Managing receivables in the construction industry is tough, especially without a succinct process to guide your actions. This becomes ever more complicated if your company is using its mechanics lien rights to control overdue receivables. The nuanced laws and complex timelines make process and policy a necessity to manage when to send notice and when to file liens.
At the zlien Credit Academy, we have developed a 5-step methodology for how to apply your lien rights to any project. The below graphic illustrates the zlien methodology.
The steps of the methodology are straightforward:
Step 1: Protect your lien rights by sending preliminary notice if necessary.
Step 2: Monitor the deadline to file a lien for all of your projects.
Step 3: Warn customers with overdue receivables that you intend to file a lien unless payment is received.
Step 4: Secure your lien rights by filing liens before their respective deadlines.
Step 5: Enforce your lien by filing suit to foreclose on the claim.
With each step of the methodology, more and more invoices will get paid, lowering your DSO and creating cash-flow for your business. Today we will discuss 4 ways to use this methodology to get paid.
1. Send preliminary notice on all projects
While most of the states require some sort of preliminary notice from second and third tier subcontractors and suppliers, there remain a few states that do not require preliminary notice. Despite the requirement, there is merit to sending a preliminary notice on all projects as it increases collections rates and improves DSOs. In some states, your company can actually get fined for not sending preliminary notice. Regardless, sending notices makes your customer and the property owner aware that you are on the project and you are knowledgeable about lien rights and the ability to use that security device.
2. Use a lien management software to track your lien rights
This one goes without saying. If you are still using a spreadsheet to track your projects’ lien rights, it is time to make a change. For one, the laws are constantly changing, and relying on your spreadsheet could lead to exposure. Most importantly, your time is better spent focusing on collecting overdue receivables rather than checking in on lien law changes and updating your spreadsheet time after time. A good lien management platform should be able to take basic project information and easily provide you with a list of the deadlines that relate to your projects.
Further, this software should streamline your company’s ability to send notices and file documents. Partnering with a lien management platform is one of the best ways to leverage your lien rights to influence your collections rates.
3. Set a deadline for notices of intent, and adhere to the deadline
A recent study by zlien found that companies that send notices of intent to lien get paid. The logic is simple, before filing a lien, send a notice warning your customer that you intend to file unless the debt has been settled. To make the process very efficient, companies set a deadline (say 40 days past due) by which if the debt is not paid, the company will send a notice of intent to lien, regardless of whether or not it is required. This is similar to a demand letter, but with a bit more teeth.
4. Commit to filing liens for long overdue accounts
If you have committed to protecting your lien rights, using a system to manage those lien rights, notifying your customer that you intend to file a lien, the last thing to do is actually file the lien. Too many companies invest heavily in protecting the lien right without actually following through on the promise. When delinquent accounts are approaching their lien deadline, file the lien to secure the lien right. After a lien is filed, the debt is usually paid or settled in some way. This provides a clear end to the debt, rather than having the debt run on for 180 days or even longer.
The zlien Methodology is most effective when it is enforced by a culture that supports using mechanics lien rights to improve collections. Subcontractors can gain leverage over parties up the payment chain by using lien rights to influence their accounts receivable.
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