The speed of business in the PHCP and PVF wholesale industry can be blazing fast, with materials flying in and out of the doors faster than most credit departments can handle. Deciding who can have company credit, how much credit and when to pull the plug are daily decisions that impact the bottom line.
A company’s success at managing credit and collections processes depends on its written credit policy. But many credit policies overlook the construction industry’s most effective cash protection devices: mechanics lien and bond claims. Here’s why lien protection is so important and how it fits into a company’s credit policy.
Claim rights matter
When it comes down to getting paid, a company’s mechanics lien or bond claim rights are, by far, the most effective available remedies. In fact, research shows that simply threatening to file a lien produces payment within 20 days in 47% of cases. Thereafter, filing the actual claim produces payment within an additional 90 days in more than 64% of cases.
Companies could eliminate hundreds of thousands of dollars in aging receivables by simply subjecting their default accounts to a lien and bond claim regimen.
However, many companies are unprepared to embrace these rights. To avoid this, companies should develop an organized plan for compliance.
Credit policy
A credit policy is simply a company’s written guideline that outlines the terms for supplying goods on credit and the steps to be taken in case of delinquency.
The cornerstone concepts of all good credit policies aim to get quality customer details on the front end in order to be prompt and persistent in collecting on the back end.
When extending credit in the construction industry it’s important to incorporate how the company will use its mechanics lien and bond claim rights.
This means setting out the company’s philosophy about when it will protect and use its lien rights and when it will not. There are two big-picture questions you need to answer to accomplish this:
Preliminary notice commitment:Suppliers are almost always required to send preliminary notice at the very start of furnishing, and accordingly, the decision to preserve or not preserve lien or bond claim rights must be made at the very start of every furnishing.
Many companies separate projects into risk categories (i.e., by the customer’s risk factor or by the value of the project) and then devise a rule about sending preliminary notices to designated risk categories. Whatever the rule, it should be set forth in the credit policy.
Execution of the commitment: Once the decision is made to preserve lien and bond claim rights, the company must outline a plan to execute that policy. This not only requires setting up a method for sending preliminary notices upfront, but also determining guidelines on when to file or escalate the account to foreclosure litigation.
Just as a company dictates when to send a demand letter or when to make a collection call, so should companies set forth rules about when lien and bond claims will be filed or foreclosed.
Decide, plan, implement
Credit is a fact of business for material suppliers and strong credit policies lead to strong bottom lines. Companies should not ignore mechanics lien and bond claim rights simply because compliance is confusing or complicated. These rights are too effective and can be a cornerstone piece to collection efforts. Incorporating lien compliance into credit and collection procedures is smart and enables companies to enforce and benefit from the same.
Scott Wolfe Jr. is the CEO of New Orleans-based zlien, which provides software and services to help supply and construction companies reduce credit risk and default receivables. Contact him at scott@zlien.com.
