I found a pithy and pointed article on Inc.’s website providing businesses with 5 Tips to Ensure Customers Pay You On Time. The article references a RocketLawyer.com survey revealing that 25% of companies have trouble collecting payments, and of those 60% had to write off the bad debt. The Inc. writer then rattles off 5 tips to help avoid falling into these percentages. In essence, these are tips to avoid and manage potential deadbeat customers. The article summary explains: “Every business runs into deadbeat customers. Here’s how to make sure they don’t take advantage of you.
Why Avoiding Bad Debt Is Important
You probably don’t need me to explain exactly why bad debt should be avoided. Absolutely no one is a fan of bad debt. However, it is worth taking a moment to discuss the true costs of bad debt.
It’s a common misconception that the cost of bad debt equals the cost of the outstanding invoice, but nothing is further from the truth. Bad debt can have far reaching consequences, not the least of which is the need for your company to pay off the total amount of the bad debt with profits earned elsewhere. If you’re running a profit margin of 10%, and you have a $10,000.00 bad debt, you’ll need $100,000 of revenue to make up for the $10,000 lost. That’s a heavy hit to your bottom line.
General Tips To Avoid Bad Debt and Deadbeat Customers
So, what can your company do to be better at avoiding bad debt?
The Inc. article had a few tips that are worth repeating, some proactive and some reactive, as I’ll discuss in more detail below. Among the proactive tips are to perform a background check, create and sign a contract, and then bill customers consistently. Among the reactive steps are to have an attorney send a demand letter and to send the nonpaying customer to collections.
I think these are great tips, and certainly not novel collection tools. In fact, these are similiar to the tips I’ve suggested in the past within the Construction Payment Blog’s Collections category, and also on my law firm’s blog: The Construction Law Monitor.
Those in the construction industry should understand these general tips, and use them, but I have really great news. Mechanic lien and bond claim laws provide those in the construction industry with the most powerful collection tools in any industry, all explained below.
Proactive Collection Tips for Contractors & Suppliers
There are a few things contractors, suppliers and others in the construction industry can do proactively to avoid bad debts and deadbeat customers. Two years ago, I discussed this generally in a post titled: “Filing A Lien Is A Discipline, Not A Knee Jerk Reaction”. The point of the post rings true still today, which is that if you want to file a lien to protect your right to get paid (and you shoulds want this), you need to take steps at the beginning of the construction project to protect your lien rights.
In many states, this means sending a preliminary or pre-lien notice to other participants in the construction project. Your state may or may not require this, and it may or may not be required depending on your role in the project; but if you must send the notice by law, the failure to send the notice will cause you to forfeit all of your lien rights.
When looking to collect on a construction project, having lien rights can prove vital. Look at this article to learn just a few of the reasons why liens produce payment.
Aside from protecting your right to later file a lien, the act of sending your preliminary notice is actually enough to increase the odds you’ll be paid. Those companies who send notice usually are given top priority when its time to get paid, as the prime contractor and the owner know, if payment isn’t made to them, they could lien!
Reactive Collection Tips for Contractors & Suppliers
When I say “reactive collection tip,” I am talking about things you can to collect from a deadbeat customer after they have already failed to pay. Therefore, this action is in reaction to the non-payment.
And to what am I going to refer? Filing a lien or bond claim, of course.
We have a tag here on this mechanics lien blog titled “Why Lien” It’s a collection of blog posts that express why it’s important to file a lien when you’re unpaid, and within those posts we repeat this many times: Filing a mechanics lien or bond claim is the best collections tool available to you.
If your proactive measures were unsuccessful and you still have a collections problem, the best thing you can do is file a mechanics lien or bond claim. Be sure to file it timely, and be sure to get it filed correctly!