steps to preserve your lien and bond claim rights on the project.

While laws vary across the country by state or project type the general rule is that a “preliminary notice” must be sent at the start of furnishing to preserve lien and bond claim rights.

There are two things to take from this article’s section:

  • (1) Lien and bond claim rights are a huge asset for the construction and building material supply industries; and
  • (2) You need to take proactive measures immediately when furnishing services or materials to preserve that asset.

Part III:  Send Smart Invoices

A portion of this third part should be a no brainer: Send invoices.  If you don’t send invoices to bill for your services or materials you’re not likely to get paid.  This section, however, does not direct you to “send invoices.”  It directs you to “send smart invoices.”

Sending “smart” invoices boils down to doing two things:

  • (1) Leveraging technology to send invoices in a way that increases delivery success and encourages payment; and
  • (2) Using data to set intelligent terms.

Leveraging Technology:  There are tons of invoicing solutions out there for both the SMBs and Enterprise organizations. These solutions make invoicing painless for your company to send, and more importantly, painless for your customers to receive and pay.  Take advantage of these technologies or suffer the consequences.

If you don’t want to shop around let me direct you to two.

  • If you’re a small or medium sized business, go with Freshbooks.
  • If you’re an enterprise organization go with BillTrust.

Use Data To Set Intelligent Terms:  You may have heard about the data revolution, no?  If not, your business needs to get with the program.  You can improve your company’s bottom line by just paying attention to your own data and the public data out there about your industry. Making tiny changes to the wording on your invoices can result an increased percentage of on-time payers, which can result in big money for your company.

Here is a great article from Freshbooks about the “Best Invoice Terms To Get You Paid Faster.”

Part IV: Followup on Slow-Payers and Non-Payers

This is a huge part of successful accounts receivable management.  Everyone in the credit and collections industry knows that the longer you wait to collect on an invoice, the harder it will be. Another thing everyone in the credit and collections industry knows it that following up on on an invoice is critical to preventing a “slow-paying” customer from turning into a “non-paying” customer.

As Meredith Wood suggests in her FundingGates blog post above-cited, “Get On The Phone.”  She even goes on to provide Collection Call Scripts.  Great resources.

Don’t let your receivables age. Followup. Take action. Handle the excuses, and determine if next actions are needed.  Which brings us to…

Part V: Take The Next Steps

An invoice is aging. What to do?  What are your options?  What are your next steps?

Understand Your Options: Waiting is not an option. Some options include filing a mechanics lien or bond claim, having the invoice factored, putting the receivable on the auction block through a company like Receivables Exchange, sending an attorney demand letter, or submitting the account to collections.

Filing A Mechanics Lien or Bond Claim:  We’re big believers in the value of using the mechanics lien or bond claim process to get paid.  There’s lots of information on this blog about why this is important, including How Security Instruments Can Help Your Collections Procedures. Don’t ignore this very, very valuable collections tool.

Going To Collections or Lawsuit:  Don’t let a sour account fester.  Get it in the hands of a qualified commercial collections agency or get a lawsuit filed.

Talk to Us

If you’re having trouble getting paid on a project, we might be able to help. Let’s talk about getting you paid.

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Editor’s Note: Kudos goes out to Meredith Wood over on the FundingGates Blog for writing a post that inspired this article: The 8 Best Resources for AR Management.