NCS Experts Answer CRF Member Questions about A/R Trends & Issues
Recently, members of The Credit Research Foundation (CRF) posed questions to NCS Experts.
“It has been a year + of the pandemic and the resulting A/R issues and process changes. What have you seen?”
“In an average year, mechanic’s lien filings are high in Q1, low in Q2 & Q3, and rise again in Q4. This is the cyclical, seasonal nature of the construction industry. Typically, Q2 & Q3 are active construction months; preliminary notice volume increases during these quarters, and payment issues frequently arise 30-120 days later, resulting in the lien filing increases in Q4 and Q1. As an example, a construction project starts in April and various parties will furnish to the project in waves. A party may finish furnishing in September, then payment is delayed 60 days resulting in the filing of a mechanic’s lien in November.
The high number of liens filed in Q2 2020 was a direct result of businesses’ initial reaction to the uncertainty of the pandemic, and their approach to how to best deal with the unknown risks associated to the ‘new normal.’
After a turbulent 2020, the NCS Lien Index reflected some return to normalcy in the latter quarters of 2020 and Q1 2021. The Q1 2021 Lien Index posted a -3.1. All US regions except the southern states have been trending down in total liens filed over the past year with the northern states experiencing the steepest decline.” – The NCS Lien Index, Q1 2021
“Creditors have refined their credit-granting processes. Lowering thresholds for securing mechanic’s lien rights and filing UCCs, doing quarterly credit reviews on their debtors, and we’ve even seen an increase in the use of monitoring services. More creditors are using tools like bankruptcy monitoring, debtor monitoring, credit report alerts, to ensure they are notified of changes as soon as possible. We’re also seeing significant price increases in some industries, which means the existing credit lines won’t stretch as far. I think you’ll see companies trading security for an expansion of the credit line to solve this issue.” – Jerry Bailey, Executive Sales and Education Services Manager
“We’ve noticed changes across UCC, Notice & Mechanic’s Lien, and Collection services. There has been a significant increase in UCC filings, which is good because more creditors are secured. If you have been waiting to file a UCC, don’t wait too long; the more creditors are filing, the lower you will fall in priority. We expect to see an increase in UCCs generally across all industries, but definitely a rise in the solar market as the White House pushes bigger green initiatives. These initiatives will likely drive more solar companies to take security through fixture filings.
In notices & mechanic’s liens, parties are scrutinizing every detail of documents, to a level I have not seen in 20+ years. Historically, legal descriptions have been reviewed but not to the extent we are seeing now. And obtaining accurate legal descriptions has been more challenging because properties have been rapidly changing hands. Not to mention, issues of leasehold.
Throughout the last year, courts have been very slow. In some cases, like New York, the courts have been shut down entirely. These court delays have hampered some suit actions. On the upside, the use of arbitration has increased, and attorneys have negotiated settlements outside of court, which results in parties collecting monies sooner. Much like our notice & mechanic’s lien services, parties are scrutinizing every document for timing, terms, confirming signatures, etc.
We expect to see a rise in bankruptcy with the emergence of subchapter 5 of Chapter 11 bankruptcy. Many businesses are using this provision to restructure, because it allows the business to remain open, maintain control, and pay off a portion of debt within 3-5 years.” – Michelle Gerred, Attorney
“Overall, we see more people taking security by filing UCCs. There is no advantage in waiting to file. In fact, the longer you wait to file the lower you fall on the priority ladder, because others are aggressively protecting their A/R. Not to mention, if your customer files bankruptcy and you waited to file your UCC, you may find your UCC is thrown out as a preferential action if it was filed within 90 days of the bankruptcy, leaving you unsecured.” – Cindy Bordelon, UCC Services Manager
“Given that many companies are simply shuttering their businesses, why would I want to execute a UCC filing? Aren’t the banks always first anyway?”
“This is a common question. Of course, it’s great to be first, but even if you aren’t first in line, the UCC is still an incredibly helpful tool.
Too often we think of a UCC filing as just a priority tool. It’s easy to forget that UCCs aren’t solely about getting in front of the bank or at the front of the payout line. Aside from priority, UCCs provide you with leverage. Specifically, if you have outlined default in the security agreement, you can begin exercising your rights of collection or repossession upon the debtor’s default. If you are monitoring your customer, you are likely to notice them in distress or default before they get to the point of having to close their doors.
Then there’s the immense benefit of the public record. Your UCC filing creates a public record. When landlords or escrow companies perform a UCC search, they will see your filing and contact you for liquidation.
Also, if you have filed a UCC and your debtor has shuttered their business, as a secured creditor you could pursue payment from the debtor’s customers through Article 9-607 and pursue legal action against them if they go unpaid.
Yes, you definitely want to file UCCs.” – Jerry Bailey, Executive Sales and Education Services Manager
“We are selling into the ‘mall construction’ space and we cannot get our vendors to respond, we’re not even sure they are still there – what is the best practice to execute our mechanics liens?”
“Malls are certainly complex structures and correctly identifying property ownership is one of the greatest challenges. As a best practice, carefully track your deadlines and file the lien as soon as possible. Be prepared for higher title costs, as you will likely discover a leasehold situation – especially if you are furnishing to individual stores within the mall.” – Amy Hunger, Attorney Liaison, Notice & Mechanic’s Lien Services
“Anecdotally, can you tell me if filing a UCC will improve my ROI?”
“It’s difficult to say whether it will improve your return. UCCs need to be viewed through the lens of risk mitigation. A UCC program is the most economical way to reduce your risk when selling on open terms. There is a cost to file UCCs, and each situation is different in terms of how much risk you wish to mitigate. We have many customers that benefit by receiving payouts that cover the cost of their program for years and years to come.
A UCC filing costs less than $0.10 per day, and compared to other options like credit insurance, UCCs are very cost effective.
The other benefit that should not be overlooked is the ability to increase sales with UCCs. Being a secured creditor allows you to increase your credit limit with your customers. Imagine being able to go to your sales team to say they can increase their share of wallet with their customers because they have UCCs filed on them.” – Craig Slimmer, Director of Sales & Marketing
“It could depend on the collateral you are securing. If you are securing equipment or inventory and you file a PMSI, you could repossess the collateral under UCC 9-609.
Essentially, if you have filed a PMSI, and you want your goods back, and your customer has the goods, you have the right to repossess without disturbing the peace. If you are unable to peacefully repossess the inventory/equipment, you could file a temporary restraining order or file suit against your debtor. If you don’t want your goods back, you can place your claim with an attorney to file suit. By filing suit, you may receive Judgment which allows you to garnish accounts and/or attach to assets.
Once you have repossessed the inventory or the equipment, you then have an opportunity to resell it, which would add to your return; it’s certainly better than no recovery.” – Jerry Bailey, Executive Sales and Education Services Manager
“UCCs make you a payment priority. In bankruptcies, frequently we see secured creditors recover claims in full or, at minimum, at a significantly higher rate than unsecured creditors. Often unsecured creditors collect pennies on the dollar or nothing at all. The return lies in the security.” – Michelle Gerred, Attorney
“If I am lucky enough to repossess my product (which is clearly not my first choice), is there even an aftermarket for the product?”
“The value of the goods will be what you can resell them for. Perhaps the bigger value is letting your debtor know that if you repossess the goods, they must send a notice of disposition to all other secured parties with an interest in the collateral. This would mean the debtor’s bank and I would think that would give the debtor a big push to pay.” – Jerry Bailey, Executive Sales and Education Services Manager
“I would like to know the best practice for delivering notices during the pandemic given the changing dynamics in the construction industry. What should I do?”
“To ensure your notices are served timely, start tracking deadlines immediately and identify whether the notice has to be postmarked by the deadline or received by the deadline. If the notice must be postmarked by the deadline, maintain copies of tracking information and the certified mail cards, in the event you need to proceed with suit and show proof of service.
The bigger challenge is for notices that must be received by the deadline. If the notice must be received by the deadline, check the certified mail cards to confirm the parties actually signed the card or if “C-19” or “COV-19” is written on the card. If the card is labeled “C-19” or a similar reference to COVID-19, you may want to consider serving the document via FedEx, UPS, personal service (process server), or post the notice at the jobsite, whatever is deemed an acceptable form of service by statute. Also, give yourself plenty of time; try not to wait until the last minute to serve your notice.” – Amy Hunger, Attorney Liaison, Notice & Mechanic’s Lien services
There is no substitute for true credit management: know your customer. Review credit reports and financial statements. Monitor mechanic’s lien activity through LienFinder and your customer’s status through Corporate Monitoring. Carefully review all contracts and agreements and take time to audit credit applications for signatures, security language, and terms and conditions.
Creditors are securing receivables sooner. You should file any security as soon as you can, whether it’s a UCC, mechanic’s lien, or bond claim. And if it’s a situation where no security is available, send the debtor to collection and file a judgment. The sooner you begin recovery of assets, the better.