By Al Dias
It is unfortunate that in today's economic climate we are faced with situations that challenge our ability to keep business moving forward. Being proactive instead of reactive will assist with minimizing your business risks. Whether you are a business owner, in charge of sales or even a salesperson moving through the ranks, you will be faced with challenges, such as loss in potential profits, which can trickle down to affect sales commissions, shortages of contracts awarded for materials and/or craftsmanship, and labor. This brings me to the point of this article -- protecting your assets by making smarter decisions in regards to collecting money from your customers.
If you have clients that owe you money and have showed any signs that they are not willing to work in good faith, you must make a decision and take action. The nonchalant attitude or not making this a priority and giving debtors too much time to strategize increases your odds on losing 100% of what's owed. You are now in competition with the banks calling in their notes and the IRS as their revenues are down, more so now than ever.
Signs to look out for begin when your clients are starting to not return phone calls, drag on with excuse after excuse, saying payment is on its way and it never shows up, etc. These are all red flags and I assure you that something's going on. They could be buying themselves time to shut the company down and transfer all current assets to the new company, simply shut down their operation and file bankruptcy, or simply be using your money as an interest-free loan.
This is happening more frequently nowadays. Products are being sold and not paid for, contracts are being executed and contractors aren't getting paid, banks are putting the brakes on projects in various stages, loans aren't being distributed, credit lines are being cut off or minimized, and many suppliers want to get paid up front for materials needed to begin the jobs.
These are just a few signs of the times that our economy has been forced to implement due to the mortgage crisis, stock market plummeting, and many other contributing factors. Many people are living on borrowed money and above their means; we need to get back to the basics. You must do your due diligence before the execution of any deal.
Proactive Procedures
Take advantage of doing some preliminary background investigations including credit checks, bankruptcy watches, asset and liability investigations, checking references and talking to other industry professionals in your area, and check to see if your prospective clients or existing clients have any pending lawsuits against them either where they are the plaintiff or the defendant.
Table 1 is an outline of customized searches you can utilize outside of the standard Dunn and Bradstreet. Paying for these services will have to be deemed whether worth the investment during the due diligence phase of your credit granting process pending the amount of the credit requested.
| Table 1 | |
| Basic Search | Civil Filing Search |
| Corp status and date of incorporation | Lawsuits (subject named as defendant) |
| Officers | Lawsuits (subject named as plaintiff) |
| Address | UCC1's |
| Phone numbers | Liens/ Bankruptcy Information |
| Expanded Background Check | |
| Basic search | Associated individuals (silent partners/stockholders) |
| Affiliated companies | |
| Civil judgments/liens | |
| UCC1 filings | |
| Bankruptcy search | |
| Assets (Real Estate and vehicles) | |
Doing business in general is a challenge and today moving forward it will take skilled management and diversification with your internal procedures. Create an Internal Flow Chart that your credit department must live by and do not deviate from it. You must be proactive vs. reactive.
Procedures for Contractors
Make sure contracts are executed and your interest is secured before the execution of any contract. Should there be issues on the jobsite, documentation is key to protect your interest. Immediately use certified mail to client(s) to document issues and/or resolution to establish for the record, if applicable. Verbal communications do not help should this turn into a collection item or if there are any disputes regarding full payment due.
Upon completion of the job an authorized signatory would further protect your interest to document for the record a satisfactory completion and that any issues have been resolved, if applicable.
Should there be any extra work requested over and above the original scope, the request should go to your site foreman to relay back to management to obtain signature for authorization of work and price increase to reflect the change; do not proceed if this cycle is broken or if you are pressured to do work without the documented authorization.
Should there be a need for design drawings do not proceed to build until an authorized signatory has been obtained before the build. This rule should apply to material man and manufacturers as well.
On every job a journal should be kept and logged of the daily activities along with any issues. Labor logs also should be kept to reflect and establish first date on the job and the last date on the job to secure your lien rights should you need to file. Documentation will help further secure your interest and justify your case should there be any issues. Those with out documentation are at risk.
As soon as debtors realizes that you are being lenient they will take advantage and look for ways to back charge you, penalize you, and simply hold the money as long as they possibly can -- or simply not pay at all until they have to. It's human nature for some to think that once they have it they believe it's theirs. Only a small percentage of people pay on time as required and do good business. Review with your credit managers on a weekly basis to determine if any red flags have arisen so you can initiate your collection efforts immediately. Get deposits if you can, make sure your pay applications are submitted on the due dates required, obtain delivery confirmations that pay applications have been delivered, or send them certified to ensure delivery.
Protecting Yourself
Business is like a game of chess and you have to make a move. Ask yourself a few questions: What resources do I have? What leverage do I have?
Do you know the lien laws in your area and the time frames required for documents to be filed? You can use online services such as www.nationallienlaw.com or www.lienlawonline.com, you can use your Google search engine, go to the library or your state website to acquire information (only some states provide it), or simply seek council that specializes in construction law. The requirements are different across the country for each state and whether the job is commercial or residential.
There are generic services that provide the documents for filing but if you are not familiar with how to use them simply do not pursue and seek council. If you are familiar with the process and have successfully filed liens internally you must stay abreast of the changes in your state as some states lien laws change frequently.
If you are not familiar with the lien laws it is recommended to seek council. If liens are filed improperly they will be deemed frivolous and can end up costing you a countersuit along with damages that will in some cases add up to over three times the amount you were initially going after.
In today's climate if you are unable to obtain a documented commitment regarding payment arrangements or good faith payments, you need to seek outside assistance within 45-60 days if your internal efforts have failed -- in some cases sooner due to time frames involved should you need to secure your lien rights.
Table 2 is an example of an internal flow chart to be considered under standard business practice. While the chart goes out to 91 days you might consider utilizing a flow that reflects a 61-day process because of the current economy.
| Table 2: Internal Flow Chart | |
| 0 Days | Invoice/Statement Sent |
| 15 Days | Courtesy Call to Customer |
| 31 Days | Past Due Letter |
| 41 Days | Collection Call #1 |
| 50 Days | Collection Call #2 |
| 60 Days | Termination of Credit Letter |
| 70 Days | Collection Call #3 |
| 80 Days | Final Demand Letter |
| 91 Days | Placement with Third Party |
Due to the fact companies are folding and filing bankruptcy for various reasons the use of a personal guarantee will become more common and the need to be on top of your accounts will become more advantageous regardless if you are dealing with a small, medium, or large company.
Debtors cannot go to a bank and request a loan with out attaching a personal guarantee to it. Neither you nor I can go to a bank and request a loan without a personal guarantee and all sorts of strings attached, so why should you float someone that could be using your money interest free? You're not a bank.
Third-party Assistance
Reaching out to a commercial collections firm that specializes in the construction industry and that is licensed in all 50 states minimizes your risk on throwing good money after bad. The fact of the matter is a good firm will work strictly on a contingent basis and fees are negotiable based on the size of the account, how old the account is, and how many accounts you have. A good firm will also provide you with resources and free consultation to help minimize your risk moving forward and provide all the tools as listed above to help you do your due diligence before execution of contracts and the credit granting process.
This way, should money get collected, fees are paid out of the transaction upon cleared funds and not out of your pocket, therefore minimizing your exposure versus paying a handsome retainer to an attorney who has nothing to lose. Also, should the standard collection efforts fail; a good firm will do their due diligence to determine if the account is "suit worthy." This is done in most cases by licensed and bonded private investigators utilized to do onsite visits and who will also have access to privileged information to determine if there are bank accounts for garnishment, if there are assets to go after, or if the debtor is truly having troubled times but is sincere and wants to show a good faith effort or if it is simply an unwillingness to pay.
After review, should an account be deemed "suit worthy" then a good collection firm will have an established network of specific specialized collection attorneys who also work on a contingent basis. The only out-of-pocket exposure you would have in this case is any state-required court costs and filing fees. This process will minimize your risk of, in some cases, throwing good money after bad.
Al Dias is an active vice president of consultation for Allied Collection Resources. He is available to consult with readers of Pavement Maintenance & Reconstruction and he can be reached at 817-570-9155 or via e-mail at [email protected].
