To material suppliers and equipment lessors who ship thousands or millions of dollars of materials and equipment out on credit, credit policies are quite important. One component of a credit policy too often overlooked in the construction industry is lien protection. When it comes to getting paid, filing a lien can be the most effective way to prevent high receivables. Filing the lien on time and delivering all required notices is critical to preserving your lien rights, and its why lien protection measures must be incorporated into a well thought-out credit policy.
What Is A Credit Policy?
So what is a credit policy anyway? According to businessdictionary.com, a credit policy is:
Clear, written guidelines that set (1) the terms and conditions for supplying goods on credit, (2) customer qualification criteria, (3) procedure for making collections, and (3) steps to be taken in case of customer delinquency. Also called collection policy.
Writing a quality credit policy requires an intimate understanding of your business, and when preparing a credit policy for a material supplier or equipment lessor, a quality credit policy also requires an intimate understanding of applicable mechanic’s lien laws. Inc. Magazine ran a pretty good article about How To Create A Smart Credit Policy, which gives some good tips on creating a general credit policy for your business. When it comes to collecting on an outstanding debt, the article describes:
In the case of delinquency, be prompt and persistent. “If follow-up contacts are not timely, it sends the message that customers need not have a sense of urgency,” says Swafford. Your written policy should specify contact at regular intervals, starting with a reminder five to seven days after the due date. Further notice should escalate: A second written reminder might be followed by a phone call, followed by a final notice from a lawyer. If you still haven’t been paid 30 days after the due date, it’s probably time to turn the matter over to a lawyer or a collection agency.
The difficulty with all the commentary and resources available about credit policies is that they all look at these policies from the perspective of a company who does not have mechanic’s lien rights. However, when you do have the right to file a lien, protecting and enforcing those rights should be a critical part of your company’s credit and collections policy (read about why you should love mechanic liens). The next section explains how.
Lien Protection As Part Of Your Credit Policy
To incorporate lien protection as part of your credit policy, you need to focus on two essentials: (1) Creating a policy as to which projects will get lien protection, and which will not; and (2) Sending out your required preliminary notices.
Create A Policy Designating Which Projects Should Get Lien Protection
First, depending on your budget and your receivable problems, you may want to protect your lien rights on every single new project…or, you might want to give your best clients a pass and only take protection actions on riskier projects.
I have clients that go both routes, and in large part, it works. For those who pick and choose between projects for lien protection, these clients give each project a category or risk (in colors, for example, green, yellow and red). The low risk clients are not part of the lien protection procedures, but the high risk clients are.
There is nothing wrong with an approach like this, except don’t fall victim to your tendency to trust your clients. Even though a client may have good intentions, the realities of cash flow problems, the current economy and business can control the day and leave you without payment.
Monitor Notice Requirements…and File Your Notices
Knowing your lien deadline is important, but sometimes, it’s not quite as important as knowing your preliminary notice deadline. The reason is simple. By the time lien deadlines expire, you likely already know you have a payment problem. Preliminary notice deadlines, however, expire way before you see any red flags.
If a state requires preliminary notice, they almost always require them from material suppliers and equipment rental companies. There is hardly ever an exception to this. Check out our color-coded map of the USA indicating which states require notices.
Preliminary notice requirements create a big challenge for material suppliers and equipment rental companies who want to incorporate mechanics lien protection into their credit policies. The reason? Because the laws are complex, and they vary significantly from state to state.
You can’t use a single notice form for every state and situation, and you can’t always send the preliminary notice within the same period. For example, preliminary notices in Oregon and Louisiana are required within just 8 and 10 days respectively, whereas Washington state provides a much roomier 60 days to file preliminary notice.
Aside from getting preliminary notices sent on time, you must also get the contents of your notice correct, and it must be sent in accordance with strict requirements. Again, all this varies from state to state.
You need some type of system to help you manage the preliminary notice requirements in each state (Zlien provides this with its web based LienPilot). And if you really want to ensure your preliminary notices are always sent correctly, and on time, consider outsourcing the work to save you time, money and headaches.