If you are a contractor, mechanic’s liens can help you collect your accounts receivable and improve your cash flow. Mechanic’s lien laws, which may vary by state, were enacted to provide protection to you, if you are not paid for material or labor supplied to a job. The process of obtaining a mechanic’s lien is very specific. It requires certain documents be delivered to various parties including your client, the property owner and construction lender, or filed in required public records by certain dates.
Mechanics’ lien accounts receivables are more likely to be collected and collected faster than accounts receivables not protected by mechanic’s lien laws. Here’s how mechanic’s lien laws can help you collect your accounts receivable and improve cash flow.
If you use the mechanic’s lien process to protect your accounts receivable, the first thing you have to do is deliver a Preliminary Notice, within 20 days of first furnishing material or labor to a job site, to your client, the property owner and construction lender. The Preliminary Notice puts the appropriate parties on notice that you intend to file a mechanic’s lien against the property if you are not paid.
Your client will know from the Preliminary Notice that you will file a mechanic’s lien against the property if not paid. It is more likely that you will be paid before a contractor or supplier who has not delivered a Preliminary Notice, if your client has a cash flow problem. The last thing your client will want is to have a lien filed on the property. This will upset the property owner and the construction lender, and could cause delays in the project.
In the event your client files for bankruptcy and the property your mechanic’s lien is filed against goes into foreclosure, you will have a greater likelihood of being paid some or all of your claim; because you have a security interest in the property. Secured creditors come ahead of unsecured or general creditors in priority of payment. If you are an unsecured creditor, it usually means you will be paid little or nothing.
ASSIGN MECHANIC’S LIEN RIGHTS
If you are using the mechanic’s lien process, are not paid, and end up filing a lien against the property, you may have to wait a long time to have your claim paid. While it is better to be paid eventually than not at all, a long delay may be create a cash flow problem for you. Depending on the laws in your state, it may be possible for you to assign your mechanic’s lien rights to a third party in exchange for payment of your claim. The payment you receive will be a discounted amount, which is the incentive for the third party to buy the rights to your lien. You need to weigh the costs and benefits of assigning your claim compared to other forms of financing.
As with all legal matters, it is important to seek the advice of legal counsel regarding the requirements of and compliance with mechanic’s lien laws in your state.
Mechanic’s lien accounts receivable are clearly better protected and easier to collect. Even with these advantages, some contractors choose not to protect themselves because of the time and effort required to properly administer the process on a manual basis. If you do not have an automated accounts receivable system, it can be difficult and time consuming to keep track of the requirements, especially when you have a number of projects. An automated accounts receivable system with work flow, online notes and automated reminders makes it much easier to administer the mechanic’s lien process.
Automated accounts receivable software, which includes these important features, is available from Lockstep Collect, a leader in the field with a track record of assisting construction firms with billing, invoicing and work flow. If your firm would like to learn more about how you can improve billing, invoicing and work flow please contact Lockstep Collect at www.lockstep.io.