No credit applications, no credit limits, and no guarantees of any kind? What's going on here? It's the wild and woolly world of construction contractor supply where the key tactic in credit management may be laying the groundwork for liening the property if the customer doesn't pay. And it's a model for up-front collections management whatever your industry.

"We give credit to anybody," says Candice Kenney, regional credit manager for the eight branches of Contractor Services West (West Sacramento, CA), a division of MASCO, Inc. "Most of the time, I don't even know we've given credit to somebody until after it's done. An estimator or a salesperson goes out and gets a signed contract from a customer saying they'll pay."

The company provides construction services and supplies, such as insulation, windows, garage doors and fireplaces, to contractors and homeowners. Homeowners are required to pay COD, but with contractors it is a different story.

"We also don't require a credit application but that's usually not an issue because we're in the construction industry and, if we don't get paid, we can put a lien on the property very easily for a nominal fee.

"There's some risk but we're very lucky with the people we do business with. I also have a good collection staff, so we don't take many losses." Steps the credit department takes include:

Pre-lien notices. A pre-lien or 200-day notice informs all parties who do not have a contractual agreement with Contractor Services West that the company is providing materials for the project and, if necessary, it will file a mechanic's lien on the property. (The 20-day notice applies in California and several other states. Stipulations may vary by state.)

The pre-lien notice establishes the mechanic's lien rights. Unless Contractor Services West is selling directly to the property owner, without this preliminary notice, a mechanic's lien will not stand up in court. Once the notice is sent by certified mail and the post office sends proof the notice was received, the company has met the legal requirements.

Proactive collection calls. Payment methods include open account, COD, credit card, and advance payment. Credit terms for contractors are Net 10. There are no volume discounts. If a contractor appears risky, the salesperson determines the appropriate payment method. Contractors typically pay in about 30 days since many wait for their customers to pay them before paying their suppliers.

"Collectors do a lot of proactive calling," says Kenney. "If an invoice hits their aging, they call the customer and say, 'Do you have the invoice? Is everything okay with it?' It's a courtesy call. If it's not a big invoice that can affect their aging - like a $1,000 invoice - they don't call until it hits the 30-day mark.

"If customers do not respond at 60 days, collectors send demand letters and intent to lien letters because we want to lien the property by the ninetieth day."

Collectors also work with customers to set up payment schedules.

"If we have a customer who wants to continue to do business with us," Kenney says, "then it has to go through me and I decide how to keep doing business with this customer and get payment. We have customers who want to take three or four months to pay. That's why we charge interest."

"It's very subjective and every case is different. We don't take a lot of payments because those are the people who just don't want to pay. They either have the money or they don't. We'll take credit cards, so a lot of times, they'll just put it on the card."

Interest is usually charged only when a contractor is way behind in payment or does not usually do business with the company.

"Sometimes contractors don't include invoice numbers with payments," notes Kenney. "Payments are applied to the wrong invoices, and there are reconciling issues. We don't want to charge them interest if the problem is internal. They'll get mad and go somewhere else."

"If we know they're a slow-paying customer, we just bid their job higher than we would a prompt-paying customer. It's almost like getting interest up front."

Sales' involvement. Assisting with collection is part of the salesperson's job. Though no credit limit is set for contractors, if they get behind in payment, Kenney notifies their salesperson.

"Salespeople make friendly calls," she says. "They may say, 'Hey, Joe, my collection department is coming down on me. They won't let me service you any more unless you come up with a payment.' It has to be a friendly call because they want to keep the account."

Incentive to collect. Both collectors and salespeople are eligible for incentives based on accounts receivable.

To earn a monthly incentive, each collector must collect 60% of his or her AR and keep over 60-day agings down to 10%.

"Salespeople also get a little piece of incentive on those numbers," Kenney says, "so they're very interested in keeping their collections going."

Weekly reports and monthly meetings. Each collector sends Kenney a weekly report detailing the status of each invoice that is 60 days past due. Kenney also holds monthly meetings with collectors and salespeople to review agings.

If a collector is having problems with an account, Kenney advises the collector on the next step.

"We discuss every account," she says. "If collectors need the assistance of the salesperson, that's when the salesperson steps in. I like to have the collectors call customers and try to get payment but they might not be getting any response, so the salesperson will visit the customer."

Stopping service. After both the collector and the salesperson have attempted to collect, Kenney may stop service. "We don't have a guideline as far as a dollar amount," she says. "If a contractor is not paying and we're not getting any response, we won't keep doing the job. We call and say, 'If you don't pay, we won't do any more work'.

"It might be a large customer doing a tract. We might be on the job for a month doing the windows, the fireplaces, the insulation--different steps. The final step might include a start-up - like a gas fireplace. If they don't pay, we won't go back. That gets them very interested in paying because they want the job finished.

"Or people might be living in the homes and they want their fireplace to work. In a lot of cases, we have the homeowner pay us directly."

Final steps may include a mechanic's lien on the property or turning the account over to a collection agency or an attorney.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.