Mid-Year Credit and Collection Tune-Up - Webinar

Become an expert at collections by learning the basics, how to protect your interests, and how to improve your collection techniques.

Ariela Wagner
Ariela Wagner
Dec 29, 2020
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Dec 29, 2020
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Florida

Conduct mid-credit and collection tune-ups with ease thanks to our list of basics. Increase your knowledge on how to protect your interests, the deadlines for various pre-lien documents, how to improve your collection techniques, and a few pro tips on how to get paid quickly.

This blog comes from a webinar that was hosted by SunRay Construction Solutions, featuring Alex Barthet. Alex is a Florida board-certified construction lawyer serving clients within the state

The following points will be discussed in this webinar:

  • Shore up the basics to improve your collections generally.
  • Always protect your interests by collateralizing or securitizing those interests and some of the things that are available for you to do that.
  • Improve your collection techniques and how once the debt is accrued, how you can improve the way you collect the debt.

The Basics

Some of these basics may seem obvious but sometimes there are still people who do not have these nailed down.

1. Get it in writing

Your agreement should ideally be in writing, whether that is as a proposal, an estimate, or some type of credit application. Some type of agreement is always better than no agreement at all. There is one exception and that is whether it is of your terms of agreement or the other side’s terms. So, you need to read and understand any agreement that you are asked to sign.

Even if you are in the usual situation of people signing your agreement, just be aware that there are situations in which that may not always be the case. For example, you have a customer sign your agreement or a credit application, but when they submit an order to you, they submit it with a purchase orders that has terms and conditions.

2. Your terms vs their terms

These terms and conditions may be referenced on a website. This is seen more and more these days. So when you fill a purchase order, somewhere on the document, it says that you have agreed to be bound by the terms and conditions found at so and so website. If you read and understand them, and you want to object to them, you need to do so before you fill the purchase order.

Some other specific items include payment terms, a right to collect interest, or collection costs like legal fees. In Florida, if you want to collect this amount based on a written agreement, it has to say that the prevailing party is entitled to recover their legal fees. That has to be a specific term in the written agreement.

Some other items include warrants obligations and indemnity obligations. Also, if you are providing materials or labor to the site, have you defined how you are going to get access? You also need to know when you will be done by or when you need to start deliveries, all of these terms and conditions should be addressed in your agreement.

If not, it will be left open to interpretation and therefore, subject to dispute. So the more you can define in your agreement, the better. This will help you avoid confusion.

3. Audit your existing old accounts

The next thing you should do, is audit your existing old accounts and get new agreements signed as applicable. For example, if you are a plumbing supply house and you have been in business for many years, you may have customers that had no agreement at all or had an old version of your agreement that has since been modified several times.

You should go back through your files and determine if these folks still have an agreement. Find out if it is old or new, and then figure out how you can get your existing customer (who has been a customer for a long time), to sign your new terms and conditions.

This is also seen in the contractor and subcontractor realm where you may have what is called a “master agreement.” You may have your subcontractors or sub-subcontractors sign a master agreement and then issue them purchase orders or work orders that reference that. You need to check if that document has changed over time and if they are bound by the old master agreement or an updated master agreement.

You should go through the exercise of determining that so that you can update your records and make sure everyone is dealing with the same agreement.

4. Cap the credit you provide

Some other issues here are that you should cap the credit that you provide. You need to limit your liability and exposure by limiting the credit you give. If you can, and if you are in a supply house for example, you (it is harder as a subcontractor) should actually cut off your customer.

When their outstanding balance gets high enough, you should be able to tell them that you cannot sell them or deliver anymore product until they reduce the balance on their account. Because if things go bad, it is better to be owed $10,000 instead of $50,000.

Always extend additional credit very carefully because your customer will take as much credit as you are willing to give them.

credit and collections

5. Bill regularly

Billing is a very important component of collection. If you don’t bill for it, you will not collect it. No bill equals no payment. Your customer should be able to set their watch by how regularly you bill. If you are a rental company, service provider or supply house, you should be billing very regularly so that there is no misunderstanding about the fact that they have a bill and an amount to do.

To the extent you submit a pay request, with respect to subcontractors and contractors, make sure you get your pay request on time. Many contracts say that if you miss the pay request date, no matter which date of the month it is, that you are not entitled to payment for that month. You have to roll it over to the next month. That is very expensive because now you are carrying that debt even longer. So, billing timely is absolutely critical.

The other thing to do is, if you have a billing dispute like an unapproved change order or a disputed item on a bill, when an issue comes in front of a court, one of the things that they will consider is if the amount you are claiming is due, was ever billed in the first place. Because if it has not been billed, most courts are going to assume that it was not due.

If you have not asked for it then why are you asking for it now, if you didn’t at the time that the project was ongoing? So there is a problem of not being able to bill - for example change orders - until they are approved. But at some point, you need to get to a place where you submit a bill for your approved or not fully approved change orders.

Because if you go to court it is not going to look great that you have not even billed for it yet. The excuse that you did not bill for it because it was not approved, only makes things worse. Then the judge is going to say that if it was not approved you should not be asking for it now. So billing for disputed items at the right time is critical to support a future legal case that you may have.

Protect your Interests

You should always secure your payment with whatever is available to you to secure your payment. Some of the options you have, are talked about below:

1. Personal guarantee

A personal guarantee is a written agreement signed by an individual which says that to the extent that the customer doesn’t make the payment, that they will stand in the place of that customer to make good on the debt.

It is a pretty simple agreement but it also provides some additional security to you. This is most common in the supplier and rental company realm, but as subcontractor or sub-subcontractor, it is not out of the realm of possibility that you could ask for a personal guarantee or what is called a corporate guarantee. This is a guarantee from another entity to support the debt or credit that you are extending.

2. Joint check agreements

This is another way that you can secure your right to be paid. A joint check agreement is typically as agreement between the two parties above you. So if you are a sub, it would be between the owner and the contractor.

If you are a sub-subcontractor or supplier, it may be between the contractor and the sub-contractor. That is the more common place where you see it, and it is an agreement that says if and when payment is due from the contractor to the sub, the contractor is going to issue a check that is jointly payable to you as a subcontractor, or you as a supplier to the subcontractor, so that you can be paid.

Now the reason to be careful about joint check agreements, is because they are agreements governed by their own terms. So even though the title may be joint check agreement, you need to read it and understand. Many joint check agreements are not worth the paper they are printed on, because they give you as a sub-subcontractor, rental company, or supply house, very little right to enforce that agreement.

One of the things to consider is, if you are presented with a joint check agreement, that you have a lawyer review it to make sure that it protects you if you are the recipient of the agreement. And even if you are just a participant, like maybe you are a sub, where the agreement is moving through, that you have a lawyer review it.

It is also suggested that if this is something that you either have done or plan to do in the future on a regular basis, that you hire a lawyer to draft your own joint check agreement so that when the issue comes up, you can present it to be signed. So you can start with your agreement versus reviewing their agreement.

3. Construction lien or bond claim

In Florida you of course have construction lien and bond rights depending on the job. So we will briefly run through the timeframes associated with each of these. Remember of course that these dates are the outside deadlines. You should fill up and send these before as it is strongly recommended that you do not wait until the end of these timeframes.

4. Notice to Owner

Within 45 days of your first work on the job, you need to timely serve a Notice to Owner in order to perfect your lien rights as a subcontractor, sub-subcontractor, or supplier on a project. That also includes if you have a claim on a bond. It is technically not called the NTO, it is called the Notice to Contractor. But the rule is generally the same.

5. Claim of Lien/Notice of Nonpayment

No later than 90 days from your last work on the job, you need to record a Claim of lien. This is for private jobs that are not bonded. Or serve a Notice of Nonpayment, which is for public jobs or private jobs that are bonded. The Notice of Nonpayment also needs to be served no later than 90 days from your last work.

File a Lien

Remember that these dates are the outside deadlines. You can do them before, so you can serve your Notice to Owner on Day 7. It is highly recommended that you do not wait until the end of these timeframes. Also, with respect to the Claim of Lien and Notice of Nonpayment, you do not have to wait until the 90th day. You can record your construction lien while you are still working on the project.

That can be done for disputes where people cannot or do not want to stop working, but they want to exert a little leverage on the owner or the contractor. So they serve a Notice of Nonpayment or record a Claim of Lien as they are working on the job, to make sure that they get the attention of the people at the top.

6. File lawsuit to foreclose

Finally, one year from your last work for bond claims and one year from the recording date of the Claim of Lien for lien claims, you have to file a lawsuit to foreclose or sue the surety. That is the outside deadline. Again, you don’t have to wait a year. You can file that lawsuit two days after you record your Claim of Lien, or three weeks after you serve your Notice of Nonpayment.

Waiting is always a bad idea. You should move first and not wait until it is too late.

Pro Tip 1: Negotiate a guaranty for more credit

Consider negotiating a guarantee as you extend more credit. Maybe you do not have a personal guarantee on the account. One of the things you could do is you could say that the account is capped at $25,000 and that you give can a maximum of $40,000 worth of credit on the account, but that you also need a personal guarantee. And if you catch your customer at the right opportunity where they really need that credit, they may sign a personal guarantee. If written correctly, it will cover not just this additional piece, but it will cover the old debt going back effectively to the beginning, and all the credit you extend in the future.

While they may not have signed a personal guarantee when they opened the account, they may agree to sign a guarantee now. This will cover the entire account in the past and in the future. So consider that as an option as you talk to your customers.

Improve Your Collections

Now we will discuss ways to improve your collections:

1. Start now, don’t delay

Whether it is the beginning or middle of the year, your efforts today and over the next month are going to materialize as improved collections by the end of the year. Many people wait until October or November before they really make a push to collect outstanding receivables before the end of the calendar year which is almost always the end of their fiscal year. It is not always, but most of the time.

It is suggested that you do not wait so long. Start now. If you look at your books, you have a handful of folks that owe you money from the end of last year in the beginning of this year. Start now at chipping away at that debt so that you can make an improvement in your final yearly collections.

calculate deadlines

2. Contact delinquent accounts often

You want to contact delinquent account holders often. Do it verbally, in writing, nicely, and firmly. You need to be on top of them all the time so that they know that you know this debt is outstanding. Consider an in-person visit by just showing up at their office and saying that you are there to pick up a check. That type of confrontation sometimes works, so that you can start to chip away at the balance that is owed to you.

Collections are like the expression, “The squeaky wheel gets the grease.” The more persistent you are, the more likely it is that you are going to collect the debt.

3. Don’t accept any excuses

They are obviously paying someone. Maybe they are making their car payment, or they are paying rent, their cell phone bill, or internet bill. There is likely some revenue from somewhere. You need to be persistent enough so that they decide to start paying you instead of those other bills, or in addition to those other bills. They may possibly not pay other people, but you should be the one that gets paid.

4. Offer payment options to reduce the debt

You may not want to accept credit cards because of the fee, but you should. It is better to get 97 percent of the debt and pay the 3 percent fee, than none of it. So offer different ways that they can pay you and be set up to accept them.

Offer payment terms like $1,000 a week for the next ten weeks. Also accept partial payments. For example, if they say they can’t pay you the $20,000 they owe you, and say that they have only $5,000, tell them that you will take the $5,000. And tell the that you can talk about the rest in a couple of weeks.

Don’t turn away partial payments because that may be money that you will never have the opportunity to get again. Make sure of course that you don’t give a release for that partial payment in excess of the amount of money that you are getting. For example, if someone is paying you $5,000, make sure that the release has a through date or is somehow capped to the $5,000. Don’t give up more legal rights than that.

Also, consider getting some additional security. They can’t pay you now, but you can take a UCC on their inventory. Or if they have another related entity, they will give you a guarantee. So consider other security as a way to securitize your debt. For example, maybe they have a piece of equipment that they are not using, and they will deed it over to you so that you gain possession of it until the debt is paid.

Pro Tip 2: Offer a written promissory note to wrap up all the old debt into a payment plan (easier to prove and sue on if need be).

For example, if you are owed a lot of money in the tune of several hundred thousand dollars from a contractor over several years, and the contractor hasn’t been able to pay you, you can get him to sign a promissory note. And the promissory note may not just be from the company but from the company and its principal over an agreed payment plan.

The reason a promissory note is something you should consider for delinquent debts is because if you have to sue someone because they owe you money for materials or services you rendered, it gives them the opportunity to defend that case if they decide to. that they never got it on time or that the materials were no good, or that they had to supplement forces with other people. None of these may be true but are things you will have to deal with in a legal case.

If someone signs a promissory note, all of those defenses go away. The only defense is that they say they paid you. And if they didn’t pay you, they are not going to be able to prove that they did. It truly simplifies your legal case. So consider offering to people who owe you money, that you want to set up a payment plan. and I’ll present you with a promissory note, you’ll pay this $20,000 debt at $1,000 a week for 20 weeks and you will sign this note individually, and we are good to go.

5. Resolve disputes quickly and in writing

Maybe it wasn’t your best day – maybe things arrived later, or they were damaged. Try to resolve these issues quickly and in writing so that you can move forward. It is always better to give a small credit in exchange for a prompt payment and move on.

Pro-Tip 3: Expressly condition (in writing, email or text) the reduction on payment by a date certain (no credit memos)

So let’s assume you are owed $20,000. The contractor is unhappy with some of the materials and both you and the contractor agree that instead of you being paid $20,000, that the contractor will pay you $17,000. One way to handle this is, you send the contractor a credit memo on the account for $3,000. It just says credit memo $3,000. So now if the contractor doesn’t pay you the $17,000, and you sue him, he is going to say that he wants to sue you for the $20,000. But he can’t because he gave a blanket credit memo for that $3,000.

You didn’t condition the credit on payment by date certain. So that is not what you want to do. You want to send something as simple as an email saying thank you for taking the time to speak to me, I’m sorry that you were unhappy with the service we rendered, we have agreed that the debt of $20,000 will be reduced to $17,000 so long as you make payment and full of the $17,000 by MM/DD/YY. Ideally, they confirm and now you have an agreement. So If you have to go to court and you sue, you can sue for the $20,000 because you didn’t get paid the $17,000 by the mentioned date.

So you always want to condition a discount on payment by a date certain and do it in writing.

6. Avoid emotional decision-making

You want to avoid emotional decision-making as it is probably one of the worst things that you can do in your collection process. Leave your emotions at the door, because this a business. So make business decisions. Don’t be driven emotionally to avoid taking a credit because you think you are right and they are wrong, so you aren’t going to give them any credit.

Paying legal fees is very expensive to pursue a claim. And trust when we tell you that after paying legal fees for up to seven months, you are going to forget about the emotion and about you wanting to be right. Especially after you pay several hundreds or tens of thousands of dollars in legal fees when you could have taken a small discount, resolved the whole thing and moved on.

Bonus Pro Tip: Don’t fall for “I’ll give you my next job.” If that is part of a deal, it should be part of a payment plan.

Always be careful when the other side tells you that they’ll give you their next job if you give them a credit or you wipe away the debt. If you are even going to consider that as an option, make sure that you have a fail-safe in some type of written agreement. So even if you don’t get the job, they still owe you the money. Or if they get the job and it is not at your price, you still get the money, or some portion of the money.

7. Don’t delay in initiating the legal process

The sooner that you start proceeding, the better off you are. Every day that goes by, makes it that much harder to collect the debt. People leave companies, memories fade, computer systems crash, and construction documents and emails disappear. You do not want to be the last person in line collecting a debt when there is nothing left to get.

You want to be the first in line because the first in line almost always gets more than the person who is last in line.

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Disclaimer
THE INFORMATION ON THIS WEBPAGE IS NOT THE SAME AS LEGAL ADVICE. SUNRAY CONSTRUCTION SOLUTIONS, LLC IS NOT AN ATTORNEY OR A LAW FIRM. WE RECOMMEND THAT YOU CONSULT WITH AN ATTORNEY.
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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