Home Credit Q&A Why pre-liens are important

Why pre-liens are important

 

Dear Thea,

One of my sales reps had a question I really could not answer. Why do a pre-lien when we can lien the project at any time? I think he is afraid to put a bad taste in the customer’s mouth with preliminary lien notices. We are smaller, hometown company and use liens as a last resort. Is there any way you can help me explain the benefits of prelims and lines in general? I’d really appreciate it.

Signed,
Tackling the same old song and dance in Tulsa

Dear Tackling,

Don’t beat yourself up too much when it comes to questions about the lien process. It seems to be one a credit manager standard stock in trade discussions, and it’s easy to let people get in your head and turn it around.

I equate it like this: Some of my sales reps are like goldfish—the minute I am out of their field of vision, they forget everything we talked about in relation to the lien process (some in relation to everything). I know we have gone over it multiple times, in many scenarios, and yet we seem to always end up having the same discussion. Again.

I am assuming you are in a state that doesn’t require a preliminary lien notice and leaves it open to move straight to a lien situation if things do not go as planned. Easy-peasy, as they say. If only life were that simple.

When you are staring into the goldfish eyes of your sales reps, you might want to remind them that although you may not have to serve a preliminary lien notice, pre-liens do come in handy. A state in which there is no preliminary lien notice requirement could also be an unpaid balance state, and you may be out of the money and left sitting fat, dumb, and happy with no idea you have been out of the cash running for quite some time.

States are divided into two groups after the whole preliminary notice/statutory notice/notice of commencement situation. There are the double jeopardy states (regardless of whether or not the owner has paid the contract in full or if a sub or vendor has preserved their lien rights, the owner gets to pay twice) and there are unpaid balance states (if the contract has been paid in full, the owner is not liable, and the lien is not going to do you any good).

I am a firm advocate of serving a preliminary lien notice or statutory notice whether it is required or not. I suggest you make it company policy. Here’s why:

  1. Everyone knows who is on the job.
  2. They allow you to support your customer if the money is being held up further up the proverbially food chain.
  3. There’s no scrambling to figure out who needs to be notified and on what timeline.
  4. Everyone is friends at the beginning, just not so much when stuff goes down.

A notice lets everyone in the process know that you are there and creates a connection to the money. If the go-to move is to wait for stuff to go down and then slam a lien on the project, how does that affect the relationship? With a prior notice you get all the pertinent information upfront and can reach out directly to whomever is holding up the cash while still communicating with your customer that you have reached out and are working on both of you getting paid.

As for the super-sad, incredibly tired argument that liens are a last-ditch effort, that they reflect badly on the general contractor or sub, or that no other supplier does it, well, that may have been an argument that held up prior the Great Recession. In a post-recession, even post COVID world, that does not pass muster and is the equivalent of a modern-day smoke screen.

Fun Fact: Goldfish can be trained to do tricks, and they get bored. Just something to keep in mind when talking to your sales reps.

With more than 30 years of credit management experience in the LBM industry, Thea Dudley consults with companies on a wide range of credit and financial management issues. Contact Thea at theadudley@charter.net.