In yesterday’s lesson, you learned what a lien is and how it works, right? Today, we are going to discuss how to create your company’s own lien policy that should work for projects in every state, every time.
Why make my your own lien policy?
Cash is the lifeblood of every business, and the best way to get cash is by collecting on your receivables. This fact makes the credit department (or accounts receivable department) vital to the success of any company.
As foolish as it sounds, collecting on 100% of your invoices is far too often the hardest thing a company has to do. Year after year good companies write off bad debt because they are unable to collect payment for work that has already been performed. What’s more, is that sometimes your best customer can be your most dangerous customer!
Crafting a lien policy gives you control over your company’s receivables by securing each and every invoice. You might have a great credit system in place to evaluate the client’s ability to pay, which is very important. But even the best companies have been known to push out payment far longer than the terms of their purchase agreement. Thus, securing your invoices by protecting (and perfecting) your lien rights closes the loop on accounts receivable.
In fact, by protecting your lien rights you can even take on new business that you normally wouldn’t go after because you have secured your invoices.
What is a Collections Funnel?
Each company has their own philosophy toward collections, and this philosophy should guide the company’s funnel. The theory behind a collections funnel is simple. Start at the top of the funnel (or the wide part) where 100% of your receivables go in. Throughout the funnel, you have your collections efforts: invoices, demand letters, collections calls etc. After an amount of time (say 90 days) you are left with a certain percentage of invoices that have not been paid.
What is the zlien Funnel?
In the funnel described above, your collections efforts rely upon getting the attention of your customer when they are ready to pay and financially able to pay. A very high percentage of your customers will pay within 30 days, an even higher percentage will pay within 60 days, and an ever higher percentage will pay within 90 days. But what about those who do not pay within 90 days? Some companies drag on for months, or even years before collecting or eventually writing off this debt.
With zlien this debt is not only secured by an interest in real property, but your customer is made aware of your right to file a lien throughout the life of the project, so your chances of getting paid is significantly higher. Take the following picture for example:
You will see on the left, an ordinary collections funnel will collect about 95% of the receivables within 90 days, but the zlien funnel will collect on 99% of the same invoices within 90 days. And even after those 90 days, you still have a secured interest in the property where the work was performed!
How to make your own funnel
It is always best to start by looking at the lien laws for the states where you perform work, you can find them in zlien ’s resources. There are three questions that you should be able to answer:
1. Do you need to send a preliminary notice at any point in the project?
2. How long after finishing work do you have in order to file a lien?
3. Once a lien is filed, how long is it effective?
Once you know the answers to these questions, you are ready to incorporate a lien policy into your regular collections efforts. Here is an example of how it might look.
Day 1: Perform and finish work or deliver first and last materials on the job site. Send out your preliminary notice on the project (if applicable). Send out your invoice to the customer.
Day 30: Invoice is due, begin collections efforts
Day 70: If invoice has not been paid, send out Notice of Intent to Lien
Day 80: File a lien to secure your interest in the property where work was performed, if the Notice of Intent did not procure payment
Day 85 – 160: Continue collections efforts, consider hiring a collections firm to assist
Day 160: If the invoice has yet to be paid, consider filing suit to enforce the lien or foreclose on the property
If all of the above steps are taken, the chances of you going completely unpaid on a project has been reduced as close to 0% as possible. We started today’s discussion with the idea that cash is the lifeblood of every business, and a successful collections funnel is your key to providing your company with the cash flow it needs to survive.
Tomorrow we will talk about how to enter your first project into zlien ’s lien management tool: the Lien Pilot.
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