Service Area: UCC Services

The Important Role of Blanket UCC Filings in the Foodservice

Posted on March 13, 2017 by - UCC Financing Statements

The Important Role of Blanket UCC Filings in the Foodservice, Beverage & Hospitality Industries

The restaurant, beverage and hospitality industries are massive. The National Restaurant Association projected the commercial restaurant services sales would reach $783 billion by the end of 2016, which is about 4% of the U.S. gross domestic product.

With a flooded market, there is variety, but there is also significant risk.

If you are supplying goods, equipment or services to the foodservice, beverage or hospitality industries, you are faced with a unique set of challenges when extending credit. The most common challenge? The high rate of company failure.

“Most restaurants fail quickly, and the seeds of their failure are planted before the restaurant even opens.” — Christine Letchinger, professor at Chicago’s Kendall College.

In The Anatomy of Restaurant Failure: Dead Man Walking, author Christine Letchinger cited studies that estimate 60% of restaurants fail within their first three years.

“Various studies estimate that among the 60% of operations that fail within the first three years, 44% failed the first year, 33% within the second year, and 23% in the third year.”

So how can you, the creditor, reduce your risk in extending credit? UCC filings. We’ve previously discussed how consignment filings can reduce risk to scan-based trading and today we are going to discuss blanket filings.

Blanket (aka Basic) UCC Filing

A Blanket Filing is a security interest in all assets of your customer on a non-priority basis, eliminating potential conflict with your customer’s primary lender. (Think of it as a blanket that lays down over all customer assets.)

The priority or payout in a bankruptcy is determined by the filing date (first in time, first in right). For example, if ABC Co. files the first UCC and XYZ Co. files the second UCC, ABC Co. will be paid first and XYZ Co. will be paid second.

Blanket filings are popular among those supplying to restaurants, as they are most commonly used in situations when your customer “consumes” or otherwise does not stock your goods.

Here’s an example of a new restaurateur, whose creditors secured via Blanket Filings, and the fate of his secured & unsecured creditors in a Chapter 7 bankruptcy.

Chef Charles is going to start a restaurant. He’s worked in the restaurant industry his entire working life and thinks “OK, I’m pretty good at this. I know how to run a restaurant, and how to make foods that are delicious and attractive, plus I can create an environment where people will want to dine.”

Chef Charles creates his business plan and determines he needs start-up capital, so he goes to the bank with his business plan and a request for $20,000. The bank reviews his plan and decides to lend the $20,000 to Chef Charles, and the bank perfects their security interest.

Chef Charles is ready to start. Various vendors will solicit Chef Charles regarding different materials and services he may need, and each vendor that successfully sells their goods to Chef Charles will need to decide whether they are going to sell on open credit terms, via credit card or cash in advance. If the vendor decides to sell on open terms, the vendor will need to further decide whether they will sell on a secured or unsecured basis.

Chef Charles has selected his vendors. Of his numerous vendors, four of them have taken a security interest and filed a UCC.

  • Secured Creditor 1: $10,000
  • Secured Creditor 2: $10,000
  • Secured Creditor 3: $5,000
  • Secured Creditor 4: $10,000

We’ll assume the remaining vendors have opted to sell on unsecured open terms. Business is underway! At any given time, Chef Charles has $61,000 in assets. Unfortunately, 3 years later Chef Charles becomes a statistic, when his business fails and he files for Chapter 7 bankruptcy protection. What happens to his creditors? It’s simple, Chef Charles’s assets will be liquidated and creditors will be paid by priority. Creditor priority is based on first in time, first in right.

Here are the Basics

The bankruptcy trustee is going to liquidate Chef Charles’ $61,000 in assets and begin paying his creditors.

The bank was the first party to lend and take a secured interest, so they will be the first paid, then the other vendors who filed UCCs will be paid in the order in which they secured their interest.

Total Assets $61,000.00
Bank is paid ($20,000.00)
Secured Creditor 1 is paid ($10,000.00)
Secured Creditor 2 is paid ($10,000.00)
Secured Creditor 3 is paid ($5,000.00)
Secured Creditor 4 is paid ($10,000.00)
Total Available for Unsecured Creditors $6,000.00

Once the secured creditors have been paid, there is $6,000 remaining, and that $6,000 will be disbursed on a pro-rata basis to all general unsecured creditors.

In this case, Chef Charles has 100 unsecured creditors that were each owed $1,000. Each of these creditors will receive $60 (based on the pro-rata disbursement) or 6 cents on the dollar.

Customer Default & Your UCC Filing

If your customer has defaulted on payment(s) and you have filed a Blanket UCC, you could place the outstanding debt with a collection agency or file suit against your debtor.

  • If your customer filed Chapter 7, File your secured proof of claim.
  • If your customer filed Chapter 11, File a secured proof of claim and monitor for distribution.

With 60% of restaurants failing in the first three years, and little surviving beyond five years, are you willing to take the risk of losing money?

If you are not securing your rights through UCC filings, you are taking an unnecessary risk and allowing your company to be competitively disadvantaged.

Alternative A in Action and Your UCC Filings

Posted on March 6, 2017 by - UCC Financing Statements

Alternative A in Action: The Debtor’s Name as it Appears on the Unexpired Driver’s License — Even if it’s Incorrect

In a recent court decision, one creditor’s security interest was eliminated because they spelled the individual debtor’s name correctly.

Yes, I said “correctly.” Because, in this case, “correctly” and “as the name appears on the driver’s license in compliance with § 9-503(a)” resulted in two different spellings of the debtor’s name.

Case Background

In 2014 and 2015, MainSource Bank (MainSource) entered into two different loan agreements with the debtor (specific to this case is debtor Ronald Nay). With each loan agreement, there was a signed security agreement and MainSource filed the appropriate UCC Financing Statements toperfect their security interest.

At the end of 2015, LEAF Capital Funding, LLC (LEAF), executed an agreement with one of the debtors, Ronald Nay, for the purchase of two pieces of equipment. With the finance agreement, LEAF also obtained a signed security agreement and subsequently filed a UCC Financing Statement to perfect their security interest.

In May 2016, the Nays filed for bankruptcy protection. As a presumed secured creditor, LEAF filed their proof of claim in September 2016, and soon after, MainSource filed a complaint arguing that LEAF did not have a perfected security interest.

The court agreed with MainSource, leaving LEAF with an unperfected security interest.

The Difference Between Two Financing Statements

MainSource’s UCC identifies the debtor as “Ronald Markt Nay” (emphasis added) which is not how Ronald spells his middle name, it is however, the way Ronald’s name appears on his driver’s license.

LEAF’s UCC identifies the debtor as “Ronald Mark Nay” (emphasis added) which is the correct spelling of Ronald’s middle name, but not the spelling as it appears on his driver’s license.

Why is LEAF’s UCC unperfected? After all, LEAF correctly spelled Ronald Nay’s middle name!

Because, to be compliant with Alternative A under § 9-503(a), the debtor’s name must appear on the UCC Financing Statement exactly as it appears on the unexpired driver’s license.

The Amendments & The Alternatives

July 1, 2013. A day that will live in infamy! That is, if you are familiar with Article 9 of the Uniform Commercial Code, as it is the date the 2010 Amendments went into effect.

One issue addressed in the 2010 Amendments was how to determine the debtor’s name as it should appear on the UCC Financing Statement.

In compliance with § 9-503(a), when the debtor is a registered organization, creditors should rely on the information found on the public organic record.

If the debtor is an individual, creditors must first look to the state’s legislation.  With the 2010 Amendments, each state had to decide whether they would implement “Alternative A” or “Alternative B.”

  • Alternative A: if the debtor holds an unexpired driver’s license, the Financing Statement must list the debtor’s name as it appears on the unexpired driver’s license. (If the debtor does not have a driver’s license, the Financing Statement should list the “individual name” of the debtor or the debtor’s surname and first personal name.)
  • Alternative B: the debtor’s driver’s license name, the debtor’s actual name or the debtor’s surname and first personal name may be used on the Financing Statement.

Most states opted to enact Alternative A, including Indiana — the state where Nay is located and the Financing Statements are filed.

Seriously Misleading or Minor Error

In its decision, the court admitted the spelling error on LEAF’s UCC was minor, and per Indiana Code § 26-1-9.1-506(a) “A financing statement substantially satisfying the requirements…is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.”

But, per code § 26-1-9.1-506(b), “Except as otherwise provided in subsection (c), a financing statement that fails sufficiently to provide the name of the debtor in accordance with IC 26-1-9.1-503(a) is seriously misleading.” So, we must circle back to IC 26-1-9.1-503(a), which is Alternative A, and is, in fact, the technicality that invalidated LEAF’s security interest.

“§ 26-1-9.1-503(a)(4) … if the debtor is an individual to whom this state has issued a driver’s license or an identification card for nondrivers under IC 9-24-16 that has not expired, only if the financing statement provides the name of the individual which is indicated on the driver’s license or identification card.”

The Court

As you may know, the UCC is considered seriously misleading, thus invalid, if a search of the debtor’s name does not reveal the UCC. The court held that LEAF’s UCC would not have been uncovered via a search using standard search logic.

“In this case, considering the plain language of the statute, given its ordinary meaning, and reading section 503 together with section 506, it seems clear that the “only” correct name of the Debtor under section 503 is the name on his Indiana driver’s license, Ronald Markt Nay. Section 506 provides relief to LEAF only in as much as a search of the debtor’s “correct” name (as established by section 503), using standardized search logic, would reveal its financing statement. It does not.”

Parting Thoughts

At face value, this opinion seems quite extreme. But it is a clear reminder that compliance is king. Use caution when identifying your customer on the UCC filing, whether it is an organization or an individual. If it’s an individual, carefully list their name exactly as it appears on their unexpired driver’s license.

If you have questions regarding this recent court decision or UCC filings, please contact NCS today!

Consignment UCC Filings in the Foodservice Industry

Posted on February 20, 2017 by - UCC Financing Statements

Consignment UCC Filings and Open Credit in the Foodservice, Beverage & Hospitality Industries

Statistic Brain reports that only 47% of retail entities are still in business after their 4th year. And grocery stores sit in the #3 spot of businesses with the worst rate of success after a 5th year. This high rate of failure is driven by many factors including poor business planning, poor credit granting practices, inadequate inventory and unfamiliarity with suppliers.

Because the risk of failure is so prevalent in the food, beverage and hospitality industries, creditors must actively and aggressively implement UCC filings for security. Creditors often include security language within their credit applications and establish standard business practices by always obtaining a signed Security Agreement, because UCCs work.

UCCs are a basic risk mitigation tool; they are a low-cost solution, requiring nothing more than a signature from the customer. Let’s take a look at how consignment filings can reduce your risk in scan-based trading.

Consignment Filings — Scan-Based Trading

There are two type of consignment:

  • “Sale or Return” where goods are delivered to the consignee primarily for retail purposes.  In this type of consignment, title passes to the consignee upon delivery, but the consignee remains contractually obligated to return any unused goods.
  • “True Consignment” where the goods are delivered to be primarily used by the consignee, but consignor retains title to the goods.  Consignee may either be pulling goods from stock on an as needed basis, or might be testing out goods on a trial basis to determine the necessity of the goods.

How Does a True Consignment Work?

The consignor/owner retains title to the delivered goods, while the consignee/recipient holds and attempts to sell the goods. If/When those goods are sold, the owner’s security attaches to the proceeds of the sale. If the consignee is unable to sell the goods, they can simply return the goods to the owner.

This falls right in to scan-based trading. Grocery stores are a great example of scan-based trading.  A creditor provides a grocery store with an inventory of goods. Until those goods are scanned at the counter, the title to those goods remains with the creditor. Once the goods have been scanned/sold, the creditor records the sale and the sold goods leave the inventory.

But, to maintain title to those goods, you must perfect a security interest via a UCC filing. NCS’ Jerry Bailey comments on how Article 9 changed consignment sales.

“Article 9 changed consignments and it basically said, ‘look, that stuff belongs to you, you and your debtor both know that, but nobody else does because there’s no public registration, and that’s not right.’ They call these secret liens because the goods belong to you, but nobody else knows that.

Potential lenders should be able to do a search and see what’s there and who it belongs to. So, they said from now on if you’re selling under consignment, there should be a public registration.

There had been instances where banks came in to a business, saw all the inventory and decided they would factor this inventory into their risk analysis and lend based on the inclusion of that inventory. Unfortunately, they didn’t realize that of the $1 million worth of inventory they looked at, $300,000 of it was consigned goods and belonged to creditors, so it shouldn’t have been factored into the lending.”

Keep in mind, consignment filings may not be the best fit for your business. Creditors supplying to food, beverage and hospitality industries also use Blanket Filings, PMSI in Inventory or Equipment Filings and even Fixture Filings. We’ll discuss the applicability of these other filing types in upcoming blog posts.

Have questions? NCS can help – contact us today!

What You Should Know Before Filing Your Own UCC in Florida

Posted on November 1, 2016 by - UCC Financing Statements

What You Should Know Before Filing Your Own UCC Financing Statements in Florida

You have taken the meticulous steps to properly perfect your security interest. You may have spent countless frustrating hours going back and forth with your legal department to agree on the security language. You have created a collateral description that others have only dreamed about. You have overcome obstacles with your sales team and even with your customers. But now you are here — you have conquered the proverbial mountain.

You’ve done it all & you are ready to secure your right to payment!

And just like that, you are tumbling back down the mountain, because someone missed a keystroke when indexing your filing… poof… your security interest is gone.

OK, perhaps I’m a smidge dramatic… but, the devastation that accompanies an invalid security interest is real.

“I can do it!” Just because you can, doesn’t mean you should.

When we discuss the UCC filing process with creditors, we frequently hear “Eh, it’s easy, we just do it ourselves.” Recording a Financing Statement may appear to be a simple task, but appearances can be deceiving.

We’ve said it before & I’ll say it again, UCC filings are more than a form fill document! A properly perfected security interest requires a detailed and accurate security agreement and a carefully completed, reviewed and indexed Financing Statement.

There are 50 states and over 3000 counties in the United States, which means there are hundreds of different processes for recording Financing Statements and fixture filings. Our UCC experts are familiar with all recording offices & processes — after all, they are experts. In some states, the Secretary of State’s office is responsible for the recording of the UCC, while in others the state may hire a third party to process the filings.

Recently, our NCS experts conducted an audit of UCC filings filed by a state-hired third party in sunny Florida. The results were unfortunate.

What Our Experts Were Looking For – Errors

The state of Florida uses a private company to manage their UCC filings. Unfortunately, this third party Florida has hired does not utilize electronic data entry.

Most Secretary of State offices operate an online system and although each system is different, they are online nonetheless. However, Florida didn’t get the memo. No electronic data entry means that every filing has to be faxed and/or physically mailed to this third party and the staff of this third party will manually index the info into their system.

It should come as no surprise, but this third party makes mistakes and they don’t subsequently review their own data entry, so the errors can go unnoticed quite easily.

As you know, even simple errors in UCC Financing Statements can quickly invalidate a security interest. (Remember the ‘falling down the mountain’ analogy above?) Companies operate on margins of error, and those margins are typically low, so how does this third party stack up?

Our UCC experts tracked this third party’s errors in July & August, here are the results:

  • July: 13% error rate
  • August: 7.5% error rate

In the month of July, out of 477 filings, 62 filings had errors, which is a 13% error rate. These aren’t minor errors. These are errors in the entity’s legal name and address — errors that would deem the filing seriously misleading.

Fortunately for our clients, part of our internal process includes reviewing every filing once it has been recorded and indexed. In the event we discover errors when we review the filings, we contact this third party and request it be corrected. The third party may be annoyed when we point out their mistakes, but we are doing our job to ensure our clients’ UCC Financing Statements are indexed correctly.

Just Because You Can, Doesn’t Mean You Should

Yes, recording a filing may seem simple, but not everything is as it seems. If you choose to file your own UCC Financing Statements, you should always review the filing once it has been recorded and indexed. Don’t ever assume that the Secretary of State, or in this case a company hired by the state, has indexed it correctly.

Have a review process in place, or better yet, rely on our experts to handle your UCC filings for you!

Credit Survival Guide: UCC Filings

Posted on October 18, 2016 by - UCC Financing Statements

Credit Survival Guide: UCC Filings

You go out on a limb and sell to a new customer. As an experienced credit professional, you aren’t worried about working with this customer because you have a UCC filing program to lower your DSO, increase your sales, and to elevate your creditor status to a secured creditor.

A couple years down the line, your customer files for bankruptcy. You think you’re in good shape because you used a UCC filing to secure your transaction.

But it turns out that your debtor’s business not only changed ownership, but changed names, without informing you. With incorrect information on your UCC filing, you are left as an unsecured creditor.

This is a very common and frustrating situation for creditors. Whether or not you’ve been burned this way before, here are a few tips to avoid collecting pennies on the dollar or, even worse, a write-off.

Where do you start?

Tip #72: Know Your Debtor

You have your Security Agreement/Credit Application signed by your customer (the Debtor) and are ready to file your UCC-1. Before you file, make sure the customer’s legal name is listed on your Agreement. Many times, Debtors will list their DBA names on the Agreement, which could be a problem in the event of a bankruptcy.

For registered entities, make sure the legal name as shown on their Articles of Incorporation is listed on the signed Agreement. If filing on a Sole Proprietor, the Agreement should show the individual’s full legal name, as reflected on their unexpired driver’s license.

You can also list a DBA name, but it isn’t required for the UCC filing. If filing on a partnership, make sure that both partners have signed the Agreement and their full legal names are reflected as well. The UCC-1 is a public record of your signed Agreement so the information on both documents should match and reflect the correct information for your Debtor.

My UCC is filed and I made sure all of my debtor information is accurate. I’m good to go, right? Not quite.

Tip #62: Reflective Searches Can Keep You Ahead of the Game

Often times, we take for granted when a UCC is instantly recorded online that all is well. BUT how do you know your filing will actually show up on a UCC-11 search? Each secretary of state office has their own software to house UCC filings that sometimes can be unreliable or outdated.

The only way to determine if your UCC filing is indexed correctly is to conduct a Reflective Search. If that Reflective Search does not display the filing, you have a problem.

In addition to making sure your UCC filing is correctly indexed, monitor your debtor for any changes to avoid an amendment of your filing.

Tip #35: Monitor for Name Changes

Are you aware that if your customer changes their name, you must amend your UCC Filing or your security is jeopardized? Section 9-507 (c) of the UCC tells us that we have 4 months to amend our UCC filing when the debtor name changes. If not, the UCC filing is not effective to perfect a security interest in collateral acquired by the debtor before or within four months after the change.

Make sure your Security Agreement requires the debtor to advise you of any changes to name, address, or organizational structure. It is the secured party’s responsibility to ensure the UCC filing is updated and contains the correct information. Best practice is to monitor your customer for change.

Takeaways

Filling inaccuracies and unreported changes to name, address, or organizational structure can jeopardize the security of your UCC filing. The experts at NCS are well versed in every state’s search logic and can alert you to indexing errors, making sure your filing is accurate.

Ask about NCS Corporate Monitoring Service! Corporate Monitoring provides an email notification to alert you of an entity name or status change and NCS will recommend what you need to do to retain your secured position.

Today’s 3-in-3 Topic is: UCC Filings and Consignment

Posted on September 13, 2016 by - UCC Financing Statements

Today’s 3-in-3 Topic is: UCC Filings and Selling on Consignment

Today’s 3-in-3 features UCC Specialist, Elizabeth Hunt. Read on to learn more about consignments and how UCC filings can secure consignments and reduce your risk.

“What is a consignment?”

Elizabeth: A consignment is when the owner or the consignor retains title to the consigned goods that are delivered to the consignee.  The consignee will then hold the goods for sale or for use.  Once those goods are sold, the consignor’s rights then attach to the proceeds.

“Does consignment carry risk?”

Elizabeth: Yes, consignment does carry risk, specifically if the consignor doesn’t take the necessary steps to protect their ownership of their goods. Without the additional security of a UCC Financing Statement, the consigner could lose their rights to their goods and the proceeds.

“How can a consignor protect the consigned goods & what steps should they take?”

Elizabeth: Consignors can protect their goods by complying with Article 9 of the Uniform Commercial Code and filing a UCC-1.

If you are consigning goods, follow these important steps:

  • First, you should have a consignment agreement signed by both you (the consignor) and your customer (the consignee). This agreement should include the terms and conditions of the consignment, a clause granting the security interest, and a detailed description of your consigned goods.
  • Second, you need to make the agreement public record by filing the UCC-1 Financing Statement in the consignee’s state of organization.
  • Third, you should conduct a UCC search and send authenticated notification letters to the prior secured parties. This notification informs prior secured parties that you have, or expect to acquire, a Purchase Money Security Interest in your consigned goods.

Once these steps have been completed, the consigned goods are protected against competing claims. It is important you complete this process prior to releasing your goods, because anything delivered prior to perfection of your security interest may not be secured from prior secured creditors.

3-in-3 Takeaway

The takeaway from this segment is that if you are consigning product, make sure you file a UCC. When filing the UCC, you should search and notify all other creditors of the goods located at your customer’s business that you hold title to those goods.

Perfection is key; make sure the process is complete prior to delivering your goods so you’re secured moving forward.

What is the Right UCC Filing?

Posted on August 23, 2016 by - UCC Financing Statements

Today’s 3-in-3 Topic is: What is the Right UCC Filing?

Today’s 3-in-3 features Cindy Bordelon, Manager of our UCC Services, and her recommendations for determining the appropriate UCC filing.

Question 1:  How do I figure out what filing is needed for me to protect myself?

Cindy: The best way to answer your question is with some questions.  What are you selling, what is your customer doing with the goods and what do you want to secure?   The type of transaction that is taking place and what you’re trying to secure will help to determine the type of filing you need.

Question 2: In these 2 examples, what would be the appropriate filing for me?

Example 1: Let’s say you’re a manufacturer and are selling product to someone that’s going to be stocking it, like a stocking distributor. And they’re going to be holding the inventory for 60 or 90 days and you would like to take a secured interest or a priority interest in your inventory, maybe the proceeds and accounts and accounts receivable.

Cindy: Well this would be a prime example of a Purchase Money Security Interest in inventory, — also known as a PMSI in inventory.  So you’re looking to secure your inventory, take priority security in the inventory so you’ll be able to repossess it in the case of a default or bankruptcy, and also — depending on certain circumstances — you might want to try to secure your accounts, accounts receivable and the proceeds.

Example 2: What if you are the manufacturer of a piece of equipment that your customer is going to use in the course of their business? In this example, what would be the appropriate filing?

Cindy: This would be an equipment filing because they’re actually using the piece of equipment in the course of their business so you want to secure that piece of equipment since they’re not restocking or reselling anything.

Question 3:  When would a blanket UCC apply?

Cindy: When you’re not looking to repossess anything and are just concerned about taking a secured interest in the accounts, accounts receivable and the general intangibles. So it’s kind of like laying a blanket over general items and nothing specific.

3-in-3 Takeaways

  • Use a blanket UCC filing when you’re trying to take a secured interest in the personal property of your debtor or their intangibles.
  • Use a PMSI in equipment filing when you want to take a priority interest in your equipment that your customers are using in the course of their business.
  • Use a PMSI in inventory filing when you want to take a secured interest in your inventory accounts and accounts receivable just in case of default or bankruptcy.

The Tale of Two Rivals: Sales and Credit

Posted on June 24, 2016 by - In Other Commercial Credit News

The Tale of Two Rivals: Sales & Credit

If you are a credit professional, you have likely worked with sales folks who can’t seem to get you the information you need – despite how loudly and persistently you ask.

If you are a sales professional, you have likely worked with credit folks who seem to never have enough details. No matter how much you give, they are always harping for better information.

When the credit department wants to implement a new process, a mechanic’s lien process, for example, there is almost always one stumbling block: “How am I going to get sales on board with this?” (Sales, I’m sorry, but I don’t know how you feel, as I, too, am a credit professional and can sympathize with credit departments a bit more easily.)

This week, we shared an article by Walter Cupkovic and Jack Parrino (“authors”), Construction Due Diligence: Sooner is Always Better than Later. This article resonated with me for two reasons, the first reason comes in the first sentence of the second paragraph.

“When a contractor, subcontractor, or material supplier ‘sells’ a job, it is selling three things — ‘labor, materials, and credit.’”

YES! It’s brilliant and exactly how it works (or should work) in the construction industry. It’s not just furnishing materials and labor, and it’s not just extending credit. It’s both–working as a team.

Next, the authors acknowledge what I consider the second most resonant point of the article — that even a good customer can’t guarantee timely payment on a construction project.

“While credit due diligence is an important factor, there is no guarantee that a particular construction project will be successful or that otherwise having a ’good customer will’ result in payment in full. Let’s face it, contractors, subcontractors, and material suppliers sell to and/or work with many qualified contractors and owners but still find themselves in the middle of a troubled project, whether as a result of lack of additional financing to complete, a bankruptcy within the tier of contractors, or some other circumstance.”

Again, may I shout “YES!”?

Determining the credit worthiness of your customer is more than bank statements and credit reports. Credit worthiness is not simply concluding, “Well, they’ve been a good customer for over 30 years.”

Determining true credit worthiness is about understanding the risks associated with a particular project and that lie within the contractual chain; it’s about knowing what monies may be tied up in other projects throughout the state and country.

This is why additional tools like LienFinder, Bankruptcy Monitoring & Corporate Monitoring, are so incredibly valuable! A resource like LienFinder can provide you with a broader picture of the parties within your ladder of supply.

It’s easier for me to show you the value of this tool through an actual example pulled from LienFinder for one of our clients.

Alert

Warning: Since January, Classic Homes is the owner and/or GC on mechanic’s lien filings with claims totaling $661,767.

NCS Recommendation: You currently have outstanding claims of $462,185.70 on 6 projects that Classic Homes is a part of (Classic is listed as Owner and/or GC). It does not appear the liens are filed on any projects you are directly supplying to, however, keep a close eye on current projects & any project going forward. Ensure your customer continues to pay you timely and in the event payment stalls, proceed with the filing of a mechanic’s lien.

This matters! We know an ol’ saying which seems to thrive in the construction industry: robbing Peter to pay Paul. It is quite possible that this NCS customer will never be impacted by the information above, but if history is any indication of what’s to come…you can never have too much information.

The mechanic’s lien process is an awesome security afforded to those furnishing to construction projects. Just remember, mechanic’s liens aren’t reported to credit bureaus and mechanic’s liens aren’t reported to financial institutions. The credit worthiness of your customer may appear immaculate, per the credit report you pulled–but what happens when hundreds of thousands of dollars are tied up in ongoing projects?