What Is A Credit Policy?

So what is a credit policy anyway?   According to businessdictionary.com, a credit policy is:

Clear, written guidelines that set (1) the terms and conditions for supplying goods on credit, (2) customer qualification criteria, (3) procedure for making collections, and (3) steps to be taken in case of customer delinquency. Also called collection policy.

Writing a quality credit policy requires an intimate understanding of your business, and when preparing a credit policy for a material supplier or equipment lessor, a quality credit policy also requires an intimate understanding of applicable mechanic’s lien laws.  Inc. Magazine ran a pretty good article about How To Create A Smart Credit Policy, which gives some good tips on creating a general credit policy for your business.  When it comes to collecting on an outstanding debt, the article describes:

In the case of delinquency, be prompt and persistent. “If follow-up contacts are not timely, it sends the message that customers need not have a sense of urgency,” says Swafford. Your written policy should specify contact at regular intervals, starting with a reminder five to seven days after the due date. Further notice should escalate: A second written reminder might be followed by a phone call, followed by a final notice from a lawyer. If you still haven’t been paid 30 days after the due date, it’s probably time to turn the matter over to a lawyer or a collection agency.

The difficulty with all the commentary and resources available about credit policies is that they all look at these policies from the perspective of a company who does not have mechanic’s lien rights.  However, when you do have the right to file a lien, protecting and enforcing those rights should be a critical part of your company’s credit and collections policy (read about why you should love mechanic liens). The next section explains how.

Lien Protection As Part Of Your Credit Policy

To incorporate lien protection as part of your credit policy, you need to focus on two essentials:  (1) Creating a policy as to which projects will get lien protection, and which will not; and (2) Sending out your required preliminary notices.

Create A Policy Designating Which Projects Should Get Lien Protection

First, depending on your budget and your receivable problems, you may want to protect your lien rights on every single new project…or, you might want to give your best clients a pass and only take protection actions on riskier projects.

I have clients that go both routes, and in large part, it works.  For those who pick and choose between projects for lien protection, these clients give each project a category or risk (in colors, for example, green, yellow and red).  The low risk clients are not part of the lien protection procedures, but the high risk clients are.

There is nothing wrong with an approach like this, except don’t fall victim to your tendency to trust your clients. Even though a client may have good intentions, the realities of cash flow problems, the current economy and business can control the day and leave you without payment.

Monitor Notice Requirements…and File Your Notices

Knowing your lien deadline is important, but sometimes, it’s not quite as important as knowing your preliminary notice deadline.  The reason is simple.  By the time lien deadlines expire, you likely already know you have a payment problem. Preliminary notice deadlines, however, expire way before you see any red flags.

If a state requires preliminary notice, they almost always require them from material suppliers and equipment rental companies. There is hardly ever an exception to this.   Check out our color-coded map of the USA indicating which states require notices.

Preliminary notice requirements create a big challenge for material suppliers and equipment rental companies who want to incorporate mechanics lien protection into their credit policies.  The reason?  Because the laws are complex, and they vary significantly from state to state.

You can’t use a single notice form for every state and situation, and you can’t always send the preliminary notice within the same period.  For example, preliminary notices in Oregon and Louisiana are required within just 8 and 10 days respectively, whereas Washington state provides a much roomier 60 days to file preliminary notice.

Aside from getting preliminary notices sent on time, you must also get the contents of your notice correct, and it must be sent in accordance with strict requirements.  Again, all this varies from state to state.

You need some type of system to help you manage the preliminary notice requirements in each state (Zlien provides this with its web based LienPilot).  And if you really want to ensure your preliminary notices are always sent correctly, and on time, consider outsourcing the work to save you time, money and headaches.

I practice law in Louisiana, and I had another equipment rental company call my offices last week to discuss their options in collecting a debt for some leased equipment.  Whenever I’m contacted to help collect a debt, I immediately discuss the potential client’s lien rights.  Bar none, filing a mechanic’s lien is the absolute best first-step to collect a debt.

This particular potential client had leased equipment, the equipment was used on a construction project, and this company was within the statutory lien period.  Everything was in line for them to file a mechanic’s lien…except for one little, but massively important thing:  they didn’t send a Notice of Lease.

“A notice of what?” they asked.  And rightly so.

Typically, Louisiana a non-notice state, meaning that folks can file mechanics liens without delivering any preliminary notices.  There are two small exceptions:  (1) Prime contractors must file a Notice of Contract when starting work; and (2) Equipment rental companies must deliver a Notice of Lease within 10 days of renting equipment or machinery.

To put it lightly, these two exceptions aren’t well known in Louisiana.

In fact, this particular client had leased heavy construction machinery for about twenty years, and had never heard of the requirement. The requirement, however, is certainly there, nestled within La. R.S. 9:4802(G)(1), mandating as follows:

G.(1)  For the privilege under this Section to arise, the lessor of the movables shall deliver a copy of the lease to the owner and to the contractor not more than ten days after the movables are first placed at the site of the immovable for use in a work.

We wrote about this “Notice of Lease” requirement on this blog before, and you can take a look at the Notice of Lease tag.

Since the Notice of Lease must contain certain information, the best practice is to simply sent the written lease itself to the receiving party.  According to the statute, the lease must be delivered “to the owner and to the contractor,” but another best practice is to send the notice along to any and everyone up your contracting chain.  The lease must be sent along to the required parties by certified or registered mail.

The notice must be sent within 10 days of when the equipment or machinery is first placed at the jobsite.  If it’s a day too late, or if it’s not sent properly or to the correct parties, it could spell game over for your lien rights.  In other words, don’t overlook or underestimate this requirement!

Read a full-text of Senate Bill 2800 on the Construction Lien Blog here.

The legislation amends sections 85-7-131, 135, 181, 185 and 189 of the 1972 Mississippi Code to include equipment renters and suppliers in the class of parties who can file construction liens or stop notices (as the case may be).   Previously, these parties did not have any lien rights in the state.  The amendment is effective July 1, 2010.

(Looks like a lot of work on getting this law changed came from RentalPulse).

Chances are you are stuck in rough spot and have to defer to your contract for remedy. There is likely no answer for you under the lien law – unless you filed a notice of lease agreement with the owner within the appropriate time frame.

Lessors often do not learn about the dreaded notice provision until after they have been bitten by a bad customer. Both the Private Works Act and the Public Works Act each require that the Lessor of equipment to a construction project provide advance notice to the owner of the equipment’s use and existence at the jobsite.

Luckily, satisfaction of this requirement is quite simple. Under both Acts, a Lessor of movables (equipment, vehicles, etc.) must “deliver a copy of the lease to the owner not more than ten days after the movables are first placed at the site of the immovable for use in the work.” La. R.S. 38:2242(c). If the job is private and not public, you must also provide a copy of the lease to the contractor. La. R.S. 9:4802(G)(1).

The official comment for subsection G of La. R.S. 9:4802 states that the purpose of this law is to give notice to the owner and the contractor that equipment being used by a contractor is leased and thus potentially creating liability under the Private Works Act.

Though the type of delivery is not specified, it is commonplace to use hand delivery or certified mail. If hand delivery is utilized, it is important that the courier fill out a simple affidavit specifying what was delivered, when it was delivered, who it was delivered to, and where it was delivered.

Finally, the Notice of Lease Agreement does not have to be in any specific form – simply a copy of the contract should suffice. We do prefer that you use a cover sheet to inform the owner and contractor of the purpose of the delivery, reserving your rights under either La. R.S. 9:4802 (Private Works) or La. R.S. 38:2242 (Public Works).