3 steps to complete credit and collections control
By Scott Wolfe

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Credit and collection processes are important to every business regardless of size and industry. Since the construction and building supply industries are so complicated, however, they are especially important to credit professionals and business owners in these industries.

INDUSTRY PULSE

Which is the best precaution for nonpayment?
  • 1. Mechanics lien and bond claim rights
  • 2. Personal guaranty
  • 3. Joint check agreements

Implementing a successful credit and collections procedure, however, is not all that complicated. It requires understanding some fundamental principles, implementing rigid policies, and then sticking to your guns.

This article will explore the three steps to complete control in credit and collections.

Make smart credit decisions on the front end

You'll never get control of your cash flow and write offs if you don't have an intake procedure that distinguishes between customers you should trust with credit, and those you should not. This is important to every type of business in the world, but especially critical in the construction industry since business in this industry have high failure rates.

There are two components to a strong intake procedure.

First, your company needs to write and adopt a credit policy. A credit policy is simply a document that dictates when your company will and will not extend credit. Extending credit can be issuing a formal credit line for material purchasing, or accepting a job and construction contract from a general contractor or owner. In either case, your company will be depending on another company to pay their invoices on time.

Second, having a quality construction contract or credit agreement will ensure that you get the parties contractually obligated to pay you on your terms, and subject to penalties in the event payment isn't made.

Take risk precautions just in case of nonpayment

Strong intake procedures will reduce the chance that a customer will stiff you, but it won't eliminate the possibility. For this reason, it's important that your company take precautions in the event of nonpayment. Here are some example precautions, listed from best to worst:
  1. Mechanics lien and bond claim rights: Protect your right to file a mechanics lien or bond claim on the project by sending preliminary notice at the start of every construction project. If you don't get paid, you'll be in a good position to collect.
  2. Personal guaranty: Whether the customer's credit isn't great, you fear non-payment, or want to make it a general policy, collect a personal guaranty. If the customer doesn't pay this will enable you to seek payment directly from the company's principals.
  3. Joint check agreements: Having multiple parties agree to pay you is better than only having one party obligated, but be careful because joint check agreements can be tricky.
Respond to nonpayment with structure and consistency

The front-end credit policy will help you avoid nonpayers. The precautionary measures will give you something to fall back on in the event of nonpayment. Now it's time for rubber to meet the road and for you to go out and collect the money due. How do you do that?

The answer is with structure and consistency.

Just like we suggested implementing a credit policy for the intake process, it's important to also have a collections policy that guides your company in the event of a nonpaying client. Create a structured plan about when and how you'll followup with nonpaying customers and at what frequency.

Then, stick to your plan and consistently treat every customer the same. Your policy is your policy, and you should live or die by the policy. Trust me, you'll live by it.

Scott Wolfe is the CEO of Wolfe Law and founder of zlien.com, a resource that helps contractors receive payment and manage financial risk. An attorney in six states, Scott is also the author of The Lien and Credit Journal, which zeros in on credit management. You can connect with him via Twitter, LinkedIn and Google+.