How do you handle customers who don’t qualify for credit? 2 of 2

Now let’s get to the question we started with above:

How do you handle customers who don’t qualify for credit?

There are several companies that adhere rather strictly to policy and procedures with regard to credit extension. These companies are not quite as tolerant of past due payments, bad checks, and broken promises as some other companies. I think this is also reflected to a large degree by the industry and the local industry customs, however sub-standard (loose) or stringent they might actually be.

As I have quite a background in this particular arena, I’ll be interjecting here and there throughout most of the following subject matter.

For starters, there are many accounts that are rubber stamped into credit extension. The reasons for this can range quite dramatically. Here are a couple:

Bleeding hearts. Once I was told to open an account for Glenda (not her real name, of course). Prior to this command from high I had sold Glenda for a few weeks. I was not pleased with the job-to-job payment performance nor the cavalier attitude Glenda had toward the credit obligations she had with us. Of course, we had met and she had signed the Personal Guaranty and stated that she really didn’t want to use the account for credit but – just in case someone needed something – it would be easier to have her crew pick up materials without her having to come over and write a check. I had asked her why she wasn’t doing business with a competitor with whom she gave as a reference, and she said “They didn’t want me to pay cash at the delivery (COD) – they wanted a check, and I only deal in cash.” I honestly don’t know who would ever refuse green cash, and of course in my mind this was one more nail in the account’s coffin, so to speak. I closed the charge and encouraged Glenda to just pay cash. That should have been the end of the matter, and risk avoided. Unfortunately she became indignant and started calling every person in the company whom she thought was an owner. Our company owner eventually met with Glenda and me, and without even asking what kind of terms or credit limit she desired, gave her an account with decent terms and right cushy credit limit. There is no real way to handle this type of account as Glenda wiped the floor with me.

Friends of the boss (FOBs). These are the monsters for most Credit Managers, as there is a clear and present danger of the accounts getting away with most anything and everything they desire. The idea here is that because they golf or bowl with an owner, they somehow are exempted from their financial obligations. Usually (and unfortunately), the bigger that customer is, the better terms they get. I know of a company several years ago who gave outrageous credit to a “friend” whose company had done business with them for over forty years. The friend continued to purchase even after the Credit Manager said no, and by the end of that second year, they were on the books for one and one-half years of purchases. The third year came around, and again in spite of the Credit Manager’s warning, the bill went up to a sizeable six figures. The Credit Manager’s only responsibility in this type of situation is to keep the owner informed with facts. After all, if the owner wants to throw away money, it’s not a subject for debate.

There are other applicants that fall into different categories of comparison:

Bankruptcy applicants. I’ve heard it said by some of my contemporaries over the years that it is safer to deal with people who have filed a bankruptcy in the past few years. After all, they cannot file a bankruptcy again within a seven year window (or something like that). To me, that is like someone rationalizing another by stating “He’s not that bad, after all he hasn’t killed anyone.” People file bankruptcy for assorted reasons, and I’ve certainly seen several over just the past six years.

I know one party who filed several years ago, and now does a real good job with managing his business and staying on top of things. This account does not qualify for credit and still has a past due amount on the books, yet I have no doubt that he will not only take care of today’s business, but will take care of the amount owed at the time of his bankruptcy. I think I know this gentleman well, and he will do what he knows he needs to do.

I know of many others however that have filed bankruptcy, and are no better off a couple years later with their cash handling and businesses obligations than they were before.

Last minute rush applicants. I know we generally should rely on rules, policies and especially procedures, but I recently approved an account the day before delivery because the truck needed to be loaded. I never had any real information on the customer until after delivery was made, but the salesman had been chasing this guy’s business for two years, so I figured it was not going to be a problem. The owner bought in on the transaction also. The customer did provide a last minute emailed credit application and personal guaranty. A one-half deposit was collected COD at the job site when we delivered, so everything looked fine. Then the check bounced. I attempted to call the customer, and received a third party text stating that a replacement check would be on the way immediately. If it was indeed mailed, I have no idea who got it. I tried calling the project owner and could not reach him so I ended up liening the property for a five-figure amount. Come to find out the owner had paid our customer a sizeable deposit a month before the job started, and settled up with our customer around the time the check came back to me. What a bad deal for everyone.

Applicants that use trade references I can’t contact. These may include small family businesses that may use a national company quite often (and big national companies typically do not divulge credit information). I also run into applicants that may be trying our business for the first time, and the last thing I am going to do is call their favorite supplier (and one of our competitors) to tip them off. So the best approach for me is to look for any negative data instead of trying to collect trade references on the credit application.

Applicants that really don’t need to have their credit checked. These are probably the ones that will stump most newbies, but if you consider facts behind the whats and whys, you will understand many of these accounts are no-brainers. Take for instance a municipality that is getting ready to start a big construction project. If you ascertain that there is a general contractor involved, and that your customer is going to do the install, you will know that by the magnitude of the job there will be a bond on the job. But what if the municipality wants to purchase the materials directly from me, the supplier? Like I said, it’s really a no-brainer. What would prompt such a situation? I suppose there could be several factors, but let’s face it – the municipality doesn’t want to pay sales tax. By purchasing directly from the supply house, the municipality is tax exempt unlike its contractor and subs. The important thing is of course to still get a signed credit application, but don’t hold your breath waiting for the Personal Guaranty to be executed.

Applicants that do not have trade references. Many times a small company or weekend warrior will want materials on credit in order to stage up a Friday afternoon or Saturday morning delivery of materials. Some of these outfits have been doing a cash business with us for some time, and others just started. In my estimation, a job-to-job limited-cap short-leash charge account will go a long way toward cementing account loyalty as long as they consider it a privilege. Be certain to get the credit application and personal guaranty signed. There are pitfalls to this arrangement of course, and to list them all would be fodder for a credit workshop.

So, some simple truths and opinions I offer to conclude this article.

Credit worthiness is not decided by anything more than the accountability of the customer. The more you know the customer, the better gauge you have on the risk factor.

If you want to avoid risk (collections) altogether, do not extend credit, do not accept checks, and always collect green cash before delivering any materials or services.

Relationships are cemented by trust; trust is earned; therefore, relationships are earned and, being cemented, are pretty hard to lose. If you lose a relationship – retrace, reconnect, and rebuild.

Anything less than a relationship is like rolling the dice. Therefore, get to know your customers and new applicants early on to start the bond.

I suppose that is enough on the subject for now. I hope this has been informative and interesting.

How do you handle customers who don’t qualify for credit? 1 of 2

I was prompted to attempt to answer the question to myself after noticing a similar question in a recent credit manager association group. I suppose we should first consider who does qualify for credit. Even in doing this, there are some basics to review.

The Credit Application
Credit extension has been going on for quite some time, and many if not most companies today utilize what is referred to as a Credit Application. I’ve written quite a few applications over the years for several companies. In the supplier to business food industry the task is rather routine and straightforward. In the construction industry, the requirements are a little more extreme.

Most credit applications consist of a profile portion, a contract portion, and a commitment area (signatures). All of these are fairly equal in importance. There are supporting documents as well that are usually needed or at least wanted by the company’s credit manager to file into the applicant’s folder largely to show that an effort was done to complete the information gathering processes as well as to have on file “just in case”.

The profile portion is information about the applicant such as his or her business name, address, and contact numbers and methods. Usually included in this information-gathering section are credit references that can be called to see how the applicant pays the bills. Banking information is also usually requested, but in today’s world it is difficult to receive much feedback from your local banker – they don’t like to share. Other information may include who to send the bills to (accounts payable contact information) and who the owners are. If the industry requires licensure, it is good to know and document this information. It is also good to know the owners’ social security numbers and residence addresses.

The contract portion is what many refer to the “boilerplate”. This is the section where the company attempts to consolidate everything it expects of the customer, everything the company can, will, or may do if the customer doesn’t do everything the company expects, and the way conflicts and general business will be conducted until the end of time – the typing of which is inconveniently sized down so as to be packaged onto an 8 ½” x 11” sheet of paper. For the company, it is my recommendation that each bullet point be applicable to the company’s needs. If it doesn’t make sense to include it, then get rid of it and keep it clean.

The commitment portion is where the parties agree by way of signature. In reality, the applicant is usually the only one to sign that he or she agrees to the contract portion.

The supporting documents vary from industry to industry and company to company. It is always good to make a copy of the driver’s license of the person signing the credit application. In Michigan, we can contact the State’s website fairly easily to verify if a company has organized, and how – such as a corporation or LLC. If the applicant is to be sold exempt of state sales tax, a sales tax exemption form is needed (as well as a basic understanding of Michigan Sales Tax). Other information may be pertinent to the situation and may vary by your local customs.

The Personal Guaranty
There is one other document that usually accompanies the Credit Application and that is the Personal Guaranty. The use of this document tends to get a little trickier and usually someone who has been around a while (or your trusted contract attorney) will be able to share the importance, effectiveness, and pitfalls of introducing Personal Guaranties in your situation. Again, I’ve written several, and I can tell you that whether yours is a single paragraph or two, or three legal pages, everything is litigious.

The Credit Application Review is largely handled by the Credit Manager or the company’s owner. A checklist can be devised for ticking off the duties of the review which generally cover answering a few company general questions:
1) Have I verified what has been placed onto the Credit Application’s profile?
2) Have I obtained good responses from most if not all of the credit references provided?
3) Have I looked beyond what appears in black and white and answered my/your own questions?

Credit Manager
The Credit Manager is usually responsible for looking out for the company’s interests with regard to making good decisions involving the exchange of goods or services on credit, and getting paid in a timely or acceptable manner. Unless you are obtaining green cash up front, there is always risk involved.

A good Credit Manager is one who looks at all the criteria and makes sure that all the information, references, signatures, and supporting documents line up to the parameters required by the company. After everything is completed, and all systems are a “go”, the only real decision to make when opening an account is how much to allow for a credit limit.

A great Credit Manager is one who takes a look at all the information and is perfectly comfortable saying “No” even though everything checks out. I’m not suggesting that there is anything negative or unjust. I’m simply stating that if a company truly is serious about its receivables and wants to avoid potential for problems, it needs a person with the intuitive ability to filter out and dig deeper into how an account is really going to perform. A great Credit Manager has a “gut” feel about his conversation with new credit applicants (which is why great Credit Managers want to speak with applicants and meet them before making a decision). As a for instance, a great Credit Manager will question why an applicant is applying for credit for materials when the construction season is just about over and two competitors are closer to him than you are. You get the idea. There are several aspects involved.

 

Protect your lien rights

There used to be a time when a lien was considered taboo in the construction industry.  If a contractor liened the job (often working for the builder), the reaction was pretty clear – no more working for that builder.

For the average Joe who hasn’t yet cut his first tooth in the construction industry in metro Detroit, it might seem like a no-brainer.  Lien it, after all the contractor should get paid.  Right?

But for contractors and suppliers in the industry in the 70’s, 80’s, and 90’s, if you didn’t play along and figure on making it up on the next job, your whole career could be in jeopardy for the short-term.  Simply put, if you wanted to play the game you generally gave up your rights and allowed the big boys to pay you when they got around to it.  By doing so, you could look forward to the next job.

The bigger the builder, the bigger the stakes, and this gamble was called rather recently in the lean years of this very decade when the housing market went bust.  Huge companies lost millions.  Small companies lost everything.  The days of carrying each other’s payoff into the next job were history.  Simply put, there was no future work to “borrow” against.  With all the cards now on the table, the banks got the kitty, but it was full of worthless paper and titles to unfinished properties.  Nobody could afford to purchase the finished properties.

To be sure, at this last stretch, mom and pop companies were doing everything they could to secure what little they might be able to by utilizing lien rights, even throwing liens onto jobs that were well past the deadlines by statute.  No longer would the good old buddy system be employed.

The projects today require the collection in full in order to make a profit.  Competition is fierce with regard to both labor and materials.  The project owner sometimes starts the project under-funded, and this inevitably causes delays in payments.  It has been my observation that some owners threaten not to pay at all, forcing the little guy to contemplate expensive litigation.  Often a deal is worked out where the bully owner offers to settle short just to be a “good guy”; and all that is required is a Full Unconditional Waiver and acceptance of seventy cents or so on the dollar.  Yes I saw this happen just last month and the contractor was cheated out of $4,500.

If you have a job that you need to get paid for in order to make a profit, don’t allow your lien rights to expire simply because your builder or general contractor has put a carrot out for a promising job in the next week or two.  If you don’t get paid for the first job, how can you possibly expect to be paid for the next job?

Find yourself a top notch attorney who knows the construction industry, lien law, and foreclosure practice, and get him on board.

And if you need a lien filed, contact www.michiganconstructionlienservicesllc.com.  Protect yourself, your family, and your business!

Thanks for visiting!

The project owner and the Michigan Builders Trust Fund Act

The very act of hiring work out on your construction project creates the potential for a lien.

The passage of the Michigan Construction Lien Act 497 of 1980 created the guidelines by which a lien was to be perfected.  The Act protects both the owner of the real property that is to be improved, and also darn near everyone else involved in the project.

There are many reasons for a lien, and typically liens are placed by suppliers and subcontractors who haven’t been paid.  General contractors usually get paid or work out their differences (usually overruns and unforeseen hiccups) with the owner.  The general contractor’s lien is usually considered their last resort.

In many situations the contractor “forgets” to pay suppliers and subs.  While there are laws that govern these situations, it usually takes a judge to decide that the act is fraudulent.

If you are in the courtroom, your competent attorney will pursue conversion under Michigan common law, which is loosely defined as “Any distinct act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with the rights therein.”  The penalty pursued for claims of conversion are trebled damages (yes, three times the basis of the claim).  Note that fraud and conversion typically are not dischargeable in bankruptcy court.

Note – I sued a contractor in district court for conversion and the judge said “Yes, there was fraud but it was only a little fraud”.  He then ruled that the defendant could not be held  individually responsible or accountable for his deeds.  This ruling allowed the contractor to literally steal money from the supplier when in fact this contractor had no right to that which is called trust money.

The purpose of this article is to introduce the project owner to the concept of the Michigan Building Contract Fund Act 259 of 1931 (Michigan Builders Trust Fund Act).  This Act was largely discounted until 1966 when a Supreme Court Justice ruled that the Act is relevant in civil courts.

The Michigan Builders Trust Fund Act provides:  “In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen, and the contractor or subcontractor shall be considered the trustee of all funds so paid to him for building construction purposes.”

This is conceptually huge for you, the owner of the project.  I urge you to ponder this for a moment, because in some ways this is like giving someone your checkbook.

If you have a project, understand that when you as an owner pay the person in charge of the project, much of that money is trust money.  It doesn’t belong to him – not all of it anyway.  You are entrusting him to pay everyone their just due BEFORE he pays himself.

If your payment to your contractor does not get disseminated to subs, materialmen, and workers, you could be liened.  If you don’t think it could happen to you, consider the Act above was created eighty-one years ago.  It was happening then, and it’s still happening today.

Thanks for your interest.

Be sure to visit www.michiganconstructionlienservicesllc.com sometime soon!

Avoid a construction lien – Know your contractor!

Customers ask me time and again how they can avoid getting a construction lien on their home or project. I don’t claim to have all the right answers nor can I offer legal advice. I do have something to share, and figure that this contribution will be a good springboard into other topics along the lines of construction liens in Michigan.

First of all, the recording of a construction lien means someone either didn’t get paid or they presume payment is not going to be coming very soon. Otherwise there would be no lien. Liens can be good, and I’ll get to that in another article.

The number one caution is: Know who you are dealing with. This holds true for anyone who enters into a contractual agreement with another person or company. If you don’t do your homework, you may as well be tossing the dice. Also, you need a well-written contract that is understood by all parties.

Here are just a few falsehoods that sheep among wolves tend to gloss over:

1) “He’s been in business for years, so therefore he is reputable and reliable”. This does not mean a thing. I know of several businesses that have funded their operations by stealing from their suppliers, their clients, the IRS, and occasionally their laborers. In another age they would have been tarred and feathered and sent out of town. Today we are much more tolerant and accommodating.

2) “I checked the Better Business Bureau and there are no complaints”. These bureaus don’t (and absolutely will not) log any negative data from creditors. The BBB boasts a really powerful mission statement and purpose, yet simply does not provide the big picture on their “accredited” businesses. Bad checks, lawsuits, frauds, poor workmanship, building code violations and so on are just not listed. Complaints are accepted online, but if people don’t realize their contractor billed them for something that was never installed, the complaint just isn’t going to be logged.

3) “This company really has it together because the website is so professional”. Now I must admit that this really wasn’t stated, but let me back up to say that I’ve done some light research on some really bad players in the industry, and I just want to leave you with no less than this truth – a great web presence means nothing. Don’t fall for this.

Knowing who you are dealing with involves a little work. The wise project owner asks the contractor where the materials will come from and whether he has an account at that particular store. You aren’t asking him for credit references, per se, as he would only give you good ones anyway. You should be interested in your project, your warranties, and your materials.

If his answer is “Home Depot” or “Lowes”, then either you don’t have a very big project, or your contractor (for whatever reason) does not have an account with a material supply company that specializes in several choices of quality products with depth, warranty, delivery, and product knowledge. If he says he has an account with them, it’s a credit card just like you get, only with commercial pricing and incentives. Home Depot and Lowes do not manage credit nor ever have, to my knowledge.

But if your contractor states your local “Home Town Lumber”, call them up and ask for the credit manager. Explain who you are and the type of materials you require for your job. Then ask how your proposed contractor handles his bills and whether the person you are talking to would hire your proposed contractor to do work on his own home.

If the response is positive, you probably have good potential for success. If the answer is anything else, ask if you can speak with the sales counter for a couple contractor referrals.  Who knows, you may wind up with a better quote!

Be sure to thank everyone for their time.

Be sure to visit www.michiganconstructionlienservicesllc.com.

Support your local (legitimate) contractor

I don’t suppose anyone plans to fail when starting a construction project.  What with all that goes into a project, and especially in the economic climate of southeast Michigan, what more needs to be said?  Profit margins are down, costs are up and continue to grow, and it seems that anyone with a hammer, shovel, ladder, and pick up truck is a “contractor”.

The irony of this is that many of the hardworking men and women in the various construction fields are surviving because they are able to do work at a cost effective price to the homeowner and smaller commercial owners.  Yet their highly competitive rate does not figure in the costs involved in legitimate businesses that must cover payroll taxes, insurance, warranties, and profit.  Yes, profit!

Further still, many of the professional contractors taught their respective trade to those who are now their competition.  Who wins?  Certainly not the project owner!

Indeed, without the legitimate licensed, bonded, insured, certified, trusted contractors that have been around for the past several years, some of whom are second and third generation, where would the industry be?

You get what you pay for.  The professional contractor who has been around a while probably knows what he/she is doing.  That professional knows what it will take to cover you on your project and be there the next time you dial his/her number.

If you have a project in the works and a bid comes in surprisingly low, you better believe the project is not going to get all of the quality and workmanship it deserves.  Double check who you are dealing with and check the product/installation list, as a poor job may be worse down the road than not doing the job in the first place.

To secure your project or interests in a project, visit southeast Michigan’s finest lien service at www.michiganconstructionlienservicesllc.com today.