The building materials supply and construction industries are some of the most financially vulnerable in the nation, owning high debt ratios, low margins and excessive failure rates. What can your company do to avoid bad debt and financial strain if in these industries? This article introduces you to the mechanics lien instrument and explains how it can help your company collect every time.
What Is a Mechanics Lien and How It Can Help Your Construction Business Collect
Introduction to the Mechanics Lien: A Security Instrument That Can Guarantee Your Payment On a Construction Project
If you’re into legal jargon, the mechanics lien is a security instrument that serves to guarantee payment to builders and suppliers that furnish to a construction project.
Mechanics lien laws exist all across the United States to protect contractors and suppliers against the risk of non-payment. If a supplier or contractor furnishes services or materials to a construction project and is not paid, that supplier or contractor can generally file a mechanics lien to “secure” the debt.
The terms “security instrument” and “secure” can be confusing to a non-lawyer. An analogy to a term more familiar – “collateral” – may help explain.
Most people understand how standard home mortgage loans work. If you’re looking to buy a house you’ll contract with a bank to loan you money. The bank puts out a lot of cash to help you buy the home, but it takes a “security interest” in your home. You use the value of your home as “collateral” for the bank. If you don’t pay your mortgage the bank will claim its collateral, kick you out of the home and sell it to pay off the debt.
The mechanics lien instrument is a very similar concept.
Whenever a contractor or supplier furnishes to a construction project in the United States, the underlying property where services are provided (i.e. the project jobsite) becomes “collateral” to guarantee the payment of those furnishing services or materials. To claim that collateral, the contractor or supplier will file a mechanics lien.
How a Mechanics Lien Can Help Your Business Collect a Debt
A mechanics lien does not immediately cause a property to get sold off at auction. It is not, in other words, an immediate foreclosure proceeding. Instead, filing a mechanics lien is the action required to claim the project jobsite as collateral for your debt. If necessary, you’ll need to take an additional step to foreclose on the property.
This additional foreclosure action, however, is rarely required. The mechanics lien filing alone is usually enough to get your business in a collectable position.
There are a number of consequences to a mechanics lien filing, including:
- Preventing the property from being sold, refinanced or transferred
- Putting parties on the construction project (like the general contractor) in contractual default
- Pressuring lenders and property owners to address your debt
- Giving your debt legal priority over other debts
And this is just the tip of the iceberg. Here is a SlideShare presentation we put together on the 17 Ways A Mechanics Lien Works To Get You Paid.
These assorted consequences of a mechanics lien filing have the effect of getting your invoices noticed and made a priority. This is usually enough to get money flowing.
If it’s not, however, you’ll be able to fall back on the property itself as security. Just like a bank.
Zlien provides software and services to help building material supply and construction companies reduce their credit risk and default receivables through the management of mechanics lien and bond claim compliance. You can connect with Zlien on Twitter, LinkedIn and Google+.
About the Author:
Scott Wolfe Jr. is the CEO of Zlien and the founding author of the Lien Blog, a leading online publication about liens, security instruments and getting paid on every account. Scott is also a licensed attorney in six states with extensive experience in corporate credit management and collections law, with a specific emphasis on utilizing mechanic liens, UCC filings and other security instruments to protect and manage receivables. You can connect with him via Twitter, LinkedIn and Google+.