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.
The Basics of Credit and Collections
Here are some things that you probably already know, but it is worth repeating just to understand the significance:
Get it in writing
It is a bad idea to not have any writing supporting your claim or your contract. So, whether it is a proposal, an estimate, or a credit application, it does not matter. Having documents in writing is better than not having documents in writing. You want to try to use your terms versus their terms.
Your terms vs. their terms
This means that you should take a little time to put together an agreement. It can be simple so that it covers the terms that are important to you. If someone hands you their contract it is going to be something that is probably intended to protect them.
Understand the different types of terms
There are some terms that you should be aware of. This includes payment terms like how and when you will be paid. You need to watch out for pay-when-paid language. Also look out for interest, collection costs like recovering legal fees, the warranty on goods and services, and indemnity obligations or if you are expecting an indemnity from the other side.
If something goes wrong, you can look to them and say that you need to be protected because of an incident. Access to the site is also something that can cause a dispute and should be set forth in your agreement. Time for performance and what happens if there is a delay is another important term.
Audit your existing accounts
These are all important provisions that are strongly recommended for you to cover in any written agreement you have with the other side. It is good to audit your existing accounts and get new agreements as needed.
For example, let us assume that you are a large supply warehouse and every five to ten years, you make some significant changes to your credit application. And what you do is you have your salespeople go out, see your customers and get new credit agreements executed. This is so that it covers the new terms as the agreement has been changed and improved.
Pro Tip: Sometimes no contract is better than their contract
For example, let us say that you are an electrician who is negotiating a contract but start work on a job before the contract is executed. The end of the first month goes by and you pick up your check. The second month also goes by and the contractor says that you don’t sign their contract that you won’t get your next check.
But you didn’t like the contract presented to you by the contractor, but you feel that if you don’t sign the contract, you won’t get your check. That is not always true. You still have an agreement and that agreement is whatever verbal understanding is there between you two. This is much better than the harsh terms that probably exist in a contract that is many pages long, that the other side gives you.
Unfortunately, if you sign the contract with all of the contractor’s terms and conditions, this may lead to many issues and a dispute in the future. So, what you should do instead is say that you are not signing the contract, and that if you are not given the check, you will lien the job today and fight about it later. This will limit your risk.
So keep this in mind. Don’t be bullied into signing a contract that you are not comfortable with.
Cap the credit you provide
Caping the credit you provide allows you to limit your exposure by limiting the credit you give. It is always better to be owed $5,000 or $10,000 than $20,000.
Cut off your customer
You need to cut off your customer, instead of just extending credit. You actually have to cut them off assuming that you have the legal right to do that.
Extend additional credit carefully
Extend additional credit carefully because most folks in construction will take as much credit as you are willing to give them. So, be careful about how much you are willing to extend.
If you don’t send a bill, the other side doesn’t think they have to pay you. So make sure that you send bills promptly and timely. The customer should be able to set their watch to get your bills.
Consider billing disputed items
If there is an item that is in dispute, consider billing for it and give credit for prompt payment. Because if you don’t bill for it and have to litigate the case, a judge is going to wonder why you are saying that you are owed money if you never sent them a bill.
Protect Your Interests
Always secure your right to payment
You always want to secure your right to get paid. There are many ways to do this when you extend credit:
Offer a personal guarantee
You can get the principle of a company to give you a guarantee that says if the company doesn’t pay, that they will pay.
Joint check agreement
Another type of security interest you can get is a joint check agreement. Know that not all joint check agreements are created equal. If this is something that you are considering especially on a regular basis. You should prepare your own or have a lawyer prepare your own joint check agreement that protects you. Contractors have their own joint check agreements that protect them.
So, if you are the supplier to an electrician and you want additional security, you can tell the electrician that you want a joint check agreement on the job, and you just take the agreement that the contractor gives you. But you may not be as protected as you think if you don’t read the terms of that joint check agreement.
Protect your construction lien/bond claim rights
Always consider and protect your construction lien or bond rights. The documents you need to serve to protect these rights are:
- Notice to Owner – You need to serve a Notice to Owner, and it needs to be in the owner’s hand no later than 45 days from the time you start work. You can send the notice early; it just has to be received no later than the 45th day. And the 45 days is the outside most day you should be doing it.
- Claim of Lien/Notice of Nonpayment – Within 90 days of your last work, you need to record your Claim of Lien or serve your Notice of Nonpayment on the contractor and the surety. The 90 days is the outside deadline. You can record your construction lien while you are still working on the job, or you can record a lien 3 days after you finish the job. You don’t have to wait.
- Lawsuit – You need to file a lawsuit on your construction lien or bond claim within a year. There is a slight difference in the rules between liens and bond claims.
You need to file a lawsuit to foreclose on your lien within one year of the recording date of the Claim of Lien. So if you finish your work, you have up to 90 days to record your lien, and then from the time you record it, you have one more year to file suit. But don’t wait for a whole year. You can file the lawsuit two days after you record the construction lien.
If you have a bond claim or Notice of Nonpayment, you need to file the lawsuit against the surety no later than one year from your last work. So you don’t have a buffer of how many ever days there are from the time that you finished work until the time that you serve your Notice of Nonpayment. So be aware of that distinction.
Pro Tip: Get husband and wife on the guaranty for real protection
If you are going to get a guaranty, and you have serious reservations about the ability of this debtor to pay, you want to get the husband and wife on the guaranty. The reason for this is that in Florida, any property, bank accounts or assets that are held jointly between the husband and wife are not going to be available for you to collect on if all you have, is one spouse and not the other on your guaranty. So, if you want to be able to get joint assets, they both need to be on the guaranty.
Do This One Thing to Get Paid
The one thing you need to do is, you need to be a collections bulldog. It is critical for you to be persistent, aggressive, and polite in your collection process. The most successful people that collect their own debts, are those that have a collections team that has all of these traits.
So how can you be a collections bulldog?
Contact delinquent accounts often
Start with doing the obvious. Contact the account holder all the time. Do it verbally and in writing, be nice but firm, but do it. And you need to do it often.
Don’t take excuses
Don't take excuses about payments, especially if those excuses continue over and over, but do offer options.
Accept different payment options
You should accept different methods of payment. It is strongly encouraged that you take credit cards. Take PayPal, checks, and wires. All of these ways of accepting payment make it easier for your customer to pay you.
Set payment terms
You also need to be able to accept payment terms. Maybe they can’t pay you all the money now. Maybe they can pay you $1,000 a week instead, or $2,000 a month. Some up with something that works and try to work down the debt. Be creative in the approach that you take. Collecting any money is better than collecting nothing. And sometimes debtors believe that if they owe a sum of money, unless they can pay you the full amount that they can just ignore you.
But if you open up the possibility that you are willing to take a smaller amount of money every week or month until the debt is paid off, then they may take you up on that, and appreciate it.
Accept partial payments
Always take partial payments but don’t give up your rights by signing a lien release if that partial payment is accompanied with a release. For example, if you are owed $25,000 and they have a $5,000 payment, but they also want you to sign a release, you just need to make sure that the through date on that release matches the $5,000 you are getting. You also need to make sure that you are not releasing all of your rights or more of your rights than the money that you are getting.
Consider getting additional security
Consider getting additional security at the point of time that someone owes you money. For example, you could say that you need to send to send it to legal and that is going to get expensive, but maybe you can pay me $1,000 a month, and give me a guaranty or a joint check agreement on this job. It is about being creative in your approach to try to collect the money that is owed to you.
Remember that the squeaky wheel gets the grease
Always remember that the squeaky wheel gets the grease. The more you call and write, the more they are going to want to take care of your account versus the other accounts that they have to deal with that may be delinquent as well.
Resolve disputes quickly and in writing
Maybe your product, materials or services were late or damaged. Try to resolve these issues quickly and on your own. It is always better to give a small credit in exchange for a prompt payment and move on.
Pro Tip: Expressly condition (in writing, email or text) the reduction on payment by a date certain)
Do not give an unconditional credit on the account for the issue that they are complaining about. You want to expressly condition in writing (like an email), the reduction of the amount due based on payment by a date certain.
So let us say that it is the 20thof the month. You are owed $25,000 and the other party is claiming that some of the product arrived damaged, and you have agreed to take a $3,000 credit on the account. Don’t just issue the $3,000 credit. Send them an email that says you apologize for the issue, that there is a $25,000 debt on their account, and that you are willing to accept a discount of $3,000. So now they only have to pay you $22,000 as long as you receive the $22,000 by the 1of the next month.
Then if the credit doesn’t arrive, you can unwind the credit in the future. If you issue an unconditional credit, you are going to have to live with that credit. You can’t undo this later because the judge is going to say that the credit was not conditioned on a prompt payment, so he/she can’t allow you to undo your accounting because you decided to sue them.
So expressly condition the reduction of the debt on payment by a date certain.
Always avoid emotional decision making
Leave your emotions at the door and make business decisions. When it comes to having to deal with a legal matter, emotions always make the process take longer and cost more money.
Don’t delay in initiating the legal process
Don’t delay in initiating the legal process. The longer you wait to enforce your legal rights, the harder it is to protect your legal rights. So, the sooner you record your lien, the better. File a lawsuit to foreclose on that lien, or sue someone for breaching the agreement, credit application or personal guaranty quickly. After you have attempted all of the things that we discussed above, if they don’t work, waiting is usually not going to improve the chances of getting paid.
So just start the process and if you have made the business decision, then that is in your best interest to do so.