How Contractors Can Protect Themselves
“The biggest cause of business failure is not paying attention to numbers,” he said. “This leads to not knowing how to price, not understanding overhead, and not keeping up with receivables.”
Hanes gave an example of how it becomes more difficult to collect on delinquent accounts (receivables) as time passes. “If you let an account get one month old, you have a chance of collecting 94 cents on the dollar,” he said. “If it gets six months old, the chance is 74 cents on the dollar.”
Philosophy Of Accounts ReceivableHanes pointed out five key philosophies of accounts receivables:
1. Be prompt.
2. Keep records of efforts. “If you get to court, judges put a tremendous amount of importance on written documents, e.g., phone call logs,” he said.
3. Be legal. Know the facts about the Truth in Lending Act and the Fair Debt Collection Practices Act.
4. Time is money. Collect interest on debt. “By charging interest — if for no other reason — you can cut a deal down the road by dropping the interest and collecting the principal only,” Hanes noted.
5. Avoid attorneys. Get the money without going to court.
Hanes said it is important for contractors to ask for credit applications from customers and builders. “Make sure your builder is licensed and attach a copy of the license to the credit application,” added Hanes. “If the builder is not licensed, the homeowner can stiff the builder and you won’t get your money.”
Hanes said there are three important parts of a credit application that contractors should pay close attention to.
Terms of payment — Stating the payment terms (e.g., 30 days, interest rates, and agreement to the terms). “This solves the problem of not having a legal document,” Hanes added.
Agreement to pay attorney fees — The only way to collect attorney’s fees is to have a written agreement where both parties agree to pay the fees. “Have this in case you need it,” Hanes said. “You can always give away some of the attorney fees during negotiations.”
Personal guarantee — Guarantees payment by the applicant and should also include the signature of the applicant’s spouse. “And make sure this agreement is notarized,” said Hanes.
When it comes to collecting on delinquent accounts, Hanes said that many people can get money owed to them, but they don’t know how. “You’ve got a whole bunch of judgments in your files, and you don’t know how to collect the money,” he said.
One way of finding out how to get the money owed is to file an Order to Appear and/or Produce subpoena. This document requests a listing of where a defendant’s money is or where it comes from.
“If possible, ask for payments more often — weekly versus monthly,” said Hanes.
Construction Lien ActAnother one of Hanes’ messages was to educate yourself — know legal terminology and ways to collect on debt. He took some time to explain another important means for collecting money owed — through construction liens.
The Construction Lien Act contains three important items, according to Hanes.
1. Notice of Commencement. Hanes said this section is “very important.”
2. Notice of Furnishing. “It is critical that you send this notice out within 20 days of when work is to begin,” Hanes added. “If you don’t send this out within 20 days, you may not be able to collect money.”
3. Claim of Lien.
Hanes said that contractors should also be aware of the “Homeowner Construction Lien Recovery Fund.” The purpose of the fund is to relieve homeowners from defending construction liens once they have paid the contractor and to give the lien claimants a fund from which to be paid.
“This is a pain to deal with, but we still have collected hundreds of thousands of dollars from this fund,” Hanes stated.
If contractors are interested in ordering or downloading some of the legal forms mentioned in this article, they are available at various state government Web sites. In Michigan, for example, contractors can visit http://courts.michigan.gov/scan/courtforms/index.htm#forms.
“You can’t believe how much information is available from the Internet,” Hanes said. “You can look up a builder’s license and find out about judgments against lawyers.”
Hanes said that the numbers prove that one debt can potentially ruin a business. “If you are working with a 10-percent profit margin and one account of $40,000 goes bad, you would have to generate $400,000 in revenues just to break even.”
Publication date: 06/23/2003