eNews October 18, 2018

Building a Championship Credit Department

The ingredients for building a top-tier credit department are similar to that of a sports franchise. In the sporting world, there are owners, general managers, operation executives, coaches, assistant coaches, athletes, trainers, etc. All the moving parts and personnel are there to make sure the team is built or structured to win a championship.

The same can be said for business credit departments, however, going by different titles. Rather than winning a championship, credit department goals include managing customer risk and collecting accounts receivable. Being on the same page from team owner to player or chief financial officer to assistant credit analyst is the top priority. This is why the structure of the organization is so important.

“We want one unified process in smaller credit departments,” said Pam Krank, president with advisory firm The Credit Department, in a recent NACM webinar on the topic. How would a credit department of three work smoothly with two or more different ways of doing something? This is similar to a head coach and the assistants running different plays at the same time: Doesn’t work.

Generally, the first way to know if there are problems within a credit department is by observing. “You can know there’s a problem right away when people working on spreadsheets have limited database abilities,” Krank noted. “The software isn’t capable of managing an active asset like accounts receivable; there are limitations [of technology and accounting software].”

Traditionally, years ago, when Krank first started in the industry, credit managers were hired with similar skill sets. Businesses hired the same type of person—good with collections and customer service. The use of generalists is still common, hiring someone to do a little of everything, yet this can cause a loss of focus on what is important. “It’s hard to stay focused on risk for credit managers in smaller firms. It’s important to know who your top risk customers are.”

The problem of inconsistent processes leads to many issues, mainly that people will create their own, making it harder during the onboarding process. Unfortunately, the exposure of the credit department can often times be limited despite the department managing one of the business’ top assets. It is important for outsiders to know “accounts receivable is not an asset like a building. It’s a building on fire, and you don’t know where the fire is because you don’t have all the right data and [customer] information,” explained Krank.

Customer information is one of several items needed for credit departments to do their job. It is one of the major aspects involved in credit scoring. The data used includes public records and trade information. Credit scoring allows for consistent decisions within the department, an efficient use of resources, the ability to track and measure scores over time and customer-to-customer comparisons.

It is important to not waste time as a credit department. Departments need more sophistication, which is why Krank said she can spot problems if they aren’t using technologies such as a database. Not all portfolios are the same. Some have few customers with big balances, while others are the exact opposite. “Studying processes is so important,” she added. “There is so much redundancy, wasting time not adding value.”

Make sure there is an appropriate resource-to-asset balance. The larger the credit line the more credit expertise is needed, while the number of past due or slow paying accounts is directly correlated to the amount of collection technology/automation needed.

Not all collection strategies are equal. In small companies, “remember the rules of credit. The lower the margin—your company’s profit margin—the faster, more aggressive the collection activity needs to be.” The industry, size of the company and size of the account determine the potential collection strategy as well.

The idea is to minimize the number of people in the process to avoid redundancy, said Krank. Being productive is a weakness of a lot of companies; “a lot of credit departments have no idea how many accounts are touched each day.”

Productivity can be measured many different ways in many different timetables. In sports, it’s winning the game today, making the postseason or even winning a championship. For credit departments, it’s analyzing a certain number of accounts per day or making so many collection calls per day.

Krank concluded with these thoughts: Make sure the current structure is the right fit and prepare the credit department for growth.

—Michael Miller, managing editor


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You Have 90 Days From Your Last Date of Work to File a Mechanic’s Lien in Connecticut, Part II

What Does “Last Date of Work” Mean? In order to be valid in Connecticut, a mechanic’s lien must be filed within 90 days of the lienor’s last date of work on a construction project. Any lien that is filed after that time period is invalid and is subject to discharge by the court. It is therefore critically important for anyone who provides labor, materials or services on lienable projects in the state to understand what is meant by the “last date of work.” Does the last date of work include warranty work? Punch list work? Repair work performed at the owner’s request? Work performed offsite? Trivial work performed at the contractor’s initiative for the purpose of extending the limitation period? Extra work that was not agreed to by the project owner? What happens when the 90th day falls on a weekend or a holiday?

The last date of work includes punch list work and work performed offsite, but not warranty work. The last date of work typically includes all work performed prior to the completion of the contract, including so-called “punch list work.” The last date of work may also include work performed offsite at the lienor’s home plant, such as preparation of as-built drawings, as long as that work is part of the contract requirements. Warranty work, however, generally cannot be used to calculate the beginning of the 90-day limitation period.

The last date of work may not include change order work that has not yet been approved by the property owner. In order for a mechanic’s lien to be valid, the owner of the property subject to the lien must consent to work being performed on the property. The consent required from the owner is more than the mere granting of permission for work to be conducted or the mere knowledge that work has been performed. There must be an agreement that the owner will or may be liable for labor or materials. With regard to work that is outside the scope of the original contract, most construction contracts require that the owner sign a written change order indicating his or her consent to the extra work. Thus, if the only work performed by a contractor within the preceding 90 days is extra work requiring a written change order, and the contractor lacks a signed change order from the owner, the contractor’s lien rights have likely expired. It is therefore critical for contractors to obtain signed change orders in order to prove owner consent and extend the lien period.

If the Land Records are closed on the 90th day, most courts will allow a lien to be filed on the first day that the office reopens. Some Connecticut courts have held that when a town clerk’s office is closed on the 90th day, a mechanic’s lien may be filed on the first day that the office is open following the 90th day. However, this is not a universally accepted rule, so a potential lienor should avoid waiting until the very last day to file a mechanic’s lien.

The bottom line: Keep track of when you last performed work and don’t wait too long to file a lien. A mechanic’s lien is a very effective remedy for subcontractors and suppliers who have not been paid for their work on private construction projects. Given the limited time period in which a lien may be filed, it is imperative that potential lienors be aware of their last date of work on lienable projects and not wait until it is too late to file a lien.

Reprinted with permission. Part I of this article appeared in the Oct. 11 eNews.

If you have any questions about the time period for filing a mechanic’s lien, or would like to file a lien to secure a claim for unpaid work, please call MKRB at 860-522-1243.

Paul R. Fitzgerald of Michelson, Kane, Royster & Barger PC in Hartford, Connecticut, practices in the areas of construction and surety law, where he handles a broad range of construction-related matters on behalf of subcontractors, contractors, public and private owners, and sureties. Paul has extensive experience litigating cases in state and federal court, and has resolved many disputes in arbitration and mediation. Paul frequently drafts, reviews and negotiates construction contracts.


Credit Congress

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The National Association of Credit Management will hold its 123rd Credit Congress & Exposition at the brand new Gaylord Rockies in Aurora, Colorado, from May 19-22, 2019. This is a one of a kind opportunity for you and more than a thousand business credit and financial management professionals to gather and share experiences, learn from experts and one another and remember why what you do matters!

Please visit creditcongress.nacm.org for more information and to register. We will continue to update the site with additional information on sessions, speakers, exhibitors and much more. 

Register by Dec. 7 to take advantage of the SPECIAL savings! Team discounts (5 or more) are also available for larger member companies.

California Bill Aims to Ease Small Business Lending

New legislation in California will help small- to medium-sized businesses (SMBs) better manage financing from borrowers. Senate Bill 1235 (SB 1235), which will take effect Jan. 1, 2019, expands the Truth in Lending Act (TILA) to business credit, requiring full transparency by commercial finance companies that will benefit SMBs and their credit lines.

Under SB 1235, online business lenders in California will now be required to display the total amount of funds provided to an SMB; the dollar cost for said financing; the term or estimated term; the method, frequency and amount of payments; a description of prepayment policies; and the total cost of financing at an annual rate. SMBs do not usually have access to this information; bigger corporations have more access to resources and lending information, giving them an advantage when looking to work with credit managers.

“This law will allow small businesses to communicate and interact with their credit managers on a more even playing field,” said Scott Blakeley, Esq., of Blakeley LLP. “Namely, the new legislation can show business owners the true costs of a loan before they sign up for one and agree to any terms.”

Several studies have revealed owners of SMBs do not know exactly how much it costs to keep their business running. Beyond not understanding the numbers that go into a business, owners of SMBs may even be exposed to predatory practices from lenders. Without understanding who they borrow from and how they can borrow, SMBs are put at risk each time their owners borrow. This then strains SMBs as they look to buy from suppliers and work with credit managers.

“Often times, small businesses have the most difficulty in obtaining financing. Because of that we see a higher cost tied to that form of financing, and that’s not just the risk that lenders perceive these small- to mid-sized businesses carrying, but also that comes through in the transparency issues,” Blakeley said. “Does the lack of transparency to this segment of the borrowing market result in those borrowers having to pay more? Or at least not anticipate the expense?”

SB 1235 will serve as an amendment to the federal TILA, which was created to protect consumers from the similar apprehensions SMBs face. According to the Office of the Comptroller of Currency, TILA “Protects you against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans.” Nowhere in the federal law does this extend beyond consumers and into SMBs.

Blakeley said this law extends to credit managers working with SMBs in California, even if the credit managers are not actually located in California. Since the SMBs are protected by SB 1235, they must receive transparent lending information regardless of where the lenders are located.

California, in general, has been very progressive with passing business laws. California was the first state to pass privacy legislation that protected electronic payment information creditors handled, which has now been adopted in other states. The rest of the country, however, may not be so hasty to adopt this California law. The state has 3.8 million SMBs, a clear outlier when compared to the rest of the U.S., and therefore, California has a stronger need for regulation within SMBs. Over time, the new law has the potential to alter SMB borrowing and the way SMBs interact with credit managers.

—Christie Citranglo, editorial associate


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Securing Mechanic’s Lien Rights on Mandelbaum’s ‘The Fifth’ Tower

Contractors hired to work on Mandelbaum Investment’s new tower—“The Fifth”—need to be familiar with Iowa’s mechanic’s lien law if they want to protect their mechanic’s lien rights. The Des Moines Register reports construction may begin soon on the proposed 33 story tower at 5th Avenue between Walnut Street and Court Avenue. Many contractors will be involved in construction, and contractors will need to be careful to ensure they protect their mechanic’s lien rights.

This blog recently reviewed a case where a contractor lost its mechanic’s lien rights on a commercial construction project because the contractor did not provide the proper notice to protect those rights. In the case, a contractor was a subcontractor of a subcontractor (a “sub-subcontractor”). The sub-subcontractor was owed approximately $100,000, and could not depend on mechanic’s lien rights to guarantee payment, because it didn’t send a notice to the project’s general contractor.

Under Iowa law, before a sub-subcontractor can file a mechanic’s lien, it has to provide the general contractor, or owner-builder, with written notice within 30 days of the sub-subcontractor commencing work on the project. The notice must include the name, mailing address and telephone number of the sub-subcontractor, and the name of the subcontractor to whom the sub-subcontractor is providing labor or materials.

The problem for many contractors is it can often be difficult to figure out who the general contractor or owner-builder of the project is. Construction contracts often don’t help, because they often refer to a subcontractor as a “general contractor” even though they are really a subcontractor. Under Iowa law, the only contractors who are “general contractors” are those who have a contract directly with the property owner. “Owner-builders” are defined as the owners of the property who are also serving as the general contractor and intend to sell the property. “Subcontractors” are defined as anyone who has a contract with a general contractor or owner-builder. Because of these definitions, contractors who are hired to work on a project like The Fifth have to ask a lot of questions to determine who the true general contractor is. Once they figure that out, contractors should provide the general contractor written notice.

The Fifth Tower will be a great opportunity for contractors. However, contractors should also be diligent about protecting their mechanic’s lien rights, so they are protected if a dispute over payment ever arises. Unless a contractor has a contract directly with the property owner, they are a subcontractor. Anyone who contracts with a subcontractor is a sub-subcontractor. Contractors should spend time to determine where they fit in the project’s hierarchy so they can take the necessary steps to protect their mechanic’s lien rights.

Reprinted with permission.

John Lande is an attorney with Dickinson Mackaman Tyler & Hagen, PC, and has experience dealing with a variety of legal topics including creditors’ rights in bankruptcy, business torts, agency regulatory actions, trademark disputes, environmental law, property taxation, municipal law, insurance and bond coverage disputes, mechanic’s liens and construction disputes, farm disputes, contract disputes and business dissolutions.


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