Security for a Softening Economy
Category: Construction Credit | Posted on 07/01/2008
It happens everyday. Credit Managers face the difficult decisions of extending credit lines, reviewing financial risk, and protecting their accounts receivable. To make these decisions even more difficult add to the mix the reports of an uncertain economy.
In April 2008 a survey of The Federal Reserve's Senior Loan Officers showed that banks are preparing to weather the storm. The survey showed 55% of banks had tightened lending standards on corporate loans in the last 3 months, up from 30% in January. At best, our economy is softening. Like it or not, this means your customers will be looking to you for discounts or extended terms. What do you do? The answer is to do the same things the banks do. Secure collateral against the credit lines that you extend. Banks have always taken advantage of this principle. Why shouldn't you do the same?
Trade creditors have different options for securing collateral against credit lines. If the goods are being permanently affixed to a building, take advantage of the mechanic's lien laws. If not, record a UCC Filing to secure your inventory, equipment or accounts receivable.
When selling materials, providing labor or services that permanently improve real estate, the mechanic's lien filing process is the best method to get the needed leverage to ensure payment. The theory is very simple. You have improved the property; therefore the owner should not retain the improved benefit until it is paid. Legally, you can secure yourself against the piece of property to the extent you have improved that property. One issue that frequently arises is that you are asked to extend credit lines to customers that do not have the financial strength to merit that credit. The lien process gives you an option to sell on open terms.
Not everyone is eligible to file mechanic's liens. It is a very defined right. Your materials must be permanently affixed to a piece of property, or your service, or labor must contribute to the improvement of that property. If your business falls within the realm of having lien rights, you must be sure to follow the required lien laws in the state where the property is being improved. In many states this means you must react early in the process. The lien laws in many states involve steps that must be taken shortly after first furnishing materials, service, or labor to the jobsite. If you do not fulfill these requirements in the times frames outlined, you may be jeopardizing your ability to take collateral against the piece of property you have improved.
UCC filings bring another opportunity for trade creditors to take security against the credit lines they extend. The good news is that UCC filings are not a defined right; businesses can take obtain security by filing a UCC Financing Statement. Taking a security interest is consensual. Your customer must grant you the right to take security in their collateral by signing a security agreement. Unlike attaching to real property under the Mechanic Lien Laws, Article 9 of the Uniform Commercial Code allows taking security in your customer's assets, which can be inventory, equipment, proceeds, accounts receivable, general intangibles, or other collateral classifications. Properly filing the UCC document makes you a secured creditor and can place you at the top of the claims pyramid.
Unfortunately there is not a crystal ball to guide you through the maze of credit decisions. However, using the tools that are available can be a great start. Do not leave yourself unprotected by not taking the proper steps. The effect of leaving your accounts receivable unprotected can be disastrous. The effect of securing your accounts receivable is peace of mind.
Presenter and Author: Jerry Bailey, Executive Sales and Education Services Manager