May 4, 2023

NACM’s Credit Managers’ Index (CMI) revealed credit application approvals dropped in April even as applications for new credit increased. The factor of rejections of credit applications fell 2.7 points into contraction territory at 49.7—its lowest level since July 2009 during the Great Recession. The flow of credit is being crunched by financial panic, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

“We are seeing the first signs of the banking crisis that erupted in March,” Cutts said. “Although actions by the Fed, the FDIC and the Treasury Department have alleviated some of the stress, credit tightening is being felt throughout the economy. Respondents in the April CMI Survey indicated that applications for new credit were up a bit from last month but approvals for new credit plummeted. Many accounts receivable managers were already concerned about customers hoarding cash and delaying payment until necessary, and the situation is getting worse now.”

The combined CMI improved slightly by 0.3 in April to a reading of 53.8, its best since September. The main driver for improvement stemmed from the favorable factors, led by a jump in sales and dollar collections. The combined index of favorable factors gained 1.4 points, with a 2.8-point jump in sales and a 2.1-point gain in dollar collections.

“The small change in the overall Credit Managers’ Index is deceiving in its impact,” said Cutts. “Sales improved, which is certainly a good sign relative to recession risk, but the steep deterioration in approvals of new credit applications is disheartening. Several respondents indicated that they are having to work with customers having cash flow problems due to capital being tied up in inventories, which requires them to be flexible on terms. But that can only go on so long, as these firms also have obligations that must be met.”

*The CMI is centered on a value of 50, with values greater indicating expansion and values lower indicating economic contraction.

What CMI respondents are saying:

• “We are seeing higher-than-normal requests for extended and modified terms. Customers are looking for creative ways to improve their working capital as banks have tightened up and as higher interest rates discourage drawing on lines of credit.”
• “We have seen a sudden increase in customers filing for bankruptcy.”
• “Customers are still citing large, built-up inventories as reasons that their working capital is tied up.”
• “Sales are up and past-due balances were down sharply as collections were good, providing overall lower AR on the increased sales volume.”
• “We continue to experience supply chain challenges.”

Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the April 2023 report. CMI archives also may be viewed on NACM’s website.

Join NACM Economist Amy Crews Cutts at Credit Congress on Monday afternoon, June 12, for a discussion of the economy and what’s next.

Clean data provides information for accurate decision-making. It is like flour to a baker—if you are even a half cup short, your cake won’t rise. And in data-driven industries like credit, it is at the basis of risk management decisions.

What is clean data? Data cleaning is a process that identifies and fixes errors such as duplicates or grammatical inconsistencies and replaces old data. This allows space for accurate data and creates a reliable model for business decisions.

The ultimate goal of keeping data clean is driven by a few main characteristics: to eliminate errors, increase data reliability and deliver accuracy while increasing quality and overall productivity for your company and customers. Many tools and platforms are available to use in order to maintain clean data practices.

Why does it matter? Dirty data can impose a significant risk to both your customer and company—even legal consequences in extreme cases.

Credit professionals should constantly analyze data to ensure it is up to standards. Set a detailed process for how data should be entered to limit the amount of cleanup that is needed—especially if you plan to move data into a new system.

“As we prepare our implementation, we’re taking a deep dive into our data looking at old transactions and errors such as duplicates,” said JoAnn Malz, CCE, ICCE, NACM chair elect and director of credit and collections at The Imagine Group, LLC (Shakopee, MN). “If you upload a lot of unclean data, it creates more noise not only for your credit analysts and your collectors but also your customers. It can make dirty data difficult to work with because it takes extra time to clean up and make it presentable to the customer.”

Inquiring the unapplied cash from a customer can be done through looking at transaction aging in order to make sure all their data is in sync with your system. “It comes with experience in looking at those transactions and being able to see where potential offsets may be,” said Malz. “When preparing to go through a customer’s account, we don't want to give them dirty data, nor do we want to burden them with having to clean up our data.”

Another danger to dirty data is the potential to lose credibility with a customer—especially if any misstatements are documented. For example, you may send out a paid-in-full notice to a customer due to data that was not updated in your system. Once the customer receives their dues are paid, they can leverage the fact that their dues being paid were written in a statement.

“Garbage in, garbage out.” The old saying still stands today. What you put in, is what you will get out and the time you spend cleaning your data is time well spent, said Darrell Horton, ICCE, director of revenue and credit at AGS LLC (Las Vegas, NV). “Clean data not only gives the customer thorough data of what they actually owe, but if you take some time to make sure your AR and statements are clean, you and your customer will both be on the same page.”

Missing data also falls under the ‘garbage’ category. For companies who use automation systems such as AI, accurate and complete information needs to be completed manually in order to match any pieces of data against each other. Reports must be accurate when you pull them from your system, said Penny Jeter, CBF, NACM Board director and director of credit at Ingram Industries (Nashville, TN). “AI is a tool we use that can match data from reports, but the information you enter needs to be correct when trying to transfer between different datasets,” Jeter said. “Your department is only as good as the data you enter into a platform. If it’s not clean, then you can seek the incorrect customer.”

Data can be lost in translation. Between new system transfers such as Excel to Power BI, it can be easy to make mistakes. Information can also be read differently and cause serious issues in the future. Whether changing ERP systems, going into new collections software or sending data to an outside source, clean data and accurate reports tell the true story of what is going on, Horton said. “If you find yourself making exceptions or excuses for mix-ups or confusion between customer data, then your data is not clean.”

Know Your Customer compliance also can be compromised if any major mishaps from dirty data impact your customer. “We always make sure to do a double check before closing out or have someone run a second audit in some instances,” Jeter added. “It’s about slowing down and being thorough. It can create more work for you in the end when you are not careful and cautious.”

Turn cleaning data into a habit. It is important to pay close attention to all data that flows in and out because it makes it much easier to spot dirty data and fix it at the source. Credit departments can implement project plans dedicated to clean data practices as well. Dirty data can lead a credit department to make poor risk management decisions. “Find the loopholes that cause data to go unclean and get on those early,” said Horton. “The longer you wait before cleaning it up, the harder it gets to clean because the information behind it is gone. Keep your data clean going in, and you’ll be in a lot better shape.”

To learn more about clean data and metrics, visit our website to download the white paper powered by NACM’s Thought Leaders.

Over the past decade, technology has expanded and shaped the way we conduct business—all the way down to payments. In a recent eNews poll, we asked credit professionals to rank their customer payment methods from most to least common and digital currencies came in last. But the use of digital currencies is expected to grow in B2B trade.

In fact, the global digital currency market is set to surpass USD million by 2030 from USD million in 2020 in the coming years, per MarketWatch. “The digital currency market is anticipated to witness significant adoption owing to advantages such as low transaction fees, fraud protection and simple international payments,” reads the article. Popular digital currencies like Bitcoins and Litecoins are predicted to drive market growth.

What is Digital Currency?

Digital currency is a form of currency that is only available in digital or electronic form. It also is known as cryptocurrency, digital money, electronic money, electronic currency or cybercash. Transactions can be made via computers or electronic wallets connected to designated networks or the internet.

Centralized vs Decentralized

Digital currencies fall under two main categories: centralized and decentralized. Centralized digital currencies are distributed by a central bank and government agencies, otherwise known as central bank digital currencies (CBDC).  

Decentralized digital currencies are based on blockchain technology; a distributed ledger enforced by a disparate network of computers. They are generally not issued or influenced by a central authority, such as the government or central bank.

Virtual Currencies

Virtual currencies are a subset of decentralized digital currencies, such as closed and open virtual currencies.

Closed virtual currencies function under a private ecosystem and cannot be converted into another virtual currency or into fiat currency, such as gaming network tokens. While open virtual currencies can be converted to other forms of money and operate in an open ecosystem. Examples of open virtual currencies are stablecoins and cryptocurrencies. The most prominent cryptocurrencies are Bitcoin (BTC) and Ethereum (ETH).

Pros of Digital Currencies

• Faster transaction times, especially for cross-border payments
• Do not require physical manufacturing
• Lower transaction costs
• Easier to implement monetary and fiscal policy
• Supports digital business models by enabling payment automation on (blockchain) platforms for trade finance, procurement and Internet of Things, per Deutsche Bank.
• Direct access to central bank funds, eliminating counterparty risk
• Payment fraud prevention through consensus mechanism

“The growth in digital currencies could make cross-border payments more efficient and help address the $1.7 trillion global trade financing gap,” reads an article from the World Economic Forum. “This gap heavily impacts SMEs who typically don’t have established financial records with banks. Public ledgers of digital currencies could be used to share payment and financial history to underwrite loans for import and export. At the same time, strong privacy protocols would need to be enforced in order to achieve this.”

Cons of Digital Currencies

• Limited acceptability
• Difficult to store and use
• Can be hacked
• Can have volatile prices that result in lost value
• Limitations on irrevocability of transactions
• A novelty, only a few launched
• Lack of regulation (potential tax evasion)
• Companies need to maximize internal processes
• Interoperability: the need to agree on a common global standard for cross-border payment based on CBDCs

Vulnerability to hackers makes digital currencies a security risk for companies. Just last year, cryptocurrency hackers stole $3.8 billion, according to a report by Chainalysis—up from $3.3 billion in 2021. In October, they had the most crypto hacks in a single month with $775.7 million stolen in 32 separate attacks.

“I see digital currency as a speculative investment and not a useful tool in settling payables and receivables,” one international banking and trade finance expert explained. “Until these digital currencies are properly regulated, I don’t see them as having practical usage for B2B payments.”

Cryptocurrencies or CBDCs are not as stable if the value of currency fluctuates, especially in international transactions. “A lot of international companies insist on U.S. dollars because it's a more stable form of currency instead of the Chinese yuan, which is more volatile,” said Karen Hart, attorney and partner at Bell Nunnally & Martin LLP (Dallas, TX). “So, companies must protect themselves by accepting a more stable form of currency, which isn’t crypto.”

Not to mention, the cost of implementing digital currencies can be high on the front end. “You need an accounting process and mechanisms to accept digital currencies,” Hart said. “So, there’s lots of operating costs and a learning curve. I think you would have to have enough of your customer base demanding digital currencies as an alternative payment method. In B2B credit, there aren’t.”

Digital Currency Around the Globe

As of March 1, 64 countries are in the advanced stage of development and over 20 central banks have launched their CBDC pilots, including Brazil, Japan and Russia, per the Atlantic Council. “Despite only being three months into 2023, these 18 countries have made significant progress on central bank digital currencies,” reads the article.

Other countries conducting a CBDC pilot are Australia, Canada, China, India, Jordan, Kazakhstan, Laos, Montenegro, Philippines, Saudi Arabia, Turkey, United Arab Emirates, Ukraine and the U.K.

Future of Digital Currencies

U.S. Treasury Undersecretary for Domestic Finance Nellie Liang announced the creation of an interagency working group to explore the development of a CBDC during a speech at the Atlantic Council. She noted that this group will comprise representatives from the Treasury Department, the Federal Reserve, the National Security Council and other respective government agencies.

But Fed leaders argue that the agency needs congressional approval to implement a CBDC. There must be privacy and security measures set in place. They must also assess the potential impact on monetary policy and the operational management of converting cash to CBDC.

The mechanic’s lien laws we know today provide a legal claim on homes and other property filed by an unpaid contractor or material supplier. Liens are used primarily to collateralize a debt that is owed. Many different liens exist today, including tax liens, mortgage liens, UCC liens and mechanic’s liens, just to name a few. Trade creditors are often most familiar with UCC liens and mechanic’s liens.

The concept of the mechanic’s lien on real estate came from Thomas Jefferson during the building of the nation’s capital, the District of Columbia. Subcontractors and material suppliers were being asked to extend large lines of credit to construct buildings, but these subcontractors and suppliers had no assurances to get paid by the property owner. Jefferson introduced the first mechanic’s lien in Maryland in 1791 to ensure that subcontractors and material suppliers could hold the owner accountable and responsible for the debt by virtue of a mechanic’s lien.

Jefferson used the term mechanic because all tradespeople, including contractors, were referred to as mechanics, and the vernacular stuck. However, with statutes currently in all 50 states, the term mechanic’s lien encompasses so much more today, said Chris Ring of NACM’s Secured Transaction Services.

“It is important to distinguish the meaning of mechanic’s lien because Jefferson’s definition of a mechanic did not have to do with machinery and repairment—the job we know today,” he explained. “Thomas Jefferson’s original concept of the mechanic’s lien law was to minimize risk of a write-off and to extend larger lines of credit when not selling directly to the property owner. The vast majority thinks mechanic’s lien laws apply to the modern definition of a mechanic, but a mechanic’s lien on real estate is different.”

For example, if you take your car in to get fixed by a mechanic, the process consists of the mechanic holding your car as collateral until the debt to repair your car is repaid. This would also be considered a type of mechanic’s lien. Associating the term with machinery did not exist until automobiles were invented—which is where a misunderstanding of the term stems from today. A mechanic’s lien is something that is filed. With vehicles, a lien has to be filed at the DMV or any motor vehicle association, rather than a mechanic’s lien on real estate which is done at the county recorder’s office.

“It’s a matter of knowing what type of lien you need to file,” Ring said. “It’s understanding what type of mechanic’s lien you need to file and when. Those who contact me are typically informed of the differences and how to understand them through a guidance perspective rather than a service we can bill them for to help them.”

Mechanic’s liens are used by trade creditors who supply materials, services or labor used in the construction of a piece of real estate. UCC liens are granted by virtue of consent and the consent comes in the form of a security agreement signed by the debtor and the creditor—and the lien is filed at the Secretary of State. UCC liens can be used by any trade creditor whose customer is willing to sign a security agreement.

NACM members are most familiar with a mechanic’s lien on real estate. But it can sometimes be mistaken for the mechanic’s lien used by automotive mechanics because the name is the same. The primary difference between UCC liens and mechanic’s liens is that mechanic’s liens are granted by virtue of a statute at the state level and the lien is most commonly filed at the county recorder’s office.

The STS Lien Navigator is the credit professional’s authoritative guide to notice, lien, payment bond and suit time requirements for all 50 states and Canada. Submit a service request so that NACM’s STS professional staff can research, produce and serve your Preliminary Notice/NTO or place your mechanic’s lien or claim against a bond filing using one of our network attorneys.