The recent economic shutdown has created financial hardships for companies of all kinds. While the federal and state governments work out how to reopen the economy, it can be hard for any company to plan for the immediate future.
Builders and contractors still need to keep the lights on, regardless of external conditions. That means taking a more strategic approach to how you manage your accounts receivable.
With so many companies facing government-mandated closures, you can expect some customers will state that they are unable to pay.
While mandates don’t excuse companies from paying for work performed, it’s worth trying to work out feasible payment terms for any long-standing customers that seem to be having legitimate cash flow challenges.
For those customers you haven’t heard from, this is not a time to assume everything is fine. Being proactive now could save you big headaches down the road. It’s good practice to take a look at your accounts now to mitigate potential damage to your bottom line later.
Spend some time thinking about which customers might be most vulnerable in the current economic landscape. Pull customers’ credit reports to see if anything has changed with their financial health. If you see troubling signs, consider getting promissory notes or even personal guarantees – especially for larger accounts or those that seem most likely to default. If a customer asks for more credit, ask to see proof of the company’s ability to pay – for example, have they gotten an SBA loan or similar aid to tide them over?
These aren’t enjoyable conversations, but customers with good intentions and well-run businesses should understand why you’re asking.
Protect Your Lien Rights
One of the most powerful tools in your collections basket is mechanic’s or contractor’s lien rights. If a customer refuses to pay for completed work, you can always sue for breach of contract; lien rights also let you foreclose on the lien. These liens are also motivation for the customer to resolve the dispute, as an outstanding lien makes it hard for them to sell or refinance the property.
This is an aggressive way to get paid and can make the customer more adversarial, so it’s best used only after other options for bringing the customer to the table have failed.
Because lien rights are based on state law, there are specific steps you must take to protect those rights. The requirements vary by state and local jurisdiction, so consult with your company’s attorney for specifics – especially if the customer is in another state. But in general, to protect your lien rights, you must:
- Notify the owner about the outstanding amount and the potential for a lien
- File a lien with the state with all required information (typically the parties involved, nature of the work, outstanding debt, etc.)
- Publicly record the lien and inform the owner and any other contractors or subcontractors who may have a legal interest in the property.
Get Creative About Cash Flow
As you optimize receivables, it pays to look at other ways to bring in cash. With so much unknown about when the economy will get back on its feet – or if there will be additional shutdowns – it makes sense to secure as much liquidity as you can now.
The federal stimulus packages have provided loans and other funding options, but in many cases those options are difficult to acquire. Fortunately, there are other alternatives.
Besides SBA and federal loan programs, many local banks are providing help with options. These include easing restrictions on draw limits, deferring payments on loans and credit lines, lowering interest rates, and increasing credit lines.
Taking steps to optimize collections and credit now can help keep your company on stable footing and prepared to move quickly once business returns to normal.