3 Things to Improve Your Credit and Collection Process - Webinar

There are some best and worst credit and collections practices. Learn when and how to file a lawsuit, when to send your Notice to Owner, and how a construction lien protects your interests.

Ariela Wagner
Ariela Wagner
Sep 16, 2021
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Sep 16, 2021
15 Mins

Learn how to improve your credit and collections process. This includes tips on best and worse practices, how a construction lien and bond claim can protect your interests, why and how to protect your interests, when to file a Notice to Owner or Notice of Nonpayment, how to get paid quickly, when how to file a lawsuit, and why you should not wait to enforce your legal rights.

This blog was taken from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in Florida. In this blog, we will discuss the three things that will improve your credit and collection process.

The following points will also be discussed:

Shore up the basics – the best and worst practices  

Pro Tip: Sometimes No Contract Is Better than their Contract  

Why you should always protect your interests and ways to do so  

Pro Tip: Get husband and wife on the guaranty for real protection

Ways to be a reasonable bulldog  

Pro Tip: Expressly condition the reduction on payment by a date certain

The Basics

We will now discuss the basics of the credit and collection process.

1. Get it in writing

First, you want to make sure that the agreement you have with the customer is in writing. This probably sounds obvious, but a lot of people do not make written contracts.

For example, there is a plumbing supply house that sells pipes and fixtures. Their credit agreement is literally just a form that the customer filled out. Now this client does millions of dollars in sales and it is just a simple fill-in-the-blank agreement for them to run some basic credit information. There are no real terms and conditions of consequence.

So, look at the process that you have in place. Make sure that you get the agreement between you and your customer in writing. That can be a proposal or an estimate. If you are in the supply business, this would typically be a credit application. But you want to make sure that it includes your terms and conditions, not theirs.

2. Your terms vs. their terms

The “your terms vs their terms” comes into play if people issue purchase orders to you. So, if you receive a purchase order from your customer, that purchase order may reflect terms and conditions either on the documents themselves or as a reference to a website where there is a section with terms and conditions.

So, it may something like all the terms and conditions located at www.xyzcompany.com/purchase-order-terms. All of those terms and conditions are incorporated into the document. When you sign the fill out the purchase order, the law will imply that you have accepted those terms and conditions by filling out the purchase order.

This usually becomes a problem with supply house customers. They go through the effort of getting things in writing with terms and conditions, and they are routinely filling purchase orders from certain customers who have terms and conditions that are contrary to their own in their credit application.

The single term and condition that is most contentious, is the pay-when-paid provision. So a supply house will almost never agree to terms for payment that say pay-when-paid. But if they fill a purchase order, and that order says that you the plumber will pay them the supply on when the plumber gets paid and it is in the plumber’s purchase order, they may have agreed to that by filling the purchase order.

Make sure you and your team understand that for every transaction you want your terms to govern and that you want to avoid their terms from creeping into your deal. Purchase orders are one way that someone can impose their terms upon you.  

3. The terms that may be an issue

Some of the terms that can sometimes become an issue are payment, interest, collection costs, warranty, indemnity, access to site, time for performance/delay, etc.

When you are going to get paid is a term that you will have to look at as well as the pay-when-paid provision. Next, when it comes to interest, if your agreement does not say anything about the rate, then you get the legal rate. It changes every few months though, so you will have to check that. It is a state-wide rate that applies.

Obviously if you have a written agreement then you want to have a higher rate of interest. Most agreements allow or state the highest rate of interest which is 18 percent. You can only do that if you have a written agreement which says you are entitled to that much.

For collection costs you want to make sure that if you have to hire a lawyer to collect the debt, the fees and costs associated with that collection effort can be reimbursed to you. You can only do that if you have that term for the recovery of collection costs in your written agreement, you can also get it if you have a lien or bond claim. But if we are talking about the document itself, a breach of contract claim has to be in that document.

claim of bond & lien

You have to be aware of what warranty you are providing. Many supply houses for example, only like to pass on the warranty of the manufacturer to the customer. So, to make that enforceable in Florida, you need to say that in the warranty provision in your credit application. Indemnity means the right to look to somebody else to recover for any losses. If you have that term in your agreement, that would be nice.

You also want to include having access to the site and time for performance or any delays. You would like to be able to say if something held you up on the job or you could not deliver materials on time because you did not have access to the site. So, none of these things will be your fault. Having those terms and conditions in your agreement will protect you.

4. Audit your existing accounts

What you also need to do is audit your existing accounts and see who has old terms and who has no terms. You need a process in place to start the new year off with a new agreement. So, have a lawyer or staff review the document that is the basis of your understanding between you and your customers.

Check when the last time was that it was updated. There have probably been incidents that occurred which led to you getting burned. Check if you have modified your agreement to account for those issues.

Some people, whenever they have an issue, will update their terms and conditions to deal with that issue. It would just be a living document with the terms and conditions. You should be doing the same thing.

So, audit your account to see who has a written agreement, who has an old agreement, and check your own current agreement. Then start fresh by getting new clients to sign the new agreement and making decisions on what old clients you are going to have sign the new agreement.

Pro Tip: Sometimes No Contract Is Better than their Contract

Sometimes it is better to have no contract than a contract with the other person’s terms. As a subcontractor, this is often the case.

A specific example of this is, if you are a subcontractor on a project, are told to start on a job, you are working and negotiating the contract at the same time. They will tell you have to sign their contract in order to keep working. But you have probably already started and then when they hand you the contract there will be terms and conditions that you will not agree to. What you need to be able to do is say no. Do not feel compelled to sign their document.

Dive deeper: Boo! The Scariest Contract Term That’s in Your Contracts (and You Don’t Even Know It)

Let us assume there is an electrician negotiating with a contractor. He thinks he is making progress in the negotiations and is around 30 percent through the job at this point. The contractor then tells him that if the electrician is to pick up his next check that he needs to sign the contractor’s agreement with no changes whatsoever.

Now what the electrician should not do here, is sign the agreement. He is better off with either no agreement or just walking off the job. Because at this point it is just a handshake agreement. There is no obligation for him to continue to perform. He can just lien the job for whatever he is owed and move on to the next job.  

Because the terms and conditions of the other side’s agreement are so onerous that he should never sign them in this case.

5. Cap the credit that you provide

Always cap the credit that you provide. Do not be afraid to cut off your customer. If you have internally decided that you are going to give $15,000 worth of credit to someone, and they have run up $15,000 worth of credit, do not be afraid to say that you will not extend any more credit. And if they want to continue to buy, they need to pay off the balance. If they say they have not been paid, then you need to stop giving them materials.

Extending additional credit has to be done carefully because the customer will almost always agree to take as much credit as you are willing to give. This is because it benefits them with very little risk. So, use the cap in your credit.

Read more: How Much Credit Can I Extend Before I Get Screwed?

6. Bill regularly

If you do not send a bill, do not expect to be paid. Customers should be able to set their watches to how often you bill. Some supply houses bill almost daily whenever an order is made and then they send a monthly statement. As a subcontractor or general contractor, you probably send periodic payments, maybe on the 25th of the month or at different stages of the project.

Whatever your agreement says or whatever your process is in the office, make sure that is solid. The customer should be able to count on the fact that they are going to get their bills. The other thing you should consider doing is billing disputed amounts. This is a big issue for subcontractors.

Because if you are a subcontractor and you have done work that constitutes a pending change order, someone has asked you to do the work, but you do not have all the paperwork together, because you submitted a change order. It has not been signed and you have to submit your pay request. The contractor will say that they cannot bill it because it has not been approved. In most instances, it all works out in the end.

But if there is any friction in the process, you have to bill the amounts that you believe are owed to you, even if they are disputed, to support your legal position that you are entitled to be paid. When someone is owed money, that amount usually includes amounts that have not yet been billed. So a bill needs to be generated for all of the undisputed and disputed amounts.

That comprehensive bill needs to be sent out so that it can be matched with the lien or any lawsuit that needs to be filed.

Why You Should Always Protect Your Interests and Ways to Do So

You should always protect your right to payment. We will now run through the three best ways that you can secure your right to be paid.  

1. Personal guaranty

A personal guaranty means that you have the right as the party extending credit to go after and recover the money that is owed to you. And not just from your direct customer who is, let us say, a plumber, but anybody who signed a personal guaranty. Maybe it is a principal, shareholder, or owner, but whoever it is, needs to sign on the dotted line and most importantly, you need to get them to sign with no corporate designation.  

The best guarantees that someone can draft are effectively two parts. The credit application has the terms and conditions of the transaction that are signed by the company. So, it can be signed by John Smith, president of ABC Plumbing, but then there is a separate section on the same document, called the personal guaranty. It has the personal guaranty terms and conditions, and it expressly states that this person signing is guarantying the debt of the company.

The signature block that says John Smith as an individual, is who is guarantying the debt. Some people are sneaky about it and they include a line in the terms and conditions that you agree to personally guaranty the debt. That is generally not an enforceable personal guaranty. You have to break it apart. You have to get a signature of the guarantor if it is an individual with no corporate designation, with their signature.

2. Joint check agreements

Another great way to protect your right to be paid is with joint check agreements. You get someone else to agree to pay you in addition to your customer.

A joint check is effectively a two-party check. In most instances it is made by the contractor, which in the example above is the contractor, and the plumbing supply house. So, the plumber gets the check, and the face of the check will say ABC Plumbing and XYZ Plumbing Supply House. Since it is a two-party check it has to be endorsed by both parties to be negotiated with the bank.

A joint check agreement on the other hand is an agreement in advance with the contractor or the subcontractor, whoever is going to be issuing the payment you want. But you need to ensure that the check you are issued always comes

as payable to you as the customer, and your customer.

Now, what you have to remember about joint check agreements is that if you sign an agreement that is given to you by the contractor (going by the example mentioned before), it is going to be written in favor of the contractor.

And most joint check agreements written by contractors to pay their subcontractors and suppliers have a lot of disclaimer language. It does not obligate them to pay, they can cancel at any time, and they have no liability whatsoever. So, it is not a great security measure as a way to protect you as the party extending credit.

So again, you either want to modify their agreement or have a joint check agreement form in place and ready to go. That way you can tell people if they want you to work for them that it looks like a great job and that you would love to provide them with labor or materials, but that you do not feel comfortable with just your lien rights. You can say that you both need a joint check agreement, and then you can give them your corporate agreement to sign, by both them and the contractor or the owner.

Have this as a document in your portfolio of documents so that you are ready to go and give it to someone as part of your collection process.

3. Construction lien or bond claim

You absolutely need to make sure that you secure your lien rights. The job that you forget to secure your lien rights on, or if you are convinced by your customer because he or she is a great customer, not to secure your lien rights, is a job where you are going to have lots of money if it is owed. You may even have a contractor or owner go out of business.

You are going to wish that you secured your lien rights. Do not ever let it slide, and do not make any exceptions. Remember to have a process in your office that you can bank no matter what job. Those jobs should get noticed and you should lien your jobs within the 90-day period.

The general rules are as follows:

a. Notice to Owner

The NTO must be served no later than 45 days after furnishing labor or materials, upon the owner. If the job is bonded, you will serve what is called a Notice to Contractor no later than 45 days from your first work. And these are the absolute last days. So, you should not be waiting this long. You should do it well in advance, ideally right after you execute your contract, or you start work on the job.

b. Claim of Lien/Notice of Nonpayment

You need to record your Claim of Lien or Serve your Notice of Nonpayment within 90 days. Remember that you can put a construction lien on a job or send a Notice of Nonpayment while you are still working on the job. You can even send it on Day 8 after you send your bill. But the longer you wait, the more risk it creates, so try to do it sooner rather than later.

Notice to Owner (NTO)

c. File a lawsuit

No later than one year from your last work on the job for bond claims, or one year from the recording date of the Claim of Lien, you need to file a lawsuit to preserve your rights. There is no such thing as re-recording a construction lien or sending a new Notice of Nonpayment. The only thing you can do is either file a lawsuit to foreclose on the lien or sue the surety within a year. But again, you should not be waiting anywhere near a year. You should be pursuing it much in advance.

Pro Tip: Get husband and wife on the guaranty for real protection

Florida is what is called a debtor state, because it is very debtor friendly. So, you need to make sure that if you really want security, that you get the husband and wife to sign the guaranty.

For example, if a husband signs a credit application and at the same time signs a personal guaranty, but all of his personal assets are joint assets with his wife, then they are not touchable by the husband.  

The only way the husband would get access to those joint assets in most cases, is if the guaranty is signed by both the husband and wife. It is not that it is bad just to get the husband or just the wife, but if you want real protection for certain accounts, you need both signatures.

Ways to Be a (Reasonable) Bulldog

Now we come to the ways that you can be a reasonable bulldog.

1. Contact delinquent accounts often

This is obvious but a lot of people just do not like doing it because it makes them uncomfortable. But you need to contact delinquent accounts verbally and in writing. You should be nice, but firm and you have to do it. You will have to do it weekly and sometimes even several times in the same week for really stubborn accounts.  

2. Don’t take excuses, but offer different payment options

Be prepared to reject excuses and at the same time offer options. Offer alternative methods of payment. Ideally you would like to get a check, but they may want to pay with a credit card. Go ahead and take the card. Ensure that other methods of payment are available so that you can give your customer options to give payment.

3. Offer payment terms

Also offer payment terms. Maybe they can pay $1,000 a week for five weeks and that will fulfil the debt. Maybe they cannot agree to short- or long-term payment plans. But what they can do for example, is let us assume they have $1,500, and they say they can give it to you immediately. Take it!

4. Accept partial payment

As long as you are not giving up any more rights than the amount of money that you are getting, then there is no reason you should be rejecting partial payments. Instead of fighting over $10,000 maybe you can just fight over $4,000.

So any time anyone is willing to give you a partial payment and you are not giving up any more rights than the amount of money that you are getting, you should be willing to accept it.

SunRay's intelligent application

5. Offer additional security

Always be willing to sneak in some additional security. Security is part of the waiting process. As an example, maybe you do not have a personal guaranty, and someone owes you $50,000. You can tell them that you want to send it over to your lawyer for collection, but if they can wait, that you want them to sign a personal guaranty for the debt.

So, you did not have the personal guaranty before, you are going to wait another month or two to get paid, but in exchange for that, try to get something. Even if it is not money, maybe a personal guaranty. If you already have one with the husband, you can try to get the wife on, if you agree to keep waiting.

6. Resolve disputes quickly and in writing

Always be willing to resolve disputes quickly and in wiring. Work done could have been bad or maybe materials arrived late or damaged. Do whatever you can to resolve these issues as quickly as possible. It is always better to give credit and get a prompt payment, but we have another pro tip for that:

Pro Tip: Expressly condition the reduction on payment by a date certain

Do not just agree to give credit. Always try to condition your credits in exchange for prompt payment. And you need to document that agreement in writing. Emails and text messages are both fine. You would need to email something like “thank you for the phone call this afternoon, as we agreed, we will reduce the $10,000 you owe us to $4,000 so long as we receive the $4,000 by so and so month and date.”

You are not giving up anything because if you don’t get the money, by the date mentioned, then the condition has not been satisfied. Where people tend to make mistakes is, they say that they have an understanding about getting the check. But they issue a credit memo and end up never getting the check. And they give the person $5,000 credit because they were told they would be paid.

Now they want to sue that person for everything but there is no condition in the credit memo for this agreement to payment. So always condition the payment of a reduced amount with a date certain for that payment. It is always better to mention a specific date on the calendar rather than something like 5 days, 7 days or 30 days, so that there is no ambiguity.

7. Avoid emotional decision making

Avoid emotional decision-making by leaving all emotions at the door. You are running a business so ensure that you make business decisions. People who spend the most amount of money on lawyers are the ones that get the most emotionally involved in proving themselves right and proving the other person wrong.

It is very important to make rational business decisions, even if that means taking a little less. It would be better to give someone the certainty of a done deal, then the uncertainty of a good legal case.

8. Do not delay in initiating the legal process

The longer you wait to enforce your legal rights, the harder it is going to be to collect. People move to other jobs. This can happen even in your own company. If you have tried everything you can to get paid and nothing has worked, do not wait month after month. Hire a lawyer and pursue the collection process aggressively. The sooner you do it, makes it much more likely that you are going to get paid.

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Ariela Wagner
Ariela Wagner
Ariela is the president and founder of SunRay Construction Solutions. She has over 13 years of construction industry experience.
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