There seems to be a lot of mystery surrounding the effects of sending a preliminary notice (also called a “notice to owner” or “notice of furnishing”). Although this document is a basic part of accounts receivable in construction, many contractors and suppliers are on the fence about whether or not to send a notice and the results it will have.
To uncover the truth, let’s take a look at three myths that often come to mind when construction companies think about notices.
Myth #1: Customers feel threatened when they receive a notice
Yes, preliminary notices are associated with filing a lien. However, they are only associated with liens to the extent that they show you are protecting your right to file a lien if you don’t receive payment.
With that said, professional contractors or property owners who understand how this industry operates understand that receiving a notice is a standard part of running a business. If anything, when receiving a notice, they realize that they are working with a contractor or supplier that understands basic payment practices and lien rights processes.
“Of the hundreds of notices that we’ve sent out, we’ve had very few questions or instances where a customer was upset. And in those few cases, we were able to explain why we were sending a notice, and they understood,” says Pete Newstrom, Vice President of Finance at Arrow Lift.
Like many other financial professionals in the construction industry, Pete has found that sending notices keeps lines of communication clear when collecting payment. Sending notices doesn’t cause frustration — it removes frustration.
Myth #2: Sending notices only protects lien rights and doesn’t affect payment speed
Once again, the purpose of sending a notice is to protect your right to file a lien in the case of nonpayment. However, that’s just one of the benefits of sending a notice. Sending notices can also prompt your customers to pay you faster.
This is because it’s easier for them to pay you since the notice clearly provides information about what work was performed, where it was performed, and when.
“If you’re sending a notice on every job, you’re going to get paid faster,” says Jason Emanuel, the Chief Financial Officer at Faulkner Haynes, an HVAC company. Jason speaks from experience — the average DSO (days sales outstanding) went from 70 to 50 days after his company started sending notices to protect their lien rights.
Another reason that notices speed up payment is because no one wants a lien filed on their property, so when a customer knows that you have the right to file a lien, they are more likely to make sure they pay you before things escalate to the point of filing a lien.
Alexa McLelland, the controller at a NGS Films and Graphics, rarely has to file a lien because she sends notices on the front end which prioritizes her invoices.
“When we’re sending the preliminary notices, it’s not meant to be a scare tactic,” says Alexa. “The notice shows that we’re serious, and that we’re ready to take the steps to get paid. A lot of companies answer to the notice right away. They ask for us to send the invoice again, and then within a week or two we have payment in hand.”
Myth #3: Sending notices only makes an impact if you are required to send them
This myth couldn’t be farther from the truth. True, notices are not always required to protect lien rights. Whether or not you are required to send a notice depends on certain factors such as where the job is located and also your role on the job. However, sending a notice when you aren’t required can still increase your chances of getting paid.
Take it from Joan Elmore, the accounting specialist at a Florida-based contracting company. The company often operates as a general contractor, and as a GC, they aren’t required to send notices to protect lien rights. However, Joan was constantly struggling to collect overdue payments — some were almost a year overdue.
Joan made the decision to send notices on every single job, regardless of whether or not they were required, and the company’s average DSO went from 60 to 14 days. Not only did they start collecting payments faster, but also, Joan no longer has to think about when to send or not send a notice — something that took up a lot of her time in the past.
“Sending these notices on every job was a game-changer because now I know that they’re always going to go out…I can be so cheerful on the phone with the customer, and I’m not freaking out if they’re complaining about not wanting to pay right then because I just know that we’re going to be fine,” Joan explains. “By sending these notices on every job, I don’t have any emotional stress because I know that I’m on top of everything, and we’re going to stay within our lien rights.”
Try it for yourself
Now that you know the truth about sending notices, are you ready to give it a try? Send a notice through Levelset for free, or talk to someone on our team to learn what it would look like to send notices on every single job to get paid faster.
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