I find myself writing about policy a lot on Construction Payment Blog. Today’s discussion is about collections policy. Collections policy is the last moving part when it comes to credit policy.
Overview of Collections Policy
If all goes as planned then there will never be a need to implement a collections policy because your company gets paid all of the time. This, however, is not a real world scenario – there will come a time when a business is unpaid on a project. This means that a business needs to have a solid collections policy in place so that when payment is past due there will be no question regarding how to act and what steps should be taken to collect the debt.
The point of a collections policy is to act quickly and succinctly, in a manner that will get you paid in full quickly.
I have clients all the time who tell me they hand the debt over to a collections agency after a specified time so they do not have to think about collections. This is should only be done as an absolute last resort, and only when other possible solutions have been failed. Even if you have secured your debt, the choice to send the debt to collections will result in a smaller payment to you.
Imagining you will not get paid on each job, and obtaining security devices along the way is the best way to ensure full payment when you try to collect.
Other Types of Security Examples
In the law there are three main types of security devices. There are many variations of these three but at the end of the day it all boils down to the following:
- Security in real or immovable property. Examples include: land, buildings, and other structures affixed to land. This is where my favorite device, the mechanics lien, is categorized. Other examples include, mortgages and other types of property liens such as a judgment lien and an IRS lien. Each are highly specific and can only be applied in certain circumstances. The bonus here, is the land is the security. If payment is not made, the land can be used to pay off the debt.
- Security in personal or movable property. This type of security is good but not nearly as concrete or valuable as security in land. Examples include: UCC lien against, vehicles, jewelry, equipment, and other valuable assets which are not affixed to the ground. This security is common because more people own personal property which they can offer up as collateral. The problem is that it may provide less security, because the property can be lost, stolen, or sold without the creditor ever being notified. This is illegal but is very difficult to reverse. The benefit to this type of security is that it is common, and fairly easy to get. However, this may be the least effective of the three for use in a collections policy.
- Security in a person or a surety. This final type of security seems a little strange upon first glance, but it is probably the most common type of security device used in the market place today. Almost any loan you get these days requires a personal guarantee and/or need for a cosigner. Every deal, from the million dollar corporate transaction – to the teenager getting his first Blockbuster membership, (I think I just dated myself) will have some type of personal security device included. Examples include: surety, co-signor, pledgeship, promissory note and personal guarantee. The plus here is that everyone can offer personal security, but an individual’s personal solvency will determine the value of the security.
The most troublesome debts are debts that lack security.So, as a credit manager, it is good to think of the devices above in a way where there may be a possibility to obtain all three major types of security for each customer you extend credit. If all three are not possible, then two, or one. The most troublesome debts are debts that lack security entirely.
How Other Security Types Bolster Collections Policy
On this blog we primarily discuss the mechanics lien. We do this because our clients are contractors and suppliers in the construction industry, so the mechanics lien is the most important security device for our clients’ collection policies. Credit managers should be aware that other types of security devices, such as those listed above, are available, and work to incorporate them into the overall collections policy.
More Security is Better & Security Operates In Tandem
I know from personal experience in the legal world that a demand letter is not very effective when merely stating that money is due. A demand letter is much more intimidating to the debtor when it states there is a lien on the project, a personal guarantee from the debtor, a UCC lien on all his equipment, or a surety has cosigned the debt.
Even the most evasive of debtors cannot out match that amount of security. Security is inexpensive and its pays for itself by getting your company paid in full.
Typically there is no specific order in which security can be enforced. These devices work in tandem within a collections policy. Good credit managers get the hang of using all of these devices. The results are small accounts receivable, equaling a win for your company.