Everybody wants to get paid what they’re owed. Sometimes, this is harder for parties in the construction industry that it is for companies in nearly every other type of business. Low margins, high failure rates, contracts that shift the financial risk, most materials or work delivered on credit, and other unique problems make the construction industry a difficult place to get paid. It’s the construction credit manager’s job to navigate these obstacles and get their company paid on every project, and this difficult job can be made much easier by implementing these 3 specific steps.
1. Create a Credit Policy – And Stick To It
Credit policies work to streamline and tie together the entire credit management process.The first, and broadest, step on the path to reinventing receivables reports and getting paid on every project is to create a thorough credit policy. Credit policies work to streamline and tie together the entire credit management process. Everything from a credit application to determination of customer credit limits, to collection and litigation policy should be well-documented and set out clearly in a proper credit policy.
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Credit policies are sets of guidelines that are used to 1) determine which customers qualify to be extended credit; 2) set the payment terms for those customers; 3) define the limits to be set on each outstanding credit account; and 4) outline the steps or procedures used to deal with delinquent accounts. While there are multiple sub-parts that must be drafted and implemented for each of these major functions – the overarching goal of the credit policy is to organize and streamline the process of extending credit and getting paid.
Credit policies should be specifically tailored by each individual business. While the main goals and functions are similar for every company, there are multiple ways to achieve the same ends. Further, some companies, and their corresponding credit policies, will be more tailored to growth while others will be more tailored to risk-aversion. In any event, though, a well-crafted credit policy will streamline the credit management process, and work to help ensure payment on every project.
2. Send Preliminary Notice On All Projects
If there is one step to getting paid that is both the simplest and one of the most effective, sending a preliminary notice on every project might be it. As well as being required (in some form) by most states, sending a preliminary notice also serves to prioritize invoices. Sending preliminary notices results in the Owner and/or GC prioritizing invoices because they have more exposure to parties who have protected the ability to file a lien. In fact, technology exists that allows parties to track who has and who has not sent preliminary notice on a project, for the purpose of minimizing and/or managing financial risk. Besides that, sending notice establishes a company as a business that is aware of the protections available, and that runs a tight ship in the credit department.
One thing preliminary notices won’t do, however, is scare away customers or repeat business. Notices are a fact of life in the construction industry – they’re either required or good practice for every party to send on every project.
3. Secure the Debt
Securing the debt owed to a business goes a long way in making sure that business gets paid, even if the customer experiences financial difficulties.Finally, a prudent credit manager should make sure that extensions of credit are secured in some manner. Point 2, above, ties into this because sending preliminary notice can protect a party’s future right to secure an extension of credit through a mechanics lien. This is only one means of securing debts in the construction industry, however. Personal guarantees, UCC liens (financing statements), or other security may also be available.
Securing the debt owed to a business goes a long way in making sure that business gets paid, even if the customer experiences financial difficulties. A secured debt is backed by an interest in collateral, which reduces the risk associated with extending credit. This means that if a debt is “secured” the party extending credit is able to claim the asset providing the security in the event of a default by an indebted party. This ability provides strong leverage to induce payment.
By following these steps, a construction credit manager can re-invent their company’s A/R report, increase cash flow, and significantly impact the bottom line.