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In the News

June 24, 2021

	I. Credit Professionals Should Brace for Possible Impact of High Inflation
	II. Government-backed Trade Credit Insurance Schemes Coming to an End

	III. Contract Review Software Increases Productivity, Frees Up Time
	IV. Rise in Fraud Highlights Why Credit Professionals Must Care about Compliance

Credit Professionals Should Brace for Possible Impact of High Inflation

Annacaroline Caruso, editorial associate

As pandemic restrictions ease, consumer demand is ramping up for the first time in more than a year, and the demand surge is driving inflation to record high levels.

“We’re in a period of inflation that we haven’t seen for several years … we’re starting to see numbers that we have not seen since the 1970s,” said Jay Tenney, managing director at Trade Risk Group (Irving, TX), during FCIB’s Global Expert Briefing last week.

Federal Reserve Board members and bank presidents increased their inflation predications for 2021 to 3.4% during a meeting last week, 1% higher than originally projected in March. The ongoing inflation will have a significant impact on how credit managers screen customers and analyze risk moving forward.

Inflation tends to give companies a false sense of confidence because orders are booming. But where businesses get themselves into trouble is forgetting to look at their cashflow statements, Tenney explained. “It’s great that the economy is ramping back up, but that can also lead to additional defaults so you have to be extra careful when going into a rising economy, especially when it has inflation,” he said. “Underwriters know you tend to see as many claims, if not more, when the economy is on the uptrend.”

No industry is immune to the domino effect inflation has on businesses in the global trade market. Credit professionals should prepare for higher receivable balances and slower paying customers. That is partly because of the increase in the cost of goods. For example, the soaring prices of copper, corn, steel and most notably lumber.

The supply shortage also means companies “will have a tendency to purchase more than they really need,” Tenney added. “This supply lag will continue as long as the economy continues to ramp up.”

All of these factors add fuel to the inflation fire and make it more difficult to stop. Tenney also pointed out that in some cases the government is slow to try and curb inflation.

“One thing to keep in mind is governments are not totally opposed to inflation because that shows the economy is growing at a healthy rate,” he said. “The higher the rate of inflation, the more it depreciates their current debt.”

The million-dollar question now is whether the current inflation is transitional or structural. Strong arguments support both cases, making it difficult to predict how long the inflation will last, Tenney said. But credit professionals should proceed with some caution either way.

“The most important thing is to know your customer,” he explained. “It’s probably more important now than it’s ever been.” Take that piece of advice one step further, and get to know your customer’s customers because “it takes one weak link for all the companies to follow-suit.”

Tenney also stressed the importance of requesting financials, even from long-time customers, to help mitigate potential risk during this inflationary period. Creditors can blame their banker when asking for financial documents to avoid an awkward conversation with customers.

For a more detailed look at other new risk factors and risk mitigation strategies for credit managers, read NACM’s upcoming August issue of Business Credit magazine in print or by downloading the app.

The next FCIB Global Expert Briefing is on July 16 and will focus on political hot spots.

Government-backed Trade Credit Insurance Schemes
Coming to an End

Bryan Mason, editorial associate

Trade credit insurance protection schemes in the U.K. and Germany are set to expire on June 30. The U.K. government and the Association of British Insurance introduced these schemes during the pandemic to provide a safeguard for jobs while enabling trade to keep flowing.

Now, the U.K. government and participating credit insurers are working together to enable a smooth transition back to pre-pandemic insurance coverage processes.

“The trade credit reinsurance scheme has been a huge success story, with the government and insurers working closely together to back more than half a million businesses, protecting jobs and providing confidence through the pandemic,” said Paul Scully, U.K. business minister, in a statement. “The scheme allowed trade to continue flowing despite the uncertainty caused by the pandemic, and it is only right that now our economic outlook has improved and businesses are getting back on their feet, the private sector resumes its role of providing insurance cover. I look forward to continuing to work with insurers to deliver the support which businesses need.”

These schemes gave businesses that use insurance the confidence to keep extending credit, said Ron Shepherd, CICP, and director of business development and membership. “Without them, trade would have been reduced. They did what they were supposed to do.”

Retailers across the U.K. are not pleased that the arrangement is coming to an end and have requested the government to extend it. According to a Retail Gazette article, Retailers call on gov’t to extend credit reinsurance scheme, retailers are arguing that the scheme offered “guarantees to insurers who cover suppliers against the risk of non-payment by their customers.” The article notes that the British Retail Consortium, a trade association for retail businesses in the U.K., expressed additional concerns to Scully, stating:

If credit insurers base their risk assessment on retailer’s recent performance, many will be left unprotected.
Insurers need six months of consistently strong trading data to reassess coverage decisions.

Lenders may be hesitant to extend uninsured credit to retailers after a year of lockdown restrictions.

In Germany, the government, in correspondence with participating credit insurers, also shared that the German state protection scheme, which performed similar functions as the U.K.’s trade credit reinsurance scheme, will also come to an end June 30. Additionally, credit limits that exist solely on the basis of the scheme may be reduced or canceled, according to a recent blog post by Astreos Credit.

However, Germany recently implemented new legislation called the “Stabilization and Restructuring Framework,” which aims to enable restructuring measures to be taken at an early stage, provide access to early warning indicators and provide debt relief for companies prior to standard insolvency proceedings.

As the plans come to an end, “some of the marginal accounts could have their coverage reduced. “It depends on what happens with claims,” Shepherd said.

Contract Review Software Increases Productivity, Frees Up Time

Bryan Mason, editorial associate

Reviewing contract proposals to identify unfavorable language is vital for credit professionals to ensure they are doing business with suitable customers. Adopting contract review software can help automate the process and ease the burden that comes with sifting through pages of terms and conditions.

“For contract review purposes, my company typically is a subcontractor on construction projects, both public and private, in almost every state,” said Danita Ward, credit manager at Kewaunee Scientific Corporation (Statesville, NC). “None of the subcontracts or purchase orders are created internally. We receive a huge variety of documents all unique to the specific job.”

Ward states that she would like to implement a contract review software platform that allows her to run subcontracts through it amidst the chaos of constantly cross-referencing information between subcontracts and the prime contract.

“Many subcontracts reference and obligate us to a prime contract and all of the documents related to the prime,” Ward said. “So, all referenced documents must be reviewed and cross-referenced to understand the contractual requirements of each order.”

The time-consuming nature of reviewing the language within these documents can be a tall task for any credit manager, especially when handling multiple order requests. A contract software application can bring a sense of relief to this process and allow credit professionals to establish a foundation for their company’s requirements for future contracts.

“Currently, I review all contracts and the intent is to speed up the review process to keep the orders moving and free up my time while protecting our interests,” Ward said.

This contract review software can perform a variety of functions to help users review contracts faster and more accurately while simultaneously organizing the results and the entire review process. Not all software platforms are the same, but some include:

Custom-built contract templates that use user data.
Real-time, in-browser editing.
Automated workflow that sends contracts when they are ready.
In-browser contract negotiations.
Automated AI contract reviews that locate user-specified information or language.
Suggestions for language.
A playbook that establishes triggers based on custom user data. Often built with the help from the legal team or attorneys and programmers

According to Shaun Papperman, CCE, CCRA, CICP and director of order fulfillment for Baltimore Aircoil Company (Jessup, MD), contract review software programs allow for more efficient workflows and improved tracking.

“Some packages use artificial intelligence to correct potential errors and improve styling or formatting,” Papperman said. “Most also highlight key areas that require review. This type of software is commonly used by law firms, but we are exploring the options that might support our legal team as well.”

Not all contract software apps may be compatible with your company’s requirements so it is important to test multiple applications to find the best fit. Neither Papperman nor Ward have settled on a software program, as of yet. However, Papperman has narrowed it down to two.

Although Ward is still evaluating options, she has established a few key factors she wants the program to possess: flexibility to review a variety of documents, confirmed ability to identify terms relevant to her company’s business model and a reasonable cost.

“So far, the options we are considering are designed to search for [common language] issues we identify to create a playbook,” Ward said. “We would work with programmers and attorneys to structure the software based on specific criteria and our experience. Some of the better options include software as well as human review.” However, these better options come at a heftier price, Ward continued.

“One software that initially appeared to have potential had difficulties with the different document formats we receive and would have to convert them before review,” Ward said. “This impacted pricing. At this point, we have not identified software that would fit our needs.”

Dive Deeper into the Credit Learning Center

Rise in Fraud Highlights Why Credit Professionals
Must Care about Compliance

Annacaroline Caruso, editorial associate

One or more regulatory compliance violations will quickly erode the trust you worked so hard to build with customers, not to mention potential lawsuits and financial liability. Regulatory compliance is a company’s ability to properly follow local, federal and international laws and regulations.

Compliance requirements pop up in numerous transaction services like the order-to-cash and procure-to-pay cycles, said Chris Doxey, CAPP, CCSA, CICA, CPC, president and owner of Doxey Inc., during an NACM and FCIB Executive Series webinar, Regulatory Compliance 101. “If you leverage compliance efforts and internal control efforts, you're really going to make sure that nothing falls through the gaps, and you're not duplicating efforts, and you're using resources correctly,” she explained.

A recent increase in fraud risk makes staying on top of compliance regulations all the more important. “A risk-aware culture is perhaps the most valuable asset that a firm can develop, especially when confronted with a changing environment,” according to Thomson Reuters Cost of Compliance 2021 report published earlier this month.

The problem is that a multitude of compliance regulations exist, and they are constantly being updated. For example, the AML (anti-money laundering) Act of 2020 will cause the U.S. Treasury Department to “create or amend at least a dozen regulations and create a beneficial ownership registry,” which could make compliance more “burdensome” for financial institutions, the report states.

The sheer volume of regulations makes it easier for fraudsters to slip through the cracks, especially as the volume of financial crimes increase. The virtual world created by the pandemic also makes it easier for companies to get away with fraud because they can hide behind a screen, making it more challenging to validate proper adherence.

Credit managers should already have a hand in the KYC (know your customer) compliance process, but properly conducting due diligence and identity verification is more difficult today. “The COVID event has underscored the financial sector’s susceptibility to operational risks, especially those related to cyber security,” the Thomson Reuters’ report explains.

So, if your company is not using a third party to help with compliance screening, it can be time consuming, Doxey said. “You may do some compliance screening today and think that you've checked everything you needed to check but unfortunately that individual or company may show up on a government watchlist like OFAC [Office of Foreign Asset Control] tomorrow, so it's really hard to keep up with everything.”

Some companies outsource compliance responsibilities due to a lack of in-house compliance skills for additional assurance on compliance processes and to access third-party KYC functionality

However, outsourcing is not always the answer for keeping up with compliance regulations. It can be expensive, and “ultimately, boards and senior management of regulated firms retain responsibility for the functions and services outsourced and are responsible for the management of risks associated with outsourcing,” the Thompson Reuters’ report says.

That is partly why it is crucial for credit managers to work with their company’s CFO and internal controls department to ensure “that we're paying our foreign vendors properly, but we're also receiving cash from our foreign vendors … and that we're not paying or receiving a bribe from anyone according to the Foreign Corrupt Practices Act,” Doxey said.

Combining compliance regulations with the internal controls program is one of the best ways to lessen the chances of a violation because doing so reinforces due diligence requirements, leverages resources and makes it easier to validate compliance requirements, Doxey explained.”[The CFO and controller] provide a stewardship to prevent cash leakage; they want to align capabilities and cost; they want to provide a strategy to make sure that the achievement of both the business and financial strategy are something that that actually happens.”