by Mark A. Cobb
It doesn’t matter whether you are a material supplier delivering products to a subcontractor, a subcontractor performing work directly for a GC, or a GC building a structure for an owner, you expect to be paid for the labor, materials, and equipment which you provided. In fact, without payment, it could send your business plummeting downward if you cannot pay your own bills.
We highly recommend that before entering into any construction contract, you perform proper due diligence and protect yourself as much as possible. No matter how thorough you are, however, as the project continues, one of the parties involved with the project might experience a material change in their business or their cash-flow which can directly impact you and make recovery of the money you are owed more difficult. Thus, you want to keep evaluating each customer’s credit-worthiness.
For over 20 years, clients have shared with us some of the early-warning signs (which they largely ignored) which indicated that their customer might be a payment risk after the initial credit-check, and we thought our readers might like to see this list (and add to it themselves!) The following is a checklist of situations which may indicate that you are working with a potentially distressed party:
1. A change in your customer’s bank account may indicate many things including accounts closed, banking problems, a garnishment, etc.
2. Your customer pays you from different bank accounts (unless its accounts are separated by project, escrow, etc.); this is unprofessional and may indicate spreading out their assets to avoid garnishment or to rely upon the float by the banks.
3. Significant fluctuations in your customer’s inventory may indicate volatile business practices, changes in credit with other vendors, etc.
4. An unusually large order may indicate that the customer has undertaken a project larger than its capabilities.
5. Unexpected / unplanned growth of your customer’s business; great businesses maintain and update business plans; unplanned growth can cripple a business, overextend its employees and assets, and cause the business to fail to meet its new obligations.
6. High debt to equity ratio; customers in this position are a credit risk.
7. When your customer loses a major job or client; if too much business comes from one relationship, then the loss of that business can be devastating.
8. A generally disorganized approach to its business, accounts payable, accounts receivable is scary; likely, that business does not understand the extent of their liabilities, realistic expectations of income, etc. and that could put you in a dangerous position if you need to implement collection procedures.
9. Rumors; my Mother always told me that “where there is smoke, there is fire.”
10. If you hear comments from other construction industry professionals that your customer isn’t charging enough, then it might indicate that your customer is trying to get business on any terms in order to improve its panic for cash-flow; inevitably, they will run out of money and someone (hopefully not you!) will be left holding the bag.
11. Requests to extend payment terms may indicate that your customer needs more time to “shuffle” its assets to pay you.
12. Liens (including state and federal tax liens which are all public record); a 10-second check on-line can indicate the fiscal health of your customers.
13. Slow payments: creditors and debtors typically establish a billing and payment practice over time, when they deviate, it may indicate a potential problem.
14. Employee layoffs; if possible, visit your customer at their office, a reduction in their workforce could hint of problems to come.
15. Key employee changes dramatically alter the bottom-line and the business practices; when changes in management occur, they may use other vendors (forgetting to pay you), may emphasis other payment policies, could indicate that top management was receiving their paychecks or benefits.
16. Family and health issues related to owner or key employee (or their families) such as divorce, death or serious illness can greatly impact a business relationship.
17. Excessive downtime may indicate unexpected reduction in your customer’s revenues.
18. You customer’s business is for sale or sold; there may be ways for a new purchaser to avoid debt incurred prior to the sale; it can also indicate financial or industry-specific problems; also, it may result in a new corporate atmosphere which may make collection more difficult; frequently, the new owners tell you the former owner is responsible for the debt, but the old owner tells you that the new owner assumed the obligations.
19. You receive excessive inquiries for credit references for your customer; this might be a customer who is trying to expand their credit in order to generate funds to pays others (“borrow-from-Peter-to-pay-Paul syndrome).
20. Excuses for nonpayment or slow payment (lost invoices, “check is in the mail”, skipped invoices, unsigned checks, NSF checks, “no one is available to sign the check”, etc.); excuses are never a good sign.
Good credit management means vigilance. Do not agree to extend credit, perform work, or supply materials unequivocally on a long-term project without some follow-up to see if your customer’s financial position has changed. If it changes, and if you react promptly enough, it will make recovery of your money easier and reduce your exposure. Fortunately, you have several options including filing a preliminary lien, obtaining personal guarantees, and requiring stricter terms. In next week’s blog we will explore some of the options you may want to consider when you see indicators that a customer may become a credit-risk to you.
If you have other early-warning signs that alert you to potential payment issues, please leave a comment below.
by Mark A. Cobb
In today’s economy, a dollar means more than it has in a long time; thus, every dollar that your credit department is able to collect helps build your company’s bottom line. Since our firm focuses on construction collections throughout Georgia, we have observed that small steps taken by sales and credit departments can result in big gains if collection ends up on a lawyer’s desk. Thus, we have listed some important tips which are easy to implement and can increase your recovery rate substantially. Although these tips are focused towards material suppliers and subcontractors working on Georgia projects, most of these tips, however, will help credit and collection managers in every industry and in every location.
1. Credit Applications: Have one for every credit customer and know where the original is located.
2. Credit Applications: Update them every 3 or 4 years.
3. Credit Applications: Make sure they are legible! We cannot overstate the importance of this, if the salesman or the credit analyst receiving the copy cannot read every word, then a third-party collector or collection lawyer will not be able to read it either–particularly after it has been scanned, copied, and faxed.
4. Credit Applications: Make sure they contain useful information in case the customer absconds or you need to locate assets. Require information such as
- middle or maiden names;
- spouse’s names;
- EINs for business applicants;
- social security numbers for all of the principals of the business;
- home address for the principals; and
- bank account information for the principals.
5. Credit Application: Make sure it is complete. If there is any missing information, have the salesman or credit analyst tell the potential customer something like, “We will be glad to process your application for credit; however, before we do so, we need all of the information completed..”
6. Credit Application: Use a forum selection clause. If you must bring a lawsuit against the customer in the future for non-payment, a forum selection clause built into the credit app establishes the location and the court where the action may be brought. Your lawyer can suggest a location convenient to him or her and save your company travel time and likely offer more predictable results from a familiar court.
7. Guarantee: Have an attorney in each state in which you supply materials draft a guarantee which meets that state’s specific requirements.
8. Guarantee: Use a forum selection clause in your guarantee which establishes the court and the jurisdiction where you can bring a lawsuit if payment is not received. This will save travel time and legal fees.
9. Guarantee: At the time the credit application is made, obtain a personal guarantee from one or more principals of the business.
10. Guarantee: Require both a husband and wife to submit personal guarantees (it will help prevent a guarantor from transferring all of his or her assets into a spouse’s name).
11. Guarantee: Get information on the guarantor. Either in the body of the guarantee or on the signature line, have the guarantor provide useful information such as a (physical) home address, a social security number, drivers license number and work information.
12. Guarantee: Update them! As businesses evolve and grow, there may be new principals from whom you should seek additional personal guarantees.
13. Guarantee: Have them witnessed/notarized. We are constantly amazed how many guarantors claim that their PG was forged–even if there was a purported witness. Don’t let an applicant return a “signed” guarantee and then have a branch employee “witness” it; implement a policy that a witness must be physically present and witness the guarantor’s signature on the document.
14. Extend Credit Slowly: Whenever the customer requests additional credit, use the request to get additional and updated information on the company and guarantors; perhaps, you could use a more comprehensive application for credit requests over a certain amount.
15. Send NTOs: In Georgia, third-tier material suppliers and sub-subcontractors may file a mechanics or materialmen’s lien or make a payment bond claim only if they have sent a Notice to Owner (“NTO”) and a Notice to Contractor (sometimes called a Notice of Furnishing) within the first 30 days of beginning to supply on the project; failure to meet this obligation will reduce your recovery options.
16. When Supplying: Get current information about the job site including the following:
- a copy of the Notice of Commencement;
- payment bond information;
- the name of the general contractor; and
- the name of the owner of the project.
17. Watch the Date: Do not let a debt continue past 90 days from the last day in which you supplied materials on a job in Georgia; all construction liens and all payment bonds must be made within 90 days of the last day in which you worked on the job site. Calendar payment for 65 days past due.
18. Joint Check Agreement: If you notice slow payments at the start of the project, watch-out for the final payments; request that your customer agree to a joint check arrangement with the general contractor.
19. Lien Waivers: Georgia Lien Waivers become unconditional after 60 days; thus, if a lien waiver is signed but you do not receive payment within 60 days, it is presumed that you received payment. After this deadline passes, you cannot claim that you are owed money; prior to the deadline, however, you have several options including (but not limited to) filing an Affidavit of Nonpayment, filing a materialmen’s lien or making a claim against the payment bond.
20. Materialmen’s Liens: Filing a proper materialmen’s lien can dramatically increase your collection rate; make certain that you utilize this very useful tool on every private project in Georgia.
21. Payment Bond Claims: Similar to materialmen’s liens, making claims against a payment bond on a public works project will substantially increase your collection rate. Do not let the 90-day deadline pass you by!
22. Payment Bonds on Private Projects: It is easy to forget that some private construction projects in Georgia are covered by payment bonds; although these differ from payment bonds on public projects, they are a very useful tool to substantially increase your collection and you want to meet the requirements for making a claim.
23. Continuing: Get information on customer’s current/additional job sites. It is very likely that your salesmen know the debtor’s current job sites. Although this may not be the site on which your company supplied materials, information on current work can help with post-judgment collections (this information can be used for filing a garnishment against the income the subcontractor may be getting from its new job or it can be used to serve legal process upon a debtor who is difficult to find).
24. Litigation: For each state in which you supply materials, choose one lien and bond lawyer who can assist you with your needs throughout the state. It will save you time, money as well as build relationships.
25. Continuing: Train, train, train your employees (both salesmen and credit analysts); bring in a specialist to educate your staff on lien laws, payment bond claims, deadlines, and other pertinent topics.
Question: I have a judgment against someone who owes me money; how can I collection on this judgment?
That’s a question we hear almost daily around here. Many law firms will handle a commercial collection matter through judgment, but then they don’t know what to do. In other words, the typical lawyer will make sure you “win” your lawsuit, but he or she won’t do much to help you collection on the judgment. To us at the Cobb Law Group, that’s not much of a victory.
We’re different. We assist our clients will every aspect of their collection issues–from filing mechanic’s liens or making a payment bond claim to filing a lawsuit, preparing a foreclosure, securing a judgment, and pursuing post-judgment collection activities.
Even if we didn’t represent you in the law suit you won, we also help those with outstanding judgments collect against those judgments throughout the State of Georgia.
There are several steps a creditor a creditor should consider if they have a judgment.
First, if you have been awarded a judgment against another party in Georgia, it is vital to make sure that the court has issued (and recorded) a Writ of Fieri Facias which is commonly referred as a FiFa in Georgia. This Writ or FiFa is a judgment lien which attaches to all of the defendant’s property in the State of Georgia. Some courts issue a FiFa immediately upon granting judgment; however, many require a written request and a $5.00 or $7.00 fee. Thus, if you have a Georgia judgment, make sure the FiFa has been issued.
Second, record the original FiFa in each and every county where you think the entity who owes you money owns any assets. For our clients, for example, we search real estate ownership throughout Georgia and record the FiFa in every county where the debtor owns real estate. That way, if the debtor attempts to transfer any real estate or attempts to refinance any real estate, then your recorded FiFa may lead to payment of the debt.
Third, if you can identify a bank account which is owned by the debtor, then it may be possible to file a Summons of Garnishment against that bank account; similarly, if the debtor is an individual who is employed, then you may be able to garnish up to 25% of his or her wages. Garnishments in Georgia can be a very effective means of collection your judgment. Lately, we have been fortunate to garnish current construction projects in order to collect judgments rendered against subcontractors. Remeber to think creatively as garnishments can often be filed against anyone who owes your debtor money (including credit card companies, employers, tenants, etc.) ; be careful, however, as Georgia does not allow garnishment against all assets (such as retirement account, child suppert, etc.) so check with your lawyer before filing attempting a garnishment.
In addition to gerniahsment, there are several other great options available to the post-judgment creditor. For example, we frequently, use post-judgment discovery to assist us with locating and identifying a debtor’s assets. We use such techniques as depositions, written interrogatories, and third-party discovery to help us locate assets in Georgia and collection on the judgment.
If you have a judgment against somebody, don’t let it sit there gathering dust; contact us to see if we can help you find the money that you are owed.
The Cobb Law Group is pleased to announce the addition of Paul A. Rogers to its staff of attorneys. Paul comes to the Cobb Law Group with extensive experience with creditors’ rights in bankruptcy. He has worked for major Atlanta law firms and has served as a Chapter 7 United State Trustee for Bankruptcy, Paul’s legal experience adds a significant dimension to our practice which will offer our clients greater options for commercial collections.
In 2002, Paul received his juris doctor from the University of Nebraska; prior to that, he had a double-degree in history and religion from the University of Georgia. He is admitted to practice in multiple state and federal courts throughout Georgia and has published several significant articles in his field. Paul practice concentrates in Commercial Collections, Commercial Litigation Creditors’ Rights and Bankruptcy including representation of financial institutions, asset-based lenders, and commercial leasing companies. He represents secured creditors, committees of unsecured creditors, and trustees.
Because of his vast experience, Paul will assist Cobb Law Group clients regarding collection matters, commercial workouts, receiverships, bankruptcy and commercial litigation issues in state and federal courts. Paul has substantial experience with Chapter 7 Liquidation cases, and with the confirmation process in Chapter 11 Reorganization cases; in addition, he has served as lead counsel in numerous contested hearings in bankruptcy courts. Paul has also served on the Private Panel of Trustees for the United States Bankruptcy Court for the Northern District of Georgia.
We are very excited that Paul will be working with us and helping to increase our client’s recovery in our collection matters.