A Supplier’s Step-by-Step Guide to Getting Paid - Webinar

This blog has been taken from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida. In this blog, we will discuss all the steps that you need to follow in order to protect your lien and bond rights as well as all the other things you can do to secure your right to be paid.

Step 1: Credit application and credit check

The first step is the credit application and credit check.

1. Do you have a credit application?

Do you have a written credit application that outlines the terms and conditions of your engagement with a customer? If you do not, you need to find out. Sometimes for suppliers, their credit application is essentially a questionnaire. It has no terms and conditions.

2. Include terms and conditions

This is why it is absolutely critical for you to include terms and conditions such as when you expect to be paid and what the warranties are that you have with respect to the materials or rental equipment that you are furnishing. Other issues like indemnity, notice and opportunity to cure all need to be in the terms and conditions of your credit application.

3. Check credit references

Next, you need to check for credit references. Your form should ideally ask for bank references and other supply house references. For other references you can talk to contractors or owners that they have done business with. It is shocking to find out that while the questions are asked and the information is given, most supply houses do not routinely check those credit references.

You do not need to check all of them, but you at least need to check some. So, make a phone call. Most supply houses share this information very readily. With banks it is a little more complicated. Many will not respond, or they will provide a very vanilla response. But you need to do some due diligence with the credit references.

4. Get written permission and run a credit check

Of course, you should run a credit check. To do that, you need to get the debtor’s written permission so there should be another term on the credit application about getting written permission to run the credit check. You can then use that credit reference and history to make your credit decision.

Know more: 3 Things to Improve Your Credit and Collection Process

5. Search Google

It is strongly encouraged that you run the principals of the business and the business name itself, and if you happen to know the names of any prior businesses that they were affiliated with, you should run all of the names through Google. Do not just stop on the first page, you will need to go further, at least 5 to 10 pages to see what comes up.

Google has the tendency to surface a lot of information that you may not be aware of. So, you will know more about the people that you are going to do business with. Obviously if some of the names are common you may get a lot of false hits, so be careful of that. But unique names are likely to generate meaningful information.

6. Check public records

Another thing you should do is check public records. So, for example, if you are in Miami-Dade County, there are two if not three places you should check. You can do this in any county in the state of Florida. The two places you can check are the recording office in the county where you are searching. Every county in Florida has a recorder’s office. So liens, judgments, lis pendens, and those types of documents are going to be recorded in the public record.

For example, if you wanted to do a search in Dade County, you would search “Miami-Dade County public records” in Google and it will take you to the public records section so you can search by name in that county. That is one search.

The other search that you want to do is for any court records. So, you want to see if anyone is a plaintiff or defendant in any case and what those cases are about. Almost all court documents are now available online. So, not only can you find out if a case involves your debtor, but you can read the documents related to that case. The way you will find it is for example, by typing “Miami-Dade County clerk of court.” That will take you to the page and you can do that with any county.

So, these are some great ways to get information, both to find information that may not have been revealed and to verify information that was disclosed to you.

Step 2: Secure the debt

Now we will talk about how to secure your debt.

1. Credit application

By now you have the credit application which is effectively a contract between you and the debtor according to those terms and conditions. This is one way that you are going to secure it, it is effectively a contract right.

2. Personal guaranty

The next way is with a personal guaranty. That personal guarantee as the name suggests is a guarantee to secure the right that you have to be paid. So, to the extent that the debt is not paid, the individual will be obligated to pay the debt.

For example, if you do business with ABC Electrician and now, you want to secure that debt with a personal guaranty, you need to have that as part of your credit application. It is going to be a separate section where the person or persons will sign the document effectively guaranteeing the debt of the business.

Typically, it is seen as a separate section in the credit application. It is usually about a paragraph long and when it is signed, it is signed without a corporate designation. So, you do not want the personal guaranty to say something like John Smith President because as a personal guarantor, they have no title. It is signed individually.

Read more: Personal Guaranties and Other Ways to Get Paid

3. Husband and wife

Florida is a very debtor-friendly state and if you get the husband or wife by themselves to sign a personal guaranty, any property or assets held jointly by the married couple are not subject to attachment.

For example, if you get a judgment against ABC Electricians, you have a personal guaranty against the wife who is the President of the corporation. In an effort to collect that debt you get a judgment and then you find out that they have a bank account with $100,000. But the problem is that bank account is owned jointly by the husband and wife, typically via a designation called Tenants by Entirety (TBE).

As a result, even though the wife has an interest in the property, you cannot separate that interest from the husband’s interest. So, your judgment against the wife will not allow you to get that $100,000.

If that is important for you or you believe that is important for the extension of the credit, then you need to get both spouses to sign the guaranty. It is not easy, but you need to understand that that is what you need.

4. Corporate/parental guaranty

There are other guaranties you can get like a corporate or parental guaranty. So, if there is a related entity and you want them to guaranty the debt, for example, you are selling to a developer directly and that developer is signing the credit application in the entity that only holds the property.  

But if they have a parent entity that manages all of their holdings, you may not only want to get the single-purpose entity that is developing the property to sign the credit application, but you may want the parent company to sign a potentiality.

It is a lot like a personal guarantee, but this time it is going to be the parent corporation.

5. Joint check agreement

You can get a joint check agreement, which is a three-party agreement between you, your customer, and your customer’s customer. So, it creates an obligation for your customer’s customer. For example, lets us say you are a supplier to an electrician and the electrician has a contract with a general contractor. The three of you would sign an agreement and the general contractor would agree that every time they would pay the electrician, they would effectively pay you directly.

But just be aware that the joint check agreement is governed by their terms. If you sign a joint check agreement that is prepared by a contractor, meaning that it is their form, we caution you to look carefully. Because it may not be worth the paper it is printed on.

Many check agreements from general contractors are very weak and do not provide the rights you are looking to secure. So, you can create your own and present it to the other side.

6. ILOC

You can get an ILOC which is an Irrevocable Letter of Credit. Effectively it is money sitting aside in a bank account that the bank will release money from after certain conditions are satisfied. This is typically done with materials, shipping from overseas to the US, or from the US to the Caribbean. Those are usually secured with an ILOC.

7. COD

You can ship COD, for example, if you have a truckload of pipe, it is going to go to the job site, you only offload it when it gets there, and you get a check. This is another way to secure debt.

8. Good old-fashioned lien and bond claim rights

Finally, you have good old-fashioned lien and bond claim rights.

Verify if you have lien rights

First, you want to verify that you have good lien rights to begin with. Those who have lien and bond rights in the state of Florida for both private jobs and public jobs are:

• Laborers
• Architects, engineers, and land surveyors
• Contractors (those in privity with the owner)
• Subcontractors
• Sub-subcontractors
• Material suppliers/rental companies to owners, contractors, subcontractors, and sub-subcontractors.

So if you are a supply house to a sub-subcontractor, you can secure your rights to be paid with a lien.

The people who do not have lien rights are material suppliers to material suppliers. So, if you are a supply house and you sell to another supply house who then sells to the electrician, you do not have lien rights. Sub-sub-subcontractors also do not have lien rights.

Step 3: Comply with the Notice to Owner rules

Complying with the Notice to Owner rules is not complicated but it is important to go through the rules so that you understand. Because lien and bond rights are the most significant and easy way you have to secure your right to be paid.

1. Serve Notice to Owner no later than 45 days from first work or delivery of materials

You need to make sure that you serve, which means you need to have it delivered no later than 45 calendar days from your first work or delivery of materials to the project. That includes serving it on all interested parties including the general contractor.

2. NTO must be received within 45 days

When you use SunRay Construction Solutions, we make sure that everyone who needs to get a copy gets a copy. And if you get it to us with ample time remaining, we can mail it out by the 40th calendar day from your first work.

Even if it is never delivered because the mail is rejected, or the post office mail truck catches on fire, whatever causes the mail to not get delivered, as long as we can serve it by the 40th day, and it is stamped, it will be deemed delivered.

3. NTO can be served before you commence work

You can serve the Notice to Owner before you commence work, but not before you have a contract. So, if you as a supply house are contracted to deliver $100,000 worth of pipe today, you have a signed agreement to do it or a PO to do it and you are not going to deliver for 60 days, you can send the notice now, after signing the agreement or getting the PO. You cannot do it before you get the PO, but you can do it after. And this must be done no later than 45 days from the first day you deliver materials on the job site.

4. The 45 days includes weekends and holidays

Note that the 45 days includes every weekend and legal holiday in between, except when the 45th day lands on a weekend or legal holiday, then it rolls to the next day.

More info: Wait, What? I Only Have 40 Days to Send My Notice to Owner

5. NTO not required if contracted directly with the owner

If you have a direct contract with an owner, you do not need to send a Notice to Owner. But it is strongly recommended that you do so anyway. Sending a notice by itself is a wonderful collection tool.

Step 4: Comply with the Claim of Lien/Bond Rules

Now we will discuss the lien and bond claim rules.

1. Record the Claim of Lien

You must file your Claim of Lien no later than 90 calendar days from your last day of work or last delivery of materials to the project. To the extent that you are making a bond claim because the general contractor has a payment bond on the project, whether it is public or private, you need to serve that Notice of Nonpayment no later than 90 calendar days.

2. Remember that 90 days is not 3 months

Remember that 90 days is not three months. Some months have more than 30 days and one month has less than 30 days. So, you should not be counting out months on your fingers, like July 7, August 7, and so on. You need to count 90 calendar days.

3. The 90 days includes weekends and holidays

The 90 days includes every weekend and holiday in between, except for when the 90th day lands on a weekend or a legal holiday, then it rolls to the next day. So, if the 90th day is a Saturday, it rolls to Sunday, which means you roll to Monday. And if Monday is a day when the courts are closed, then you roll to Tuesday.

4. Can be recorded/served before you finish work

You do not have to wait until you deliver all of the material or finish work to record your lien. You can record the lien while you are still working on the project and people do it if they are not getting paid timely, as a collection tool.

5. Last work does not include punch list or warranty work

Last work does not include punch list or warranty work. As a supply house, this means that if you deliver $100,000 worth of pipes, one of the pipes happens to be defective, and three weeks later you replace the defective pipe, you don’t send a new bill. Because it is not new pipe, extra pipe or different pipe. Your last day of work is when you delivered the load of pipe, not when you went back and delivered the replacement to fix the defect.

6. Last work does include approved change order work

Last work does include approved change order work. So, if you order $100,000 worth of pipe and you need to order another $100,000 worth of pipe, that new order would now be your new last day.

Step 5: Comply with the other lien/bond requirements

Now we will talk about the lien and bond claim requirements that you need to be aware of.

1. Serve a Contractor’s Final Affidavit

If you have a direct contract with the owner and you have lien rights, then you need to serve what is called a Contractor’s Final Affidavit. As a supply house you do not need to do this, but as a subcontractor you do. If you are a supply house that only provides materials, you do not need to serve the affidavit.

2. Respond to all requests for Sworn Statements of Accounts

If you receive a request for a timely statement of account, you need to timely respond to those requests so that you do not lose your lien rights.

3. What happens if the Notice of Commencement is terminated

If the Notice of Commencement Florida is terminated, meaning if it is cancelled because they are refinancing the project, like maybe they are hiring a new contractor, you should get that Notice of Termination via certified mail and when you do, just know that any amount of money that you are owed from that day back, you need to serve a lien for within 30 calendar days, not 90 days.

So, if you get that Notice of Termination and your last delivery of materials was 10 days ago, you now only have 20 more days to record your lien.

4. Watch for the time to be shortened by notice or lawsuit

Later, we will talk about how some of these deadlines can be shortened, which is one year from the time to file the lawsuit.

Step 6: Aggressively collect in-house

Now we will talk about some steps that you can use to collect debt in-house.

1. Call and send emails and letters

The first thing you should do is recognize that you have an outstanding balance. You should be routinely reviewing your account receivable. You should check weekly if not bi-weekly. By reviewing them you will be able to identify who is late. And you should be calling them and sending them emails at least once a week if not several times a week.

2. Repeated efforts are key

The more effort you put into it, the more likely you will be to get paid. Consider cutting off other jobs for this customer if they cannot make good on their payment. Many supply houses do this and that is how they exert their greatest leverage. So if they cannot pay on one account and cannot bring it current, you can say that you will not sell to them on any other account either.

3. Consider a visit to their office

Consider stopping by their office and say that you need to pick up a check. This is a little harder now because of the coronavirus but it is not impossible.  

So, make sure that you are being aggressive in your collection efforts. You should be courteous, but you still need to be aggressive.

4. Once you lien, calls, emails, and letters to the contractor and owner are permitted

Once you lien or serve a Notice of Nonpayment, that kind of opens the door for other people you can call. For example, once you record a lien as a supply house, now you can call the contractor, you can send the contractor emails and you can send the owner emails. Because now you have a direct claim against them due to your lien.

5. Accept partial payments

If someone wants to give you a partial payment, you should absolutely accept it. Just be absolutely certain that you read the release that you are signing the release that they are asking you to sign.

6. Read partial payment releases carefully

So, if you are owed $50,000 and the other side pays you $30,000, make sure that when you sign a partial lien release for the $30,000 that you are not releasing rights beyond the $30,000 that you are getting.

For example, if you are owed $50,000 and that covers your deliveries through June 7, then you need to make sure that your release is only good through June 7. If it is unclear at all in this document, then you need to create some exceptions. Because this release does not release $20,000 of your lien rights which remain in effect for a few invoice numbers.

So, if you have to create exceptions in the document to make sure that you do not give up those lien rights, you need to do it.

Know more: Do This One Thing Before You Sign That Next Release

Step 7: File a lawsuit/foreclose on the lien

Now we will discuss how to file a lawsuit and foreclose on your lien.

1. File a civil lawsuit to foreclose on your lien or file suit on bond

You need to file the lawsuit to foreclose on your lien no later than one calendar year from the day you recorded the Claim of Lien. If you have a claim on a payment bond, public or private, you need to file your lawsuit on that bond claim no later than one year from your last work on the job, not from the date of the Notice of Nonpayment.

So, there is a distinction of time, meaning you have a little bit more time for a lien foreclosure than you do for a bond foreclosure. That being said, you should not be waiting that long anyway. We recommend that you start the lien process at about 60 days from your last work on the job. So, give or take 60 days if you have not been paid, you should start the lien or bond process.

2. Watch out for shortening of this period by Notice of Contest of Lien and Summons to Show Cause

If after you record a lien or serve a Notice of Nonpayment, for the next 60 days your internal aggressive efforts have not produced payment, that is when we recommend that barring some other business reason, you aggressively pursue your debt through the court system. There are ways for the contractor or owner to shorten these one-year periods and that is what is called a Notice of Contest of Lien, which reduces it to 60 days.

You will get a document via certified mail saying that there is a Notice of Contest of Lien and that you have 60 days from this date. If you do not do it in 60 days, you lose your lien or bond rights.  

Sometimes they will do it even faster, so they will issue what is called a Summons to Show Cause. This reduces the deadlines to 20 days, and the document will be served on you by the process server or the sheriff. It is actually a lawsuit. Be careful upon receiving any of those documents, because if you do not act quickly, you will lose your lien rights.