The Definitive Construction Credit Checklist

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The Definitive Checklist for Construction Credit Professionals. This list give you a step-by-step guide for establishing a collections funnel and making sure your credit processes are air tight. ......

The Definitive Checklist for Construction Credit Professionals. This list give you a step-by-step guide for establishing a collections funnel and making sure your credit processes are air tight. Collect more money, reduce bad debt, lower DSO, and use your mechanics lien rights to secure your invoices. The best way to secure your receivables in the construction industry.

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  • 1. The Definitive Checklist for Construction Credit Professionals www.zlien.com mail@zlien.com
  • 2. Table of Contents 1 The Construction Credit Checklist 2 How to Use the Checklist 3 Making Credit Work For You 4 Conclusion and Additional Resources
  • 3. 1 The Construction Credit Checklist
  • 4. Construction Credit Checklist Step 1: Approve Step 3: Invoice • Create an Application • Credit Reports • Check References • Set a Credit Limit • Invoice Quickly/Accurately • Confirm Receipt • Give “On-Time” Incentive • Organize Your Receivables Step 2: Protect Step 4: Collect • Check Lien Requirements • Send Necessary Notices • Set a “File a Lien” Date • Explore Other Protections • Prioritize Your FollowUp • Automate Collection Letters • Maintain Contact • Show Appreciation
  • 5. 2 Using The Construction Credit Checklist
  • 6. Credit terms are not fool-proof. Every construction credit department has some sort of terms for their customers’ purchases. You may require 50% down before shipping materials, provide a longer period in which to pay for lower risk accounts, or require a personal guarantee for small businesses with lower credit scores. Whatever your payment terms, you can never rely solely on these terms to ensure payment. There is much more to the collections than terms, and this ebook is going to show you how to set up your collections funnel to keep DSOs low, cash-flow high, and secure virtually all of the debt your credit department issues to its customers.
  • 7. Your company is like a bank. When you extend material or labor on credit, your company bears the expense between the time the materials leave your warehouse (or labor performs work) to the time that you receive payment. Too often companies are giving customer net 30 terms but not getting payment until 60 or even 90 days. Yikes! Until you receive payment, your company is essentially loaning your customers money to operate their business, with little or no interest! The longer it takes for the customer to pay, the cheaper that loan is for them, and the more expensive it is for you. Stop thinking about inventory and labor as expenses and start thinking about them as assets.
  • 8. You can’t control your customers’ books. Your best customers can sometimes be your most dangerous. When you let the relationship with the customer affect the terms you give him or the penalty for late payment, your company is vulnerable to non-payment. After all, you are in business just like your customer, and this kind of favorable treatment often results in a negative outcome. If you have a large amount of product out on credit with a single customer, who pays the bill if that customer runs into financial difficulty? You cannot control your customers’ books, but you can effectively control getting paid.
  • 9. The WHOLE credit policy... As a credit professional, you are trained to accept only those customers who are most likely to pay. Despite this, you might still experience payment issues: late payment, non-payment, disputed invoices etc. But who says you only have to protect your company’s debt on the front-end? What your company needs is a collections “funnel” that governs how you treat every customer and every invoice. Setting up a consistent collections funnel in your company’s Credit Policy is the key to gaining control of your receivables, and increasing your cashflow.
  • 10. Credit and collections are changing... Old-school credit and collections tactics are losing their effectiveness. People get hundreds of e-mails, phone calls, texts, and other distractions every single day. If you are relying on pure luck or sheer volume to grab your customers’ attention, your invoices are not getting prioritized. The key to collections (or any other negotiation) is leverage. When you have leverage, you can get paid more easily.
  • 11. How to get leverage in collections Getting leverage in collections starts with protecting your invoices on the front-end by vetting your customers effectively. Be selective about who you do business with. Remember, your company acts as a bank when it extends credit. Vetting your customers properly, pursuant to the parameters set in your Credit Policy, will set the precedent that you take pride in your relationship and you expect honesty and accountability from your customers. The second, and most important, part of gaining leverage is securing your invoices on the back-end by crafting a strong notice and lien policy. Mechanics liens are intended to help contractors and material suppliers get paid. Not only is it helpful, its the law!
  • 12. The shift in construction payment decisions With advancements in technology, your customers are getting smarter about how and when they pay their invoices. Many of the project management systems available, like Textura, help contractors manage their payables. Among other variables, general contractors and subs are prioritizing your company’s invoices based on whether or not you supply a preliminary notice for the project. This amplifies the incentive to protect your lien rights on a project. Not only are you gaining leverage by protecting your right to file a mechanics lien, your customers are actually prioritization payment decisions based on whether or not you deliver a prelien notice!
  • 13. What is a lien? In law, a lien is a form of security interest granted over property to secure the payment of a debt or performance or some other obligation. What is a mechanics lien? A mechanics lien is a security interest over property in the title to property for the benefit of those who have supplied labor or materials that improve the property. If you build it, and they don’t pay you for it... you can have it!
  • 14. Crafting a collections Funnel Considering the changes in the industry, it’s easy to see how your collections funnel can play a big part in controlling your receivables. The idea for the funnel is simple: all of your projects and invoices go in the top of the funnel. As money gets collected over time, the percentage of un-collected receivable gets reduced progressively to 0%. 100% Outstanding $ 0% Outstanding
  • 15. A smart collections funnel includes a process for approving, protecting, invoicing, and collecting your receivables. The backbone of your funnel is leverage, and the best leverage for your receivables is exercising your lien rights.
  • 16. How much is bad debt costing your business? Watch this video that details how much it really costs to write off bad debt. If your company is writing off bad debt year after year, it’s time to make some changes.
  • 17. 3 Making Credit Work for You
  • 18. Making Credit Work For You: 4 Steps to crafting an airtight collections funnel.
  • 19. The Construction Credit Checklist is Your Collections Funnel Approve Protect Invoice Collect $
  • 20. Step 1 Approve the right kind of customer for your business
  • 21. Approve the right kind of customer for your business As a credit professional, you have a duty to extend credit to only those customers whom you reasonably expect to pay. If the extension of credit to a particular customer seems too risky, that customer is not given credit. This results in an endless battle between many sales and credit departments. You can ease some of this tension by consistently applying the principles of a thorough notice and lien policy. Regardless, approving the right businesses for credit terms is going to make your job easier as a collector, which will be reflected in the company’s cash flow.
  • 22. Step 1 Checklist : Create a concrete credit application The first step in approving your new customer is crafting a credit application that is rock-solid. The major components of this applications are as follows: 1. Contact Information 2. Credit Information 3. Landlord and Mortgage Holder References 4. Bank and Trade References 5. Statement of Payment Terms 6. Personal Guarantee and Signature (*not applicable to all applications) With this foundation your credit application will be an integral part of your credit policy.
  • 23. Step 1 Checklist : Get a Business Credit Report Once you have received a credit application, there are some other ways to check the financial credibility of a prospective customer. Companies like Dun & Bradstreet or Experian can get you detailed business credit reports. And other companies like Cortera have dynamic information about your prospective customers’ payment history. Reports like these will allow you to rate the ability a company has to pay its debts. With information like this about potential customers, your company is at an advantage when deciding credit terms.
  • 24. Step 1 Checklist : Check References You asked for trade references, bank references, landlord references, and mortgage holder references in your credit application. Use them! Look out for “red flags” when speaking with the references. Primarily you want to watch for any indication that the reference has a financial interest in the potential customer getting the business. Usual signs like frustration over late-payment are obvious indications that the customer might not be the best fit. Remember, this is an opportunity to learn about your customer, so ask good questions and listen to the answers.
  • 25. Step 1 Checklist : Set a Credit Limit Now that you have a rock-solid credit application, you have checked the business credit report, and you have spoken with the potential customers’ references, its time to set terms to the relationship. Don’t be afraid to speak with your customer and discuss what his needs are. In this step, it is vital that you not over-extend the company on a single customer. You should also take into consideration the price of your product and the typical job type and time your customer will employ. For example, if your product sells in bundles that cost $5k each and your customer usually does 10 projects per month. A $50K line of credit with net 30 terms may be a suitable agreement.
  • 26. Step 2 Protect your invoices in your collections funnel
  • 27. Protect your invoices in your collections funnel As good as your approval process might be, there is still considerable risk in extending credit. This makes the Protection a key component of a great collections funnel. Some argue that better security is more effective than restrictive credit policies. Whichever side you fall on, the fact remains that you can use your lien rights to secure the credit you issue to your customers. A complete and thorough credit policy must include a strong notice and lien policy. Why? Because mechanics liens get you paid.
  • 28. Step 2 Checklist : Check the project’s lien requirements Mechanics lien laws vary from state to state and protecting your lien rights is a complex task. This is especially true for businesses that work in multiple states. The first thing to do is determine these four facts about the project: 1. Your Role: (General Contractor, Subcontractor, Material Supplier) 2. Hiring Party Role: (Property Owner, GC, Sub-Contractor) 3. Project Type: (Commercial, Residential, Public) 4. Project Location: (State) With these four pieces of information, you can find your lien rights by visiting zlien.com/resources.
  • 29. Step 2 Checklist : Send notice if necessary Once you have checked the lien requirements for the project, make sure you send out any preliminary notices that are required. For example, some states require notice in as little as 8 days from the date on which you furnish labor and//or materials to the job site, and some states require notice before you perform any work at all! Even if the notice is not strictly required, it is worth sending to let the property owner and general contractor know that you are on the job. Remember, companies are prioritizing their invoices based on whether or not you have sent notice.
  • 30. Step 2 Checklist : Set a “file a lien” date For projects that have been paid, no need to worry. For projects that get to 50, 60, or even 70 days after you have issued your invoice, it is time to start thinking about filing a lien. Many companies will set a “file a lien” deadline by which they will file a lien if they have not been paid. This date will vary depending on your own collections schedule and credit terms. If you do have to file a lien, and you get paid, you should always release or cancel the lien. Filing the lien, however, is your best bet for securing the invoice you issued so you can get paid!
  • 31. Step 2 Checklist : Explore other protection mechanisms Mechanics liens are a very effective method for securing your debts and getting paid, but there are a number of other methods for protecting yourself from non-payment. Many construction companies will employ Joint-Check Agreements or require Personal Guarantees to help secure their debts. Whichever avenue you choose, the most important thing to keep in mind is your goal of creating a system that makes collections easier and more automatic.
  • 32. Need help tracking your lien rights? Let zlien help you manage your lien rights!
  • 33. Step 3 Invoice the customer
  • 34. How to properly invoice the customer to get you paid faster. It may sound trivial, but if you are owed money you need to ask for it. Invoicing is the way to get paid, and there are smarter ways to invoice that increase your collections chances substantially. Proper invoicing will get you paid faster. Here’s how to do it. If you are still solely relying on pen and paper receipts with your customers, you are wasting valuable time and potentially writing off bad debt as a result.
  • 35. Step 3 Checklist : Invoice the right way There are many ways to track your invoices, but the ones we like best are web-based and are easy to use. BillTrust, FreshBooks, or even QuickBooks are all excellent examples of web-based billing software. Each of these tools can digitally track your invoices and offer the reporting you need to make smart decisions when it comes to your receivables. More important than any other factor when it comes to tracking your receivables is making sure you put the bill in the customers’ hands. Your customers will not pay you what they do not know they owe. It may sound silly, but too many companies wait days or even weeks before billing their customers. Send the invoice when the debt is incurred.
  • 36. Step 3 Checklist : Confirm the Bill Has Been Received There are many ways to deliver an invoice to a customer. With the advent of e-mail as a viable method for sending official documents, Software as a Service invoicing systems can confirm an invoice has been received and viewed. For the more traditional method of sending invoices by snail mail, there are still ways to confirm that your customer has received the invoice. Some companies include language on their invoices that prompt a response from the customer. For example: “Please call 888-555-1234 to confirm the amount outstanding on this invoice” It is vital that you confirm your are getting the customer their invoice. There is no excuse for not having the correct e-mail or “Bill To” address.
  • 37. Step 3 Checklist : Give incentive for paying on time The most common way to incentivize customers to pay early is to penalize late payment. Adding a “finance charge” or “late fee” sometimes works, but often times results in frustrated customers. While it may sound counter-intuitive, it is possible to get customers to pay on time, or even early, by positive reinforcement, rather than negative. you can give discounts for paying within a certain amount of time, or for consecutive months of on-time payment. While the payment you receive may be incrementally lower due to the discount, that is far out-weighed by the increased cash-flow and lack of non-paying customers. Plus, it will lead to customers becoming loyal fans!
  • 38. Step 3 Checklist : Organize your Receivables Make sure you can quickly sort through your receivable data. If you are invoicing the right way, your system should be able to tell you how much a particular customer has outstanding at any particular time, the age of the debt, and the total amount paid to your company to date. Having this information will make you a smarter collector, but it will also empower you to use a receivables management system to take your collections process from a Honda to a Ferrari.
  • 39. Step 4 Collect your money!
  • 40. Crafting a collections process that works. Sometimes collections can be like an extension of your sales team, and every efficient sales team uses a Customer Relationship Management (CRM) Software to maintain contact with their customers. In the same way, the most efficient collections teams use a receivables management software to automate commercial collections. Some examples include Funding Gates, SunGard, and Cortera eCredit. With software like this, your collections team will have the information they need to collect efficiently through automation and intelligent data sorting. Most importantly, however, is the discipline in which you approach your collections funnel.
  • 41. Step 3 Checklist : Prioritize your followup Following up is a process, and doing it the right way can make drastic improvements in your collection success. Because the new customers do not have payment history with your company, it is imperative to set a precedent with the customers that you expect on time payment. Existing customers, on the other hand, have a payment history with your company and should be segmented into those who generally pay on time and those who generally do not. Start by calling and collecting from those who pay on time. This will boost your confidence to follow up with those who are habitual latepayers. Persistence is key. Remember, your company already did the work, they owe you the money.
  • 42. Step 4 Checklist : Automate collections letters Most receivables management systems will offer a method for sending collections letters. If sending written payment reminders and collections letters is a purely internal process, your business is wasting valuable time that could be spent on the phone collecting money, or going after new clients. The best collections funnels have a combination of automated collections letters, collections e-mails, and phone calls that are strategically timed to maximize collection effort. When you have a very high volume of invoices, automation is the only way you will make a dent if you are trying to lower DSO.
  • 43. Step 4 Checklist : Maintain contact throughout the process Collection letters, e-mails, and phone calls are all different methods for staying in touch with the customer. There is a delicate balance between maintaining a customer’s happiness and making sure your company gets paid on time. It is up to the credit team and the sales team to create a company culture that recognizes this balance. These are customers, after all, and staying front-of-mind will ensure that your invoices are not forgotten. Too often companies issue an invoice and do not interact with the customer until the invoice is 45 or even 60 days past due. Maintaining contact, even if it is to sell them more products or services, leads to an atmosphere where you customer pays bills on time.
  • 44. Step 4 Checklist : Show appreciation for your customers When your collections team is focused on collecting past-due invoices, it’s easy to forget that the people on the other end of the line are friends, not foes. These are your customers. They are the reason your company is in business. They hopefully enjoy doing business with you and you want to keep it that way. When a customer makes a payment, say “Thank you”. Make it a part of your company’s collection culture to sincerely appreciate each payment you receive, no matter how hard it is to collect the debt. Send your best customers hand-written letters and other small gifts to show your appreciation for their business. You will be surprised how little things can influence the way customers treat your invoices.
  • 45. 4 Conclusion and Resources
  • 46. The collections funnel works As we mentioned in the beginning, collections doesn’t mean credit terms and a barrage of phone calls and nasty letters. Collections is a process, with the right funnel in place, you can collect on virtually all of your receivables. Set up your credit department to accept only those customers who are going to pay. Give yourself the leverage by exercising your lien rights to secure your receivables. Establish a method for invoicing that offers detailed data and reports. Automate the collection effort to stay top-of-mind. And most importantly, be appreciative to your customers because they are your partners.
  • 47. Want to learn how to reduce DSO and collect on more receivables? Sign up for a free Collections Funnel Assessment with one of zlien’s lien policy experts zlien.com/CFA