Credit & Collections Best Practices in Florida - Webinar

In this blog, presented by SunRay Construction Solutions and Alex Barthet, Principal, The Barthet Firm, find out in detail about providing credit, how to check someone’s credit, some best practices to follow for collecting the credit, and more.

What are Some of the Reasons to Extend Credit?

Here are some of the top reasons why you may want to extend credit to your customers:

• Customer Loyalty – People often like to use someone else’s money, buy things, get paid for those things, and then pay the person/entity from whom they took the money.
• Financial Position of the Customer – You may be willing to extend the credit because you are aware of the customer’s financial position and you know that if you extend the credit, they will return the money to you.
• Industry Standard – It may be an industry standard. For example, material suppliers often extend credit to their contractor customers.
• Gain a Competitive Edge – Extending credit is a good way to gain a competitive edge over your competitors. For example, if you offer more credit and better credit terms, then customers may prefer working with you to your competitors.
• Increased Sales – If you give more credit, it will obviously result in people buying more, thus resulting in increased sales for you, if they pay for it.

What are Some of the Ways to Check Credit?

There are couple of ways to check credit:

• Start with a Credit Application – The first thing that you should check is whether you have a written credit application which includes various key information, such as:
• Business Name – You need to know the exact name of the business entity, whether it is Inc, LLC, Corporate, etc.
• Address – You need to check if the address they provided is the actual and current address.
• Tax ID – Most of the businesses will have a federal Tax ID. They need to provide this ID and you can use it to cross-reference that you have the right business name.
• License Number – Check if they have a license and get their license number. You can use the license number to make decisions on whether to extend the credit or not. For example, if you find out that the credit applicant’s license is suspended, then it is an obvious sign that you should not extend the credit.
• Bank & Business Credit – Ideally, you should get three to four bank and business credit references.
• Verify the Information – Once you receive the credit application, you must verify the information they have provided. Simply getting the information on a credit application and doing nothing with it will be of no use to you.
• Get Written Authorization – One of the key points is to make sure that you are getting their express written authorization to pull their background and credit information. For this purpose, a good practice would be to put in a sentence in the credit application that you are going to use the information provided for background verification.
• Places to Check for Credit Information – Some of the places where you can check credit information are:
• Dun & Bradstreet (dnb.com) – You can find some basic information here, especially for older, existing companies. You may not find much information about newly established businesses.
• TLO (tlo.com) – TLO is a part of TransUnion now and you can sign up and use their services to check for credit.
• Cortera (cortera.com) – Another place to check for business credit information is Cortera which is now part of Moody’s.
• Secretary of State (SunBiz.org) – All the above places mentioned will typically require you to pay a fee for their services. If you want to use a free tool, then you can check the Secretary of State’s website which is a great place to determine some basic corporate or LLC formation information.
• Pro Tip – Make sure that the contract and the credit application have the exact name as it appears on SunBiz.org because the Secretary of State will allow very similar company names to exist in their database. If you don’t verify that information properly, you may end up pulling the credit information for an incorrect business.

Even though you are using the above databases to verify information, it is recommended that you also look at other options to find more information. Below are some ways to check credit in public records.

• You can Google “___________ County Recorded Documents”. So, just put in the name of the county, for example, Miami County Recorded Documents to get a list of liens, releases, judgments, property transfers, etc. So, this is any document that's going to be recorded in the public record in the county that you're searching for.
• You can Google “__________ County Property Appraiser”. So, again you put in the name of the county, and you can look for current property ownership. One of the questions in your credit application may be, ‘do you own any property?’. If they put in the name of the property, you can check if they own it.
• You can Google “______ County Court Records”. With this search, you can look for open or closed civil or criminal cases.

Nowadays, you can find almost all the information online. So, make sure you use Google to find out all these information. You can also just type in the company and principals' names in Google and find a fair amount of useful information, such as:

• Online Reviews/Better Business Bureau Reviews
• License Complaints
• Mugshots
• Bankruptcies
• Related Companies
• Website that may reference them

All this information can help you determine whether to extend credit or not.

How Much Credit to Extend?

Ideally, the question should be how much are you willing to put at risk when you extend credit? The answer to this is whether your debt is secured? Do you have a personal or corporate guaranty? Do you have joint check agreements? Do you have any lien/bond rights?

It is also highly recommended that you start slow and extend your credit over time when you have a history of payments, like how a bank would do when they extend credit on a credit card.

Let’s look at some of the best ways to protect yourself when you extend credit.

A) Personal Guaranty

• A personal guaranty is a written promise from a person to pay the debts of the business.
• Ideally, it would be great if it included both the husband and wife. This is because, especially in Florida, if you have a personal guaranty with a personal, but all their assets, bank accounts, investment properties, etc. are with the spouse and they are held jointly as tenants by the entirety, then you cannot touch it.
• For example, you have extended a credit to a person, and they have signed it corporately and individually, but you do not have their spouse’s signature. They don’t make the payments and owe you $50,000. Then you get a judgment against the person and their business, and you try to execute on that judgment. Now, if the person’s bank account is held jointly with their spouse, then you will not be able to get any money, not even half of it.
• If the spouse had also signed the personal guaranty, then all of it would be potentially available, subject to some limited exceptions.
• The personal guaranty does not need to be conditioned on the business not paying. What this means is that when judgements are pursued for clients that have personal guarantees, there is no need to sue the business to go after the guarantors. So, again, it is joint and several liability if that is the way the personal guarantee is written, which it should be.
• It can include all debts even without their consent and even after they leave the business, unless they revoke their guarantee.
• For example, two individuals who are partners in the business sign the personal guarantee but one of them leaves. The other partner runs up a $100,000 debt. In this case, both the individuals can be sued even though one of them is no longer associated with the business. This is because they did not revoke their guarantee. But if they provide the revocation, you cannot pin any of the debts incurred after the individual has left the business and provided a written revocation.

Having a personal guaranty is great but it should be in writing, and either prepared or written by a lawyer because it needs to state some specific things to make it enforceable and in your favor.

B) Corporate Guaranty

• A corporate guaranty is not very common. It also works like a personal guaranty but instead of a person guaranteeing, it is a written promise from business to pay the debts of another business.
• So, when you extend credit and you get a personal guaranty, in addition to running the credit of the company, you should run the credit of the guarantor. You also need their express consent to run their credit information for background verification. This is applicable for corporate guaranty as well.
• If you are extending credit to one business and get a corporate guaranty, then you need to get that corporate guarantor’s consent to run their credit and get background information.
• Why would you need a corporate guaranty? For example, there is a developer who has created a single purpose entity to build a building. This developer wants to buy a generator from you on credit but since it’s a newly formed business, you can ask the parent company to guarantee the debt of this subsidiary company.

C) Joint Check Agreements

• A joint check agreement is a written promise usually from the contractor to pay a sub-subcontractor or supplier directly.
• Joint check agreements are ways to limit your risk and they are governed by their terms, so make sure that you read them carefully.
• If someone is handing you their pre-prepared joint check agreement, it probably doesn't provide as much protection as you are hoping for. Many contractors have standard joint check agreements.
• Now, what is the joint payee refuses to sign the check? The joint check agreement typically says that the contractor is going to issue a joint payment which means a check payable to ABC subcontractor and XYZ supplier.
• In the transaction, if the subcontractor disappears or refuses to sign the joint check, then unfortunately you cannot get it endorsed to you because the other party has not signed it. In such cases, you want to make sure that the joint check agreements say that after a certain period, like 3, 5, or 7 days, if the joint check is not properly endorsed, then the contractor will issue it as a single party check payable to you.

D) Lien or Bond Claim

• One of the most important ways to get your debt secured is through lien or bond claims. A lien/bond claim encumbers the property with a lien or the contractor’s bond with a claim.
• The general timeline followed is:
• You need to serve a Notice to Owner within 45 days from your first day work.
• You need to record a Claim of Lien or Notice of Nonpayment within 90 days from the last day of work.  
• You need to file the lawsuit to foreclose on the lien or nonpayment within one year.
• The most effective way to get paid for any credit you extend is ensuring that you properly protect your lien and bond rights. So, you need to make sure that you have a process in place so that every time you extend credit, you are properly protecting your lien rights.  
• One pro tip to bear in mind is that “subguard” does not protect you. Typically, larger projects will have subguard but they are in place to protect the owner and the contractor.

How to Prevent Problems?

So, what are some of the ways to prevent problems when you extend credit?

• You must re-run the credit at least annually. You must ensure that the information you have is up to date because people’s credit changes.
• You need to check the equipment, the delivery status, location, etc. Sometimes, equipment gets delivered to job one where it gets used for two weeks and then the client moves it to job two without telling you. The reason why you should be on top of these things is because it can affect your lien and bond rights.
• You need to meet with your customers and listen carefully. Sometimes, they will tell you about their business and projects which can give you clues about whether you should be extending more credit.
• You need to communicate with your sales team. Sales may have information about what's happening on projects and with your customers and you should be aware of them.
• You need to maintain good and proper records because when you reach out to your attorney, the number one thing that they will ask for is your records. Some other great records are delivery tickets with legible signature information.
• One pro tip to bear in mind is not to list the credit limit on the credit application. It is better to keep that information internal. This is because there is some case law in Florida that if you indicate a credit limit, and you extend beyond the credit limit, then, any debt over that amount may be on you, because you extended credit beyond what you should have extended.

What are Some of the Collection Tips to Follow?

Here are some collection tips to follow:

• You need to contact Delinquent Accounts often:
• It should be done verbally as well as in writing.
• You need to be nice but firm.
• Negotiate with the actual decision makers:
• You need to avoid the frustration of negotiating with someone who has no real authority.
• It is best to avoid talking to any middleman and instead talk directly to the actual decision maker. This will result in faster and successful results.
• Condition credits on prompt payment:
• Do not give unconditional credits based on verbal promises.
• Ideally, if you are issuing a credit memo, it should read:
• “This credit is expressly conditioned upon the undersigned’s receipt of payment of XXX (amount) by XXXX (date) in cleared funds, otherwise this credit memo is void.”
• If you want to send it via email, then the email can state:
• “As discussed, this morning, we will accept a payment of XXX (reduced amount) against the XXX (actual amount) owed on invoice 1234 only if payment is received by the undersigned by XXXX (date) in cleared funds.”
• In such cases even if the payment never arrives, you don’t have to worry because it is very clear that your agreement to accept a reduced amount was conditioned on payment by a date. Since it didn’t happen, the reduction goes away.
• Don’t delay in initiating the legal process:
• If you are not making any headway, then don’t wait to enforce your legal rights.
• You need to hire your lawyer and file a lawsuit as soon as possible.
• Every day that goes by makes it much harder to collect the debt. For example, it is easier to collect a debt which is 30,60, 90 days rather than one that is 10 months or 1 year old.

Key Takeaway

So, these are some of the credit and collection best practices that construction professionals in Florida should bear in mind to make sure that they don’t encounter unnecessary problems while dealing with credit and collections.

If you find yourself in a situation where you need assistance to get paid, then ensure that you get in touch with SunRay’s legal experts well in advance, so that they can take all the required steps promptly. Call 800-403-7660 today and get paid what you deserve.

FAQs

What are the key steps for establishing credit policies in the construction industry in Florida?

Key steps for establishing credit policies in Florida's construction industry include

Step 1 - Assessing creditworthiness through background checks

Step 2 - Setting clear credit limits and payment terms

Step 3 - Maintaining accurate records

Step 4 - Regularly reviewing and updating credit policies.

What are the legal requirements for filing a mechanics lien in Florida?

Legal requirements for filing a mechanics lien in Florida include serving a Notice to Owner within 45 days of commencing work, filing the Claim of Lien within 90 days of the last furnishing of labor or materials, and enforcing the lien within one year of filing.

How can subcontractors protect their lien rights in Florida?

Subcontractors can protect their lien rights in Florida by sending preliminary notices to the property owner and general contractor, ensuring timely and accurate documentation of work and payments, and filing a Claim of Lien within the statutory deadlines.

What are some effective strategies for handling construction payment disputes in Florida?

Effective strategies for handling payment disputes in Florida include open communication, documenting all agreements and changes, pursuing informal resolution methods like negotiation or mediation, and seeking legal recourse if necessary.

What are the consequences of not following proper credit and collections practices in Florida construction projects?

Consequences of not following proper credit and collections practices in Florida construction projects may include loss of lien rights, delays in payment recovery, legal actions such as breach of contract claims or mechanics lien foreclosures, and damage to business relationships and reputation.