Collecting that Account Receivable – Staying Smart on Credit
Get it in Writing
The first thing you need to do is get your agreement in writing. Use a construction contract; it will be much easier to prove your point in court than relying on some type of verbal agreement based on a hand shake.
Secure Your Payment
Next, you need to secure your rights to be paid with some type of legal instrument. Whether it’s a construction lien on real property or a UCC on materials; it’s critical that you secure your right to be paid.
Bill Regularly
The worst thing that you can do is send bills sporadically. Your customers need to know you’re serious about getting paid and they can set their watches on the bills that they receive from you.
Limit Your Credit Risk
To the extent you can limit your exposure by limiting the credit you give, you should do that. It’s much easier to suffer a loss of $5,000 than $50,000. You need to make credit decisions based on the credit risk of the customer.
Contact Delinquent Accounts Often
So you have a delinquent account; what do you do? Yes, you must do the obvious – contact the account holder. Do it verbally and in writing, nicely and firmly but do it, and do the best you can to get the customer to start paying you.
Resolve Disputes Quickly and in Writing
Sometimes your customers will tell you that the goods arrived late or that they are unhappy with your service. Try to resolve these issues yourself. Better to give a small credit in exchange for a payment, and move on.
Negotiate with Decision Makers
Whenever you’re negotiating either the contract or a delinquent debt, make sure you’re negotiating with someone that has the authority to make decisions. Avoid the frustration of negotiating with a bookkeeper with no real authority. Deal with someone who can actually move the ball forward.
Condition any Credit on Prompt Payment
After you decide that you’re going to provide a credit in exchange for an immediate payment, make sure that that condition is expressly set out in a written agreement (can be an email). The last thing you want is to give a credit and then keep waiting on a promised payment.
Don’t Delay in Initiating the Legal Process
Once you determine that there’s nothing more you can do yourself, don’t wait to enforce your legal rights. Get to your lawyer ASAP. Every day that goes by makes it that much harder to collect the debt.
Avoid Emotional Decision Making
Leave your emotions at the door when you deal with credit issues; it makes resolving a business dispute much easier. The same applies in collecting a debt.
In Conclusion
If you employ all of these 10 debt collecting strategies, you’ll likely see your cash flow increase and your frustration level decrease.
Owed Money?
What is the First Step
Step one – make sure that you are billing regularly for the debts that you’re owed. Whether that’s monthly payment applications or invoicing based on your contract, whatever it says in your contract or your agreement, that’s what you need to do to make sure that you document the fact that you’re owed money.
You Need to Document Everything
Sometimes clients come to me and say, “Well I’m owed this money on a change order, “but I’m told that I can’t bill it.” While that may be true, recognize that, if you don’t submit a bill, you’ll have a hard time convincing a judge that you’re owed this money.
Secure Your Lien Rights
Next, at the beginning of the job, you need to make sure that you serve the proper preliminary notices under your lien and bond rights. So that’s typically a notice to owner or notice to contractor, usually done no later than 45 days from your first work or delivery of materials on the job site. And those 45 days, that’s the date that it needs to be received by the owner, not just the day you mail it.
So you get this preliminary notice out of the way, the next step is within 90 days of your last work on the job or last delivery of materials, you need to record a claim of lien or serve a notice of non-payment on the bonding company.
Remember that these notices and the lien have to happen absolutely no later than 90 days from your last work. That does not include punch list work and it does not include warranty work. These are very tight deadlines, both the 45 days and the 90 days.
Enforce Your Lien
Assuming that you have properly protected your rights under the lien and bond law, you then need to make sure that you enforce your rights. The lien and the bond claims, won’t produce dollars all by themselves. It’s not that you serve this document and all of a sudden you get paid. You need to make sure that you follow up on it.
You need to be communicating with emails and phone calls. And when you get to a point where you’re getting the run around, you’re not getting answers,and your calls are not being answered, that’s when you need to call a board-certified construction attorney to help you get paid.
Most Cases Settle
Most collection cases that we handle settle, typically within one to four months of our filing the case. And that’s because the other side gets a lawyer, the lawyer usually is knowledgeable about these issues, and can explain to them that in many instances, subject to very limited exceptions, if work was done on their property, materials were delivered and releases were not given, the money is owed. They may have some back charges, they may assert other issues, but remember that if you do nothing, you will likely get nothing.
We Can Help You Get Paid!
That explains the process from beginning to end of collecting your debt. Don’t let it just sit in your QuickBooks or Sage accounting system, do something so that you can get paid. Turn that account receivable into actual green dollar bills so that you can pay your bills, and maybe have made some money on that job, and make some profit. If you have questions about this or any other lien or contract topic, send me an email, alex@barthet.com.
3 Ways to Stay Smart about Credit
Operate a construction business and you will inevitably end up wearing several hats: handyman, salesperson, estimator, bookkeeper and project manager. With so many responsibilities, it’s easy to overlook things, but the one thing you don’t want to ignore is building and maintaining good credit. You might think this is unimportant, especially when things are going so well in your business. But as so many experts point out, the best time to prepare for a downturn is when business is booming. With a few simple steps, you can establish and maintain a positive profile. Here are 3 ways to stay smart about credit:
Stay on top of your profile.
If you don’t have a profile, contact Dun & Bradstreet, which maintains credit files on businesses. It assigns credit scores based on a wide range of factors, including revenue, location, number of employees, length of credit history, and type of industry. Lenders will use this information to determine your company’s creditworthiness.
Pay your bills and pay them on time.
Paying your obligations demonstrates that you have positive cash flow and the resources to cover your liabilities. Paying them on time means you’re a diligent businessman and a good business risk. Paying late places your credit at risk and damages your reputation before potential lenders.
Limit your borrowing.
How much and how often you borrow and how quickly you retire any debt impacts your credit. Short term and long term debt on your balance sheet can have a negative impact on your company’s value and make you a lending risk.
Why Do You Need Good Credit?
Cash flow is one of the major concerns of any business, especially in the construction industry. Credit can provide you an injection of additional dollars, allowing you to expand and even become more profitable.
Access to money when you need it.
When it comes to owning a business, too much demand is typically a good problem to have. But if you lack the financial resources to expand when needed and to take on new work, you can end up like countless other businesses that fail because they can’t afford to finance their own growth.
Better finance terms.
When you need to borrow money, a positive credit history will net you more favorable terms. Whether you are applying for a credit card, a line of credit, or a loan, a better credit profile translates into lower interest rates and easier access to the funds you need.
Eliminate need to prepay.
Good credit should reduce if not dispense with the need for any prepayment requirements in your business. Being a good credit risk gives your suppliers the sort of comfort they need to allow you to purchase products and services for your business under normal payment terms.
Good credit is essential to all business concerns – make it happen.
3 Do’s and Don’ts to Keep You Out of Court and Get Paid
Smart business practices can go a long way toward reducing, even eliminating, the chance of legal trouble on a construction project. With that in mind, here are three Do’s and three Don’ts that can keep you from being sued by unhappy customers or vendors.
DO get it in writing – always.
Even a small job needs a formal written agreement. It should include scope, price, payment terms, and schedule. It should reference a complete set of plans and specs. It should include language on insurance, indemnification, warranty, termination, dispute resolution, and recovery of legal fees and costs. After you have a signed contract, continue to get everything in writing, especially changes. Have customers and vendors acknowledge each agreement, promise, or direction in an email, text, or a written document of some sort. Memories fade with time.
DO review the plans, the specifications and the site.
Plans and specs are the roadmap for getting the job done with as few hiccups as possible. But plans and specs can be incomplete or unclear, leaving out key details – ingress or egress problems, for example – that you need in order to properly price and build the project, and which you may only discover by visiting the site.
DO manage expectations.
Projects start off with the best of intentions but with different expectations. Review the scope of work and payment terms with your customers and vendors so they know what you plan to do, when you plan to do it, and how you expect to be paid. Surprises on construction projects are seldom pleasant. This will help minimize them.
DON’T start work without a deposit or assurance of adequate funding.
In most cases you will want some money upfront, even if it’s just 5% or 10% of the project sum. If it’s not customary to obtain such a deposit, you should get documentation verifying the customer’s ability to fund the entire project. A good start would be a letter from the lender on the project.
DON’T work without insurance.
Things can go wrong very quickly on any sort of construction project, and a $50,000 job can easily turn into a million-dollar liability. Proceeding without insurance coverage – be it for personal injuries, damage or loss to property, or just mistakes – is simply not worth the risk. You also need to make sure all subcontractors are insured. Deal with valid certificates of insurance, and endorsements that name the contract parties as additional insureds. And don’t forget to obtain new certificates and look for endorsements when policies renew.
DON’T walk off a job.
Relationships with customers and vendors can sour. When that happens, it may be tempting to abandon the work, especially if the customer isn’t paying you or a vendor isn’t fulfilling its orders. But don’t do it, at least not before you review your contract in detail, ideally with your legal advisor. Courts have historically not looked kindly at contractors who walk off jobs, especially without adequate written notice. Once you finish your work, you can put in the necessary effort to collect the money you earned.
Steering clear of legal trouble is both dollar wise and business savvy. Underscoring each of these do’s and don’ts in your communications and documentation will keep all parties well informed, and should keep you out of trouble and out of court.