Secure It Right, Totally!

To put it simply, extending credit to contractors is a major risk. They have no inventory to speak of. They have no money. All they have are the tools of their trade and the skills, arguably, to do their particular trade. In order to perform their trade they need building materials. A mason needs bricks and mortar. A carpenter needs lumber and nails. A glazier needs glass. Usually, the value of the materials far and away exceeds the contractor’s net worth. Therefore, in most states, the responsibility for paying for all these materials rests ultimately with the beneficiary of the materials; that is, the owner of the property in which the material is used.

In short, if you are building your dream house and you hire a contractor and pay him a lot of money to build it for you and somehow the lumber supplier does not get paid for the lumber, you, the home owner will have to pay for it…again. That is the essence of the Mechanics’ Lien Law. It enables building material suppliers to extend ridiculous amounts of credit to individuals who under normal circumstances would not qualify for the smallest loan.

In California, Nevada, Arizona and Washington, lien rights are the very foundation upon which credit extended to contractors are built. In addition to the normal credit functions of a credit department, processing credit applications, checking references, calling past due customers and posting the receipts, building material suppliers must also gather the particulars about the projects, send out preliminary notices, process waivers, apply the money to the specific projects, mail warnings of intent to lien and file the liens as well. Credit is based not so much on the credit worthiness of the customer, but rather the credit worthiness or the likelihood of repayment, of each and every single construction project. Invoicing must be job specific. A customer may have several job accounts simultaneously. It is quite the undertaking. Done right, a building material supplier can secure most of its account receivable. Done wrong, all the expense, manpower, trouble as well as the receivable can go down the drain.

If you are going to extend “job basis” credit, you might as well do it right. I have seen too many situations whereby a lot of money is spent processing and mailing preliminary notices, yet never a lien is filed. Sadly, this is not because all of the jobs are paying, but because somebody made the decision not to file the lien, or let the lien time pass and subsequently forfeited the money rightfully owed. I’ve seen suppliers sign away their rights by issuing the wrong waivers, signing off a joint check, filing liens in the wrong counties. There is any number of ways to sabotage what would otherwise be a safe and secure system.

This is where Strategic Credit Management Solutions can help. We’ve had over thirty years experience with building materials suppliers, general contractors and subcontractors. We are Lien Law experts. We can provide the systems, procedures and the training to establish and maintain proper lien rights. See our website, http://powerscredit.com/ or e-mail us at patrickpowers@sbcglobal.net. Your comments are welcome.