Have you heard about the economy? Actually, the terms “economy,” “bad economy,” and recession have been used so prolifically it’s almost lost all meaning. Nevertheless, for everyone in the credit management space, we know that recent economic struggles have translated into new realities in managing receivables, cash flow and more.
One new reality was reported on by the Wall Street Journal a few months ago in Small Firms’ Big Customers Are Slow To Pay.
The title could have been shortened to simply “Customers are slow to pay.” The point of the article is that the payment terms on invoices are longer than ever before and growing longer each day. According to the article, businesses are waiting an average of 29.2 days for payments in 2012 compared with 22.8 days in 2009.
Some larger companies are demanding extremely long pay periods (120 days or more), and one small business owner (in the construction industry, note) commented that the big company’s terms are offered on a “take it or leave basis.” Companies are simply forced to take it and dip into savings, credit lines or other sources of cash.
What does this mean?
Debt isn’t new to contractors, building material suppliers and others in the construction industry. As we’ve written about in the past, the construction industry has some of the highest debt ratios in the country.
Longer payment terms and higher debt ratios are a big cash problem for companies. The best-case scenario is that everyone eventually pays your bills and the waiting only costs you interest and inconvenience. The worst-case scenario is that the long wait for payment suffocates your business, or you never collect and can’t recover from the cash loss.
Preserving and using your mechanics lien rights is the solution to this credit problem. The mechanics lien instrument was created and provided to the construction industry for the exact purpose of solving these types of credit problems. Long payment terms are a fact of life, and things may get worse before they get better. You are doing your company a grave disservice, however, if you fail to protect and secure your accounts while waiting for payment.