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Here on the Construction Payment Blog, we discuss good credit policy often because it is so integral to making profits in the construction industry. Lets face it, we are all in business to make profits. This post discusses what happens when a good policy is in place, but not strictly followed.

In doing my research on this post, I found that credit policy mistakes have been an issue for a long long time. The key here is that companies need to learn from these credit policy mistakes rather than continue to make them.

Credit Policy Overview

There are a number of posts on our blog, referenced below, that define the different elements of a good credit policy. Simply put, a credit policy is a set of guidelines that 1) are used to determine which customers are extended credit and billed; 2) set the payment terms for parties to whom credit is extended; 3) define the limits to be set on outstanding credit accounts; and 4) outline the steps or procedures used to deal with delinquent accounts. A good credit policy will encompass multiple sub-policies – notice policy, lien (or other security) policy, collections policy, and litigation policy, to name a few – all geared toward getting the business paid.

Examples Of Common Credit Policy Mistakes

From my experience credit policy mistakes happen early and often. As is often the case in the financial realm, mistakes do not typically manifest until things go bad. This is good because most often business get paid, and if the business gets paid, the credit policy mistakes don’t really matter. The is bad because when mistakes happen, they typically reduce the options at the end of the process.

One very common example that I see is that a contractor or supplier does not send a preliminary notice when its required, in contradiction to the procedures set forth by a thorough lien and notice policy. Many times this will completely eliminate the possibility of filing a valid lien or getting any security on the project.

Another potential credit policy mistake is the failure to attempt to get a personal guarantee during the credit customer intake process. The lack of a personal guarantee doesn’t change the fact that your company is owed the money, but it does eliminate another pocket from which collection can be obtained.

Ramifications Of A Credit Policy Mistake

Some credit policy mistakes are simple, and can be easily remedied if properly handled. In the example above, a personal guarantee can be signed at any point in the process. However, since it’s often difficult or impossible to get someone to sign a personal guarantee once they owe you money, it’s generally best practice to get a guarantee early in the process – and have it be continuing.

Other ramifications can be much more severe. Many liens cannot be filed if preliminary notice is not sent, not sent properly, not sent timely, or for various other statutory reasons. Every state has different laws and rules on when notices and liens need to be delivered, to whom they must be delivered, and by which method they must be delivered. These rules can be very confusing, but if they are not explicitly complied with, the lien claim may be invalidated.

Lastly, the most compelling ramification of making a credit policy mistake is the mere fact that the mistake will decrease the chances of getting paid. As stated above, getting paid is the name of the game.

There are excellent resources on the web that pertain to this topic. Getting paid is a problem for many businesses, especially in the construction industry. Another good source for all things involving Credit and Collections is author Michelle Dunn’s blog.