“We only want to send preliminary notice on our riskier accounts,” is a statement I’ve heard countless times. When folks are putting together a preliminary notice program, they almost always explore the option of sending preliminary notice on only some accounts. This post describes why that policy is probably a bad idea.
Your Best Clients Are Your Biggest Risk!
What do you mean Scott? How can our very best clients be our biggest risk? You probably already know where I’m going with this.
Companies make credit decisions everyday by extending more credit to companies who are more credit-worthy. The art of extending credit is an art, not a science. Every time you extend credit to a company you make a series of judgments. Sometimes a company can accumulate good credit with your company (and bigger lines) for just being a good customer. This credit accumulation can occur without much regard for the company’s actual financial affairs outside of its involvement with you.
[pullquote style="left" quote="dark"]The doom comes out of no where like a thief in the night. Your bigger clients are the bigger risk because you have the most to lose with their accounts, and their accounts are no more fail proof than your smaller clients.[/pullquote] Making these credit decisions is tough because — let’s be honest — companies in financial trouble never advertise their impending doom. Doom comes out of no where like a thief in the night. Your bigger clients are the bigger risk because you have the most to lose with their accounts, and their accounts are no more fail proof than your smaller clients.
Let me tell you a story with a good lesson, but a good ending for our client.
This client furnishes materials nationwide and one of their better customers had over $750,000 of materials in-hand when they went belly-up and put into receivership. Their liabilities so outnumbered their assets that our client had slim chances of seeing any of that money in the receivership action. This was a really great customer with a large credit line, but what now?
Fortunately, our client’s practice is to send preliminary notices on every project, which meant that its lien and bond claim rights were protected on this customer’s account. It filed a collection of 7-10 mechanics liens and bond claims to collect virtually every penny owed to it without having to spend legal efforts and money in the receivership.
Nevertheless, Some Preliminary Notices Are Better Than None
In a perfect world you would send preliminary notices on every project, but there are reasons why some clients choose otherwise. There are quality reasons for these decisions. It’s just another credit decision for a company.
I’ve discussed these decisions in the past when I wrote articles about Lien Policies, and Creating a Lien Policy. When companies are implementing a preliminary notice and mechanics lien program they must draw lines designating who will get notices and who will not, as well as when liens will be filed and when they will not. Programs can be aggressive or conservative. One size does not fit all.
Nevertheless, preliminary notices and mechanics liens should be at least some part of every companies’ credit policy and credit management programs.