Collecting Payment Due
Often in the contracting business, you receive payments
later than when the contract states that you will be paid.
When I first started my business, I was nervous (very) about
calling general contractors to ask about when payment would
be made on my invoice so I would ask my supplier to do it
for me (they were always happy to do it for me because if
the general contractor's payment was late to me then the payment
to my supplier was late also).
Eventually I became comfortable handling it myself.
so bad if the general contractor indicates that the payment
is in the mail or due within a week or so.
The not so fun phone calls are when your general contractor
tells you that he does not know when he is going to pay you
because he has not been paid by the owner on the project.
Many times the general is telling the truth but more than
once I have caught a general contractor not telling the truth
about not having received payment.
How did I find out that he was not telling me the truth?
I called the owner of the project and/or the lender of the
project. Now beware, General Contractors do not like it when
you check up on them by calling the owner/lender. Chances
are you will get a heated phone call from your general wondering
what in the world you are doing calling the owner about payment.
But if you don't make these calls, then you might just end
up last in line when it comes time for payment and guess what?,
if the money runs out before they get to the last person in
line you might end up with nothing. Keep in mind though, if
you are uncomfortable making these calls, most likely your
supplier will be more than happy to do it for you.
Following is an article (from a magazine titled "The
Contractor") which is posted at the SAACA site. The owner
of the SAACA site has given us permission to post the article
at our site. Please note that the article is not verbatim.
REFINING YOUR COLLECTION PROCEDURES
A swift flowing river will slow to a trickle if the rains
that feed it stop. Similarly, the cash flow that moves
swiftly and encompasses substantial revenues will eventually
become stagnant and even dry up completely, if the sources
that feed that cash flow stop.
In the simplest terms, your money comes from your customers
and when a customer fails to pay you on time or in full, your
cash flow slows down. If enough customers fall behind, you
may find your company's revenues disappearing. Let's take
a look at how to refine your collection procedures to keep
your money moving and your business well irrigated, financially
Perfect Your Policy
Some contractors never bother to formalize their collection
procedures. Don't make this mistake. Instead, establish policies
to take action at set intervals. For instance, call customers
5 days after their invoices have been sent out, thanking them
for their business and asking if they were satisfied with
your work or product (another option would be to send a brief
note via fax / email / snail mail to save yourself the time
of that first phone call).
If your terms are ''net 30", call on day 31 and inform
the customer that you are initiating collection efforts. Something
to keep in mind at this time is the wording of your contract.
Nine out of ten times, you will be directed to the payment
clause in your contract by the general contractor as soon
as you begin collection efforts.
There might a phrase that in one way or another states that
you will only be paid when (and if) the general contractor
is paid. To an extent this clause has been struck down as
illegal but only in the implied statement that the sub will
not be paid if the general is not paid.
Regardless of whether or not that clause is in your contract,
it is now recognized that the sub will be paid whether or
not the general is paid. The only question now is when the
sub will be paid. Consistent calling lets them know that you
are aware that their payments are overdue and that you will
be aggressive and proactive in collecting those late payments.
Remember, negligent customers count on contractors' shortcomings
to perpetuate their slow payments. Institute a policy of phoning
every day or two until payment is received. At the 60 day
interval, decide whether it is a valued customer you have
or a collection problem.
Continue collection efforts based upon your evaluation of
the customer. With a customer who has been evaluated as a
collection problem, you might not hesitate to contact the
lender/owner to find out what the holdup is, but with a customer
you consider as valued, you might decide to not make that
phone call right away.
When all else fails, you may have to play hardball. If collection
efforts remain paralyzed at 90 days, hand the client over
to a collection agency. After all, your time is better
spent concentrating your efforts on receivables that are less
than 90 days old, which is the optimum time frame for collections.
Also, using a third party conveys a seriousness that often
persuades customers to pay up their overdue accounts. This
is your last line of defense, so choose a trustworthy collection
Strengthen Your Staff
Don't restrict collection responsibilities to only one or
two employees. Something this important deserves a team effort.
Involve your entire staff in the billing and collection procedures.
Your company needs an aggressive collections clerk to lead
the charge and a helpful support network behind him or her.
Also, remind the sales force and project managers to stay
aware of late-paying customers, which will help to establish
a widespread and knowledgeable defense grid against these
types of clients. You can strengthen this defense grid further
by rotating your collection staff.
This disorients negligent customers and reminds them that
they are not dealing with just one person but rather an entire
company. Furthermore, your staff will become more knowledgeable,
which could lead to new ideas for sharpening your business
Although your employees may need additional training, expanding
their job responsibilities is also an excellent way for you
to show faith in their abilities.
Finally, reward your staff for a job well done. Recent statistics
show that 90% of employees improve their work after being
praised, whereas only 30% improve after being criticized.
Positive reinforcement works wonders. Establish various bonus
or compensation programs for your collections staff. Your
employees will be more energetic and focused if they know
that their work is appreciated.
Be Selective, If Possible
Many contractors tend to roll their eyes sarcastically when
a financial advisor tells them to "choose their customers".
Obviously this is easier said than done, especially if your
business depends on a few large customers or during hard times
when your customer base dwindles.
But, when possible, be selective about the people with whom
you do business -- including owners, general contractors, and
subcontractors. Don't hesitate to perform background
checks on prospective clients and eliminate those that
seem like unworthy risks. That link goes to a page that discusses employee background checks but the information there works just as well for checking the background(s) of your potential customer(s).
Check for claims or judgments by other vendors or contractors.
Obtain a credit report and look for an increase in credit
and simultaneous increase in collection demands because of
a slowdown in payments.
Also, contact a prospective customer's bank and verify the
frequency of bank changes and the pledging of receivables
(the practice of promising your accounts receivables as or
instead of collateral on a loan).
Finally, look at your would-be client's reputation within
the industry. Does he or she refuse to - or only reluctantly
- show internally or externally generated financial information?
Remember, you may be better off accepting a smaller project
from which you receive immediate payment than signing on for
a large job that entails spending an inordinate amount of
time and energy collecting your money.
Lien Into Them
Besides collection agencies, statutory liens (so called
because legislatures use statutes to create them) are another
"hardball" tactic contractors can use to collect
For example, one common statutory lien -- a mechanics' lien
-- protects general contractors and subcontractors involved
in construction projects. Using a mechanics' lien, these parties
can use the threat of foreclosure to hold building owners
liable for outstanding payments.
If the owners fail and file for bankruptcy, mechanics' lien
holders will be paid before any other creditors.
Don't Sell Yourself Short
Contractors can spend so much time trying to complete projects
and procure new ones that they forget about the most important
part of the process, getting paid. Without being vindictive,
convey the importance of timely payment to your customers
and do not accept excuses. Explain that, though you are willing
to discuss the matter completely, further delays are unacceptable.
Don't sell your profitability short. Refine your collection
procedures to keep your cash flow moving. To learn more about
the procedures discussed here, or others, ask a professional
financial adviser to assess your current accounts receivable
process and suggest improvements.
Update: I recently added the information below:
Factor Your Receivables
Many types of businesses have long had the option of receivables factoring and now factoring companies are positioning themselves to factor receivables in the construction industry.
When you factor receivables through a receivables factoring company you are selling your invoice(s) to that factoring company.
The factoring company pays you the $ amount of the invoice less a small discount fee (usually a percentage of the invoice).
Through many receivables factoring companies you can have funds in one to two days, and then they collect payment from your customer when the invoice they bought from you comes due.
It's a tantalizing thought, being able to collect on your invoices in two days time... Imagine the strides you could make with your company if your receivables were available to you within two days after you submit your invoice(s)!
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