As a Building Material Supplier in the construction industry, most of your products are sold on credit. This can be a scary situation when reviewing your open invoice report. I can just imagine your eyes getting larger as the number at the bottom keeps growing in size. Because, let’s be honest, the thought of not being able to collect your hard-earned money can make your heart skip a beat. This is even more stressful since you are usually so far away, on the construction food chain, from the source of the money (AKA the Owner).
The following will be addressed in this four-part blog series: Cover Your Ass (C.Y.A.) for Material Suppliers:
- What should be in your credit application, and what information you need to get for every project.
- How to write off less than 1% of your gross revenue.
- How to create a consistent collection strategy.
- Why you always need signed delivery tickets.
Make sure you are paid for every outstanding invoice by tuning in each week as we break down the following topics. At The Cromeens Law Firm, we are your partners and want to help you run a successful business. So, let’s start at the beginning—the credit application.
What should be in your credit application?
The first thing to note is that your credit application does not have to be lengthy or complicated to be effective. An effective credit application should include general information, your credit terms, and contain a personal guarantee.
You can download a credit application template for free at The Subcontractor Institute.
To make sure your invoices are issued to the correct party, you need some basic information from the person or company to whom you will be extending the credit. What is their address, what type of entity are they, and who do you talk to when your bill is due? Some other helpful information includes: where do they bank and what is the individual owner’s social security number? This information is beneficial if you end up in a collection situation.
The Cromeens Law Firm is here to protect you and your business.
Make sure you are paid for every outstanding invoice. At The Cromeens Law Firm, we are your partners and want to help you run a successful business.
Trade References
Asking for your potential customer’s trade references will help you decide how much credit to extend to this customer. You can send a one-page credit reference check request. This request will tell you if they normally pay on time or are a credit risk—if so, proceed with caution.
You can download a credit reference check request template for free at The Subcontractor Institute.
Credit Terms
Your credit terms should lay out when payment is due, what will happen if the payment is not made on time, if there will be interest charged, and who is responsible for any attorney fees.
Personal Guarantee
As a Material Supplier, you rely on your customer to give you the correct information on a project. This is because you do not have direct contact with the source of funds on a project. It is industry standard for a Material Supplier to request a personal guarantee as part of their credit terms but it is your choice whether you want to require a personal guarantee.
The first step in the C.Y.A. process is to have the credit application filled out completely. The next important step is to obtain all the required information on the project—so if you are not paid, you have everything you need to know to file a lien.
What information do you need when you start supplying material to a new project?
As a material supplier, when you start every new project, you should have whoever is taking the order fill out a new job form that requests the following information:
- A complete project address is required when filling out this form.
- It is the first thing needed to perform the research required to file a valid lien.
- In addition, you need to know who hired your customer and, if that party is not the General Contractor, you need to know who the General Contractor is.
- When you get this information, you need to get the full company name, phone number(s), and contact person(s).
If your customer does not have all this information, get what you can and do some research to find the rest.
Homesteads
It is very difficult to have a lien on a homestead as a Material Supplier in Texas. If you provide material to a lot of residential projects, it may be worth your time and effort to find out if a project is a homestead before you supply materials on credit. The best free research is checking your county tax records. This information can be accessed on your local appraisal district website.
Conclusion
Material Suppliers take an enormous amount of risk when supplying material on credit in the construction industry. This blog series is all about how to reduce that risk. The first step includes having the proper credit application. The second step is getting information about the project you are supplying material to before you supply the material. In the next article, we will deep dive into all the leverage you have as a Material Supplier and how to use it to write off less than 1% of your gross income. Sign up for our C.Y.A. for Material Suppliers Webinar on Thursday, May 13th, at 12 PM to learn everything you need to know to cover your ass and quit getting screwed!
