How to Secure Your Accounts Receivable and Keep Your Customers
Category: UCC | Posted on 03/19/2007
It happens every day. Credit managers face a conundrum: how to protect your accounts receivable without alienating your customers. Whether dealing with commercial sales or protracted construction projects, the laws are specific about the steps required to ensure payment...but credit managers often fear sending the wrong message to their customers by taking those very steps. After all, won't a general contractor interpret a notice sent to the owner as an insinuation of a possible lack of pay? Won't a customer interpret the filing of a UCC as a comment upon their creditworthiness?
The simple answer is this: they shouldn't. The real world answer is this: they might, if you don't manage the process carefully -- and that reaction may be amplified by established customers.
All construction project contracting should begin with a notice to owner. The purpose of a notice is two-fold. First, it is statutorily required in most states, as the first step in securing your lien rights. Second, it is a way to enlist the owner's help to ensure your payment. In effect, you're announcing that you're here, you're in the process, and you expect to get paid. The fear is that your customer will take it personally. While you should be careful in wording a notice -- in most states the verbiage required is very particular -- you can still include language that softens the impact of a notice without invalidating your future rights. It'€™s a good idea for your notice to include language such as '€œNo lien has been filed against the property. This is merely a notice of lien rights. This notice should not reflect upon the creditworthiness of any party, nor does it indicate any expected problems in the payment of any invoices'.
In a commercial sales environment, to one degree or another, you are always at risk of your customer defaulting. Should that happen before you are paid for the goods or services you provided, you will be placed into a pyramid of payees in which the secured creditors at the top of the pyramid get paid first. How do you secure your position near the top of that pyramid?
The Uniform Commercial Code allows you to notify other creditors about a debtor's assets used as collateral, by filing a public notice. Filing the proper UCC documents makes you a secured creditor, and places you near the top of the claims pyramid. Filing a UCC puts you in the best possible position to get paid.
A UCC filing does not imply anything about your customer's ability or inclination to pay. Rather, it is an inexpensive, simple and effective way to protect your accounts receivable in the event of a customer default. In other words, it will not affect your customer in any way, and therefore will not be viewed negatively.
Choose the method of softening that you wish, but don't let the fear of customer reaction cause you to 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.