When Clients Hold Payment Hostage

One of, if not the, most common complaint we hear from pool builders is that they keep running into borrowers who will not sign the completion certificate because “punch list items” are not satisfactorily complete.

This is a common issue for builders who accept unfavorable stage funded loans because often the money the customers are refusing to release far exceed the value of those items. The simplest way to fix this is to work with a lending source that primarily gives cash directly to the borrower. This essentially makes it the same as if they were paying you cash. You follow your draws, make changes as necessary, and never have something ridiculous like a 25% final draw waiting on an umbrella stand that’s on backorder.

First of all, a 25% final draw is unacceptable. With the rising costs and prices in today’s market, that can easily be $25,000. Multiply that by how many you could have out there at any given time and the cash flow can really be held up. You shouldn’t have to choose between offering financing and paying your bills on time.

As the President of Viking Capital, I can tell you that it’s not uncommon for us to speak with builders that have several hundred thousand dollars out waiting to be collected. The 25% final draw is a problem even if they do pay so working with a source that limits that draw to 10% lowers your exposure immediately.

Next, make sure your lending partner has your back. At Viking Capital, we view this as our role as your financing partner. A knowledgeable, well-trained operations director can have a conversation with the customer for you. It’s very important that you know you can lean on your lending partner to help. A call from the lender (vs the builder) can usually solve this quickly.

There are two things that generally get customers off the fence in this situation and willing to release the funds. They think that because they have not been asked to make a payment, the longer they hold out, the more money they save. We can explain to them that this is not the case. From the moment they take the first draw, they begin accruing interest on the amounts they take.

If they’ve taken 75% of the money (let’s say it’s a $100k pool), they are letting the interest on the $75k continue to build up and, eventually, they will see that their loan balance is increasing significantly while they refuse to pay you, which triggers them making loan payments. So...by the borrower understanding that not making payments is expensive, they often decide, correctly, that they should start paying.

Borrowers don’t generally understand that they have no warranty on the project until they release the final draw and sign off on “substantial completion”. A quality lending partner will explain this in detail and generally, combined with knowledge of accruing interest, they understand that it’s in their best interest to close out the loan and deal with the warranty items afterward. We’ve learned in our almost 25 year history, that when this message comes from a third party, and not the builder looking for his money, it tends to be taken differently.

There is also the fact that a lending partner who knows your track record and trusts you can give the customer added confidence that the punch list items will be completed after they release the funds. A quality review from a partner who has vetted you and had no complaints can really help the situation. It usually boils down to “you chose the builder, you trusted them with your home and a significant project. If you like what they’ve done so far, you can trust them to finish the work after you pay”. We suggest looking at Google reviews as well. If there are no complaints of unfinished projects, they can trust that they won’t be the first.

In short, a quality lending partner, like Viking Capital, can save you countless headaches, speed up your cash-flow and make sure your clients have a better experience overall. There is more to a partner than rates. Rates change all the time and it’s impossible (and not productive) to keep chasing the lowest rate source. Choose your lending partner wisely and watch the hassles disappear. For more information or if you are interested in working with Viking Capital, please contact Kevin@vcloan.com.