It Is Time to Update Your Credit Applications

by Mark A. Cobb

Construction Project Credit

Isn’t it generally true that the best time to ask for something from someone is when they want something from you in return. It doesn’t matter whether it’s your spouse, your neighbor or your boss, if they need a favor from you, they are more likely to grant your favor in return.  Thus, the best time to get pertinent information from a customer is when they want to purchase something on credit from you!  And yes, by utilizing materialman’s liens and payment bonds laws you can substantially reduce your exposure.  However, getting the right information in the beginning can help you immeasurably.

Look at it this way, when a potential customer contacts you and requests to purchase materials for use on a construction project, use this opportunity to get information which will make collection faster and easier in case you have future payment issues with this customer. Similarly, when an existing customer contacts you and requests an increase in their credit line, guess what?  It’s another opportunity to (i) add useful information to their credit file and (ii) update the borrower’s information in their file.

As the (recent) recession has taught us so well, even the best customers can become credit risks.  In this day-and-age, even one bad construction project can topple an otherwise good company.

What Kind of Credit Information Should A Material Supply Company (or Equipment Rental Company) Request:

Written Credit Application:  Credit Applications are an easy and ideal way to collect all of the information used to determine a customer’s credit worthiness to your firm and to assist you in pursuing bad-debt. Standard forms can be uploaded to your company’s website which allow prospective purchasers to easily assess your forms.  Although there are some very good, useful template credit application forms available, it is worth the investment to use the template as a starting point–use it to build an application based upon (i) your specific industry and (ii) real-life situations your company has experienced.  Also, don’t let the form become static; instead, mend the form every time you think about or learn about additional, useful information.

Yes, you are likely already asking the question “What Information is Important to Know to Determine Credit Worthiness?”, but you should also be asking the question, “What Information Will Help Us Collect Our Money If The Borrower Defaults?”  Adding this perspective can make the difference between collecting your open accounts and forfeiting your money.

Since we are a law firm focusing on Georgia construction law, and more to the point Subcontractor Law, we regularly have to file, enforce and foreclose upon liens to get our client’s their recovery.  A very common scenario exists where our client received a monetary judgment for the amount the are owed, but the judgment must be collected. Frequently, the first (and most useful) information comes from the judgment-debtor’s (your customer’s) application for credit. Consequently, we have seen countless credit applications, and we encourage that at a minimum your credit application includes the following:

1. the Customer’s full, legal name (a step which is almost always omitted but very important is the credit analysis’ verification of the name with the Georgia Secretary of State’s business registration records);
2. Entity type (corporation, LLC, partnership, sole proprietorship); if it is a partnership, follow-up with the customer prior to extending credit to get the names, addresses and social security numbers for EVERY partner;
3. the Customer’s tax ID number (do not confuse this with the owner’s or guarantor’s social security number);
4. the business owner(s) full name and Mailing address;
5. the business owner(s) physical, Residential address; in Georgia, service of process is accomplished through the Sheriff or other court-approved process server physically providing service on the individual names in the lawsuit; thus, having (and confirming) the residential address can save a lot of time and money (this means street address only–not a post office box and, more importantly, not a fictitious business location with a mail-box drop);
6. the business owner(s) Social security number (in addition to the business’s tax ID number);
7. the owner(s) Spouse’s name and social security number;
8. Current bank account information;
9. require your customers to update their credit applications regularly to keep the information current; and
10. make sure it is LEGIBLE!  When it comes down to locating a customer, nothing is more frustrating than an illegible social security number!

Written Account Terms:  Depending upon the nature of your agreement (such as open account or written contract), you should always have every customer sign an agreement of your written terms. Having your customer’s consent to your terms is invaluable to asking a court for recovery-in-full.  For example, seeking attorney’s fees on collection matters can be much easier to get if your customer has agreed (in writing) to paying for your attorney’s fees.  Please consider including the following terms on your contract or open account agreement:

1. a Joint-check provision to allow you to request a Joint Check from the general contractor; if payment from a particular project is not flowing-down to you, this provision can give you some authority (and the GC some firmer ground) to circumvent your client and seek payment directly for the prime contractor; this can give you easier access to the project’s retainage;
2. Jurisdiction and venue consents can save you money as it can allow your collection lawyer to file all suits in the same convenient location; this promotes lower fees and a more predictable (dare we say favorable?) court;
3. jury trials can add expense and delay recovery; Waiver of jury trial can be an effective way to avoid these problems;
4. include provisions that allow you to collect Interest, Attorney’s fees and collection costs;
5. Liability for theft, inclement weather, of other loss to your materials on the jobsite; this provision clears up any gray area as to whom is responsible for your materials after delivery; and
6. periodically have your customer update their consent to your terms (you don’t really want to try and enforce a provision signed in 1981!)

Personal Guarantees:  Most customers are willing to provide personal guarantees prior to receiving the materials which you are able to provide them, but it’s almost impossible to obtain a PG after credit has been extended.  Pursuant to Georgia’s Statute of Frauds, a personal guaranty MUST be in writing in order to be enforceable.  Here are some ideas which you should consider adding to your PG:

1. make sure your guarantee meets Current legal requirements to be an enforceable guarantee; during the recession there was a great deal of litigation surrounding PGs and your document should reflect some of the changes in the laws;
2. although you don’t want to be onerous, there is no legal limit on how many personal guarantees you are allowed to require in order to extend credit;thus, it is OK to require More than one person to submit a guarantee; this is particularly helpful in situations where your customer is a partnership (get all of the partners to submit to a credit check and a PG) or where the owner of the business has moved his or her assets into a spouse’s name to avoid collection of their debts;
3. obtain the Guarantor’s social security number, mailing address and physical, residential address; and, like the credit app recommendation above, verify that this information is legible;
4. get a copy of the guarantor(s) Drivers license; this contains useful information including (i) driver’s license number, an example signature, and a photograph (we shouldn’t have to remind you, but check to make certain the photo ID and signature match with your account app, contract terms, PG, etc.;
5. get the personal guarantee Witnessed by someone who can later testify that the guarantee personally signed it;
6. UPDATE the guarantees and re-verify the credit worthiness of your personal guarantees.

Use Georgia’s Statutory Construction Notice Scheme for your Benefit:  As you likely know, third-tier subcontractors (which are generally sub-subcontractors and material suppliers to subcontractors) must comply with Georgia’s statutory construction notice scheme; although it may seem cumbersome because it may require you to send notices to the project owner and the general contractor, there are advantages to compliance; when you supply at a third tier level, it is important to meet all of your notice obligations; although your customer may not have all of the necessary information, you should try to get the following from them before you supply to them (or extend them credit):

1. Keep in mind that in order to file a valid materialmen’s lien or payment bond claim, you must demonstrate that the materials, labor or services which you provided were used on the project against which you claim a lien (or payment bond claim); thus, you must get the information necessary for your construction notice compliance on each “purchase” or “rental”;
2. You need to know the project’s name;
3. the project’s location;
4. the prime contractor’s name and address;
5. the project owner’s name and address;
6. your customer’s payment bond information (if applicable);
7. the general contractor’s payment bond information (remember that payment bonds are required on most municipal, state and federal projects, but many private construction projects are ALSO covered by a payment bond);
8. a copy of the Notice of Commencement.

Don’t Forget!  In order to take advantage of some of the useful collection techniques permitted by your industry, you must make certain that your internal accounting procedures comply:

1. keep track of supplies by customer and project
2. apply payments properly
3. have a calendaring system which alerts you to deadlines

Contact the Best Georgia Construction Law Attorney