I have been working with construction companies for many years, and never before have I encountered so many situations in which so many contractors were unable to get paid, where neither they nor their customers had done anything wrong. The problems that are plaguing our banking and finance systems in this country are touching most industries, but when they hit construction it is with a bang.
What I have seen of late is a great increase in the number of projects in which the owner had lined up sufficient (or nearly sufficient) financing to complete a project, but its lender was told by bank regulators that it could not fund the rest of the loan. Certainly, this happens when a bank fails and is taken over (the acquiring bank wants its deposits, not its obligations to make new loans), but it is now happening to ongoing, otherwise solvent institutions who used to have “correspondent” banks with which they shared risk, and many of those are gone.
I know as well as you do that telling you to file a mechanic's lien or bond claim is no substitute for being paid in the ordinary course of business. No contractor or vendor will stay in business long if the flow of cash is stopped. So, given the very uncertain times we face, what alternatives are there to improve cash flow, which is hampered by lenders unable to honor commitments? Well, I sat down with one of my partners who represents banks, and we brainstormed as to the best advice to give clients. Our consensus: stop thinking like a “payee” and start thinking like a “partner.”
First and foremost, you have to understand what the problem is. Everyone has to operate with full disclosure. That includes you, your customer and its lender. It is not unusual for people with credit problems to have made up as many different stories as they have creditors, so it is in your interest to get the facts from the lender. Since bankers are prohibited by law from giving you any information about their customers, the customer will have to agree to this disclosure on your behalf. You may need to consult your attorney as to the kind of information you need in order to verify what truly is preventing release of funds.
Is the problem just this lender? Bank regulators tend to not announce that a bank is failing in advance, to make the possible transition of accounts to a new facility smoother, so you might not know that it is the lender who is in trouble. If this is the case, it may be that the credit can be moved to another institution. Or it may be that the bank has some ability to lend, but not as much or as fast as the project appears to need, in which case a partial funding with a promissory note from the borrower may be better than a project that shuts down and never restarts, leaving no one paid.
Or is the problem this particular project? It may be that the lenders have analyzed the financials and determined that the project itself will not be able to generate enough revenue from future rents to pay the bills, so that extra money to cover changes or unanticipated problems is just throwing good money after bad. In that case, it may be necessary for more capital to be injected into the project (equal more investors) to cover the shortfall. Does your customer have other assets that it could pledge against this loan to make it more palatable to finance? Is this a project that you feel good enough about to take an equity position in, a position that you can convert to cash at a later date?
Or is the problem this particular borrower? Does your customer have problems on other jobs that have made lenders nervous about its ability to stay solvent itself? Often it is the last job that ends up unpaid, even though the one that caused the problem finished a year ago. When no new cash flow comes in to cover the job that was being raided to pay off old bills, that new job is the one that ultimately fails. Can the owner be convinced to sell or transfer (probably at a reduced price) to an ownership group with stability? Can you help put that group together? What about management? It may be that the lender would feel more comfortable advancing more funds if the borrower had a new team in place to run the job.
If there are many trades involved in a project, it is not likely that the owner or its lender has singled out the plumber to take the entire loss. Think carefully about the pros and cons of banding together and hiring one lawyer to represent you all. There are good aspects to this: less cost per firm, more clout, more control over the outcome. But there are bad aspects too: how to handle hold-outs, having to reach “consensus” decisions, not everyone being in the same legal or factual position. So don't assume that what is good for the excavator, who is complete and out of there, is as good for the HVAC contractor, who is only half done.
These solutions (if they can even be called that) are not painless, but then neither is shutting your business down for three years until the economy recovers or filing liens and lawsuits to squeeze blood out of a turnip. Remember: the lender wants to be repaid too, so looking at the problem from his perspective - as his partner, not his enemy - may enable you to contribute to fashioning a solution that allows all of you to survive.
Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].