Mechanic’s liens vs personal guarantees: Choosing the right tool

No matter the industry or region, credit professionals share one common goal: collecting payment from customers. For some, this means establishing favorable terms and conditions. For others, it hinges on building strong customer relationships. Construction credit, however, is far more nuanced. 

Why it matters: With construction projects, additional parties and conditional clauses can cause payment delays or legal complexities that make it difficult to secure funds. Depending on the state and project type, credit professionals may choose to file a mechanic’s lien, request a personal guarantee (PG) or use both. Knowing when and how to apply these tools may determine whether you get paid—or walk away with nothing. 

Unlike general B2B credit, construction credit carries unique financial risks. Most notably, companies have a higher likelihood of failure than businesses in many other industries. “Suppliers are often faced with extending credit beyond a company’s financial capacity, suggesting they may be unable to repay their debts,” said Tom Long, CCE, credit and collections manager at Empire Pipe & Supply Co., Inc. (Birmingham, AL). “Sometimes, they may have other obligations to meet and therefore can’t pay us on time.” 

Collecting on job-specific credit can be demanding because funds are tied to project milestones. Delays are more common, which can push payment timelines back. This situation is further complicated by pay-if-paid and pay-when-paid clauses in construction contracts, which determine whether and when subcontractors get paid based on whether the general contractor (GC) has received payment from the project owner. In these situations, suppliers are typically paid last, leaving credit professionals at the end of the reimbursement chain.  

Working with mechanic’s liens 

In most states, creditors have the right to assert their lien rights on projects. For instance, the Florida mechanic’s lien statute allows contractors, subcontractors, material suppliers and service providers the ability to file mechanic’s liens in the event of non-payment. Unfortunately, in construction there are multiple reason funds don’t trickle down the ladder of supply and that warrants consistently securing lien rights.

Like many state statutes, Florida requires a preliminary notice to be served to preserve lien rights. Many state statutes require preliminary notices to be served within a certain number of days within first furnishing. Florida is unique in that the preliminary notice has to be received by the property owner within 45 days of first furnishing and that requires preliminary notices be served prior to the deadline to assure delivery by the deadline.

Banks, title companies, owners, GCs and subcontractors all have the right to send waivers of liens down the ladder of supply. It’s especially critical for material suppliers and service providers to review waivers of lien before submitting them back up the ladder of supply. For example, a lien waiver may be titled as ‘conditional’ or ‘partial’ waiver of lien. But when you read the language of the waiver it could be an ‘unconditional’ or ‘final’ waiver of lien. Florida has two types of waivers: ‘Waiver and release of lien upon progress payment’ and ‘waiver and release of lien upon final payment.’

“Whether the state requires it or not, we’ll send a preliminary notice,” said Long. “By doing so, the owner and/or the GC may have the license to request a lien waiver, which relinquishes a party’s right to claim a lien on a property or asset.” 

Working with personal guarantees 

Often included in the credit application, a personal guarantee ensures business owner or principal assumes personal responsibility for debt repayment in case the company defaults. Essentially, it makes the guarantor personally liable for the debt, allowing the creditor to pursue the guarantor’s assets if the borrower defaults.

Personal guarantees are typically used for privately owned businesses, especially ones that may not be as established or for those with inadequate credit history to qualify for loans and other credit on their own. “If something goes wrong—say there’s no money left in the project to pay us—even if the owner paid the GC and the GC paid our customer, our customer might still be unable to pay,” said Long. “Depending on the state, the owner may have no liability to us, which renders the lien worthless. If we can’t collect using lien or bond rights, we would have to sue the personal guarantor who signed the personal guarantee.” 

If the owner has limited personal assets, a personal guarantee may offer little protection compared to a mechanic’s lien. Pursuing a guarantor can get expensive due to high legal, administrative and collection costs, often outweighing potential recoveries. Additionally, requesting a PG can strain customer relationships, which is vital for maintaining long-term financial security. 

Choosing the right tool for you 

Strong customers understand that guarantees and liens are standard risk controls. When in doubt, it’s recommended to secure lien rights before asking for a personal guarantee. In some cases, creditors choose to use both methods to recover funds. “We evaluate whether the contractor is creditworthy and ask for a personal guarantee up front,” said Long. “If that customer wants to buy materials for a project, we set it up as a job account and send a preliminary notice to establish the right to claim a lien if the customer doesn’t pay. That way, we have both the personal guarantee and a potential lien against the owner’s property, and, if necessary, we can ultimately file the lien.”

The bottom line: Neither tool replaces proactive credit management. With proper training and application, credit professionals are able to minimize risk in construction projects. 

For more information regarding mechanic’s lien and bond rights, visit NACM’s Secured Transaction Services at our website or contact STS representatives Chris Ring at Chrisr@nacm.org and Jocelyn Vanlandingham at Jocelynv@nacm.org. You can also join our Construction Credit Thought Leader Forum to connect and network with others in the industry.