April 27, 2023

Customer payment methods have come a long way since cash and checkbooks. Last year, Automated Clearing House (ACH) payments were the most commonly used payment method by customers (43%) followed by paper checks (33%), wire transfer (13%) and credit cards (11%), according to an NACM eNews poll.

This year, we asked credit professionals to rank their customer payment methods from most to least common. Check was the highest ranked but ACH was a close second. Although credit cards were one of the lowest ranked, many credit managers say they are seeing more credit card payments than ever before.

Advantages

Credit cards benefit creditors by payment integration, which syncs sales data with accounting, CRM and ERP platforms whereas checks and money orders are processed and reported by hand. Not only are credit cards faster than other payment methods, but safer than debit cards, eCheck and ACH payment. In case of fraud, both sides of a credit card transaction receive protections, including refunds.

Customers not only have the convenience of instant pay, some have discount terms, in which discount is forfeited if they pay with a card. This is the case for Tina Hatfield, CBA, credit manager at Mountainland Supply (Orem, UT), where 28% of AR is paid by credit card. She does not charge fees currently, but is considering it in the near future. “Due to the extra labor to have staffing onsite to post checks, that is our least preferred method,” she explained. “Our team is remote, except for one person, to ensure that checks are properly handled. Credit cards are instant, but we do cover the fees and it is hard to collect on disputes. ACH is always preferred, but it is hard to get our customer to adopt that process.”

Disadvantages

Credit card payments are convenient but come at a cost for many businesses. Credit card companies charge higher fees to companies that accept credit cards. “I think the fees are high because there’s so many benefits to credit cards such as points for flights or miles,” said Steven Hopkins, CCE, CCRA, regional credit manager at North Coast Electric Company (Seattle, WA) whose primary payment methods received by customers are check, ACH and credit cards. “Creditors are willing to accept credit card fees if that means get paid now.”

Customers can ask for chargebacks, a charge returned to the payer in a transaction after they raise an item on their account. They can claim that the goods never arrived or the item received was different from what was described, damaged or the purchase was never authorized by them. This makes it harder for creditors to collect on disputes.

How to Offset Credit Card Fees

Creditors can offset high fees by a credit card surcharge, an additional fee for customers to help cover the cost of credit card processing. “Our surcharge fee is 3% additional,” said Sandra Logan, credit and collections manager at Stanton Carpet Corporation (Calhoun, GA). “But the CFO ultimately determines if that fee changes or not.”

Surcharging is permitted in most U.S. states, but not all, so it’s important to review the rules of your jurisdiction before doing so. “We try to have something in writing to avoid chargebacks should we get a dispute,” said Chris Roshong, credit manager at Graves Lumber Company (Akron, OH), who accepts Mastercard, Visa and Discover. Roshong advises a 2% surcharge for late payments 30-days past due or beyond.

For credit professionals who don’t surcharge, it’s the cost of doing business. “I think we should charge a fee but the incentives are too great not to,” Hopkins said. “We don’t charge fees because we accept credit cards at point of sale or when someone is past-due and that is the only method for collecting payment.”

Others accept credit card payments through their company website that is secured by a bank. “Our merchant card processor firm is enabling a 3% fee for all card transactions,” said Christian Pedersen, CCE, corporate credit manager at Emcor Services Aircond (Smyrna, GA), who’s only had one chargeback in 10 years. “There are no additional fees but the gross transaction dollars per accounting period increased by 3%, so the volume-based merchant fees will yield a minor increase for the accounting period.”

Interchange optimization, the process of sending additional data along with a transaction in order to qualify for the lowest interchange rates, can save creditors money. This means sharing your client’s industry (some have higher rates than others), where the product is shipped to and from, the invoice number and the invoice line-item details, can help lower the interchange fee. “If you integrate your payment processing service with your Enterprise Resource Planning (ERP) platform, it’ll be even easier to practice interchange optimization,” reads an article by VersaPay.

Credit professionals can also choose methods that minimize chargebacks by using card readers with chip detection and contactless payments. They also can limit card-not-present payments, such as over-the phone payments.

Fraud Red Flags

Accepting credit cards comes with the risk of potential fraud. According to Experian, B2B fraud costs U.S. businesses more than $50 million per year, and that’s an estimate. Fraudsters can set up firms “operating as dream clients in times of economic hardship—until they don’t, and the fraud is revealed, harming their creditors and investors,” reads an article by SEON.

To safeguard against fraud, creditors must do their due diligence by monitoring incoming and outgoing payments and verifying the company’s information. This includes detecting fake credit references and double-checking information on the credit applications.

Creditors can also use a third-party to process credit card payments. Kelly Simon, CCE, senior credit and collections manager at Outdoor Research (Seattle, WA) uses Signified, a service that reviews credit transactions for potential fraud. Signified covers the costs and provides documentation to fight the claim with the credit card company. “If our B2B customers don’t qualify for open terms, then we process on credit card terms,” she said. “But, if a customer has open terms when an invoice comes, they can pay by credit card which is processed by my team. The cost is worth it.”

Under the Uniform Commercial Code (UCC), debtors have a variety of options to overcome insolvency. For example, an Article 9 reorganization is an out of court restructuring that sells the assets of the debtor company to a third party with the proceeds for the benefit of the secured lender. Any residual balance of the secured debt remains with the debtor company. The buyer continues as a new business and does not absorb any of the liabilities of the debtor, including the trade debt. The sale must be at a fair market price, and may be concluded in as little as 60-90 days. With an Article 9 sale, the company avoids bankruptcy and a foreclosure action that would add additional expenses.

No preference law exists in an Article 9 restructuring and creditors may struggle getting payment. Although the creditor doesn’t have the risk of a potential preference action in an Article 9, they must look only to the insolvent debtor for payment of their unsecured trade debt. Maintaining open lines of communication and a strong business relationship with a customer, especially if their financial condition weakens, is the best defense against being taken by surprise by this or any other insolvency action. The new company is not responsible for the debts of the old company and should be considered a new customer. Credit professionals should follow the same procedures and due diligence used in onboarding any new company.

In a UCC sale, if any assets left behind benefit the unsecured creditor, take a proactive approach. “Doing a foreclosure under Article 9 is a great way to move assets because there’s a buyer that can potentially make a commercially reasonable sale,” said Deborah Thorne, U.S. bankruptcy judge, Northern District of Illinois. “From the bank’s perspective, it is a way to quickly dispose of assets where the borrower or debtor has been unable to fulfill the terms under their agreements.” However, it is less than ideal for creditors.

Sales by a secured lender should always be commercially reasonable, and is considered the ultimate test under Article 9. Secured lenders cannot do a foreclosure under Article 9 and sell assets in a manner that gets its debt paid off, but does not maximize value, said Jason Torf, Esq., partner at Tucker Ellis LLP (Chicago, IL). “The problem with Article 9 is there’s not nearly enough transparency as there is in a bankruptcy process where everything is publicly available on a court docket,” Torf said. Even with both public and private sales, notices can be hard to find because not all notices are sent to every creditor. “Sometimes, Article 9 sales can be done by private transaction where you don’t get any notice as an unsecured creditor or might get a notice after its done.”

Creditors must stay ahead of what’s happening with a debtor. Unsecured trade creditors should be in touch with their debtors and ask questions in order to find if they intend to do a secured party sale, said Justin Kesselman, partner at ArentFox Schiff LLP (Boston, MA). “You have to know what the terms of the sale are because the secured party sale could possibly wipe out all of the collateral,” Kesselman said. “The proceeds of that collateral pay the secured debt leaving the debtor with no remaining assets or anything to pay trade creditors. In contrast, with a bankruptcy case, it’s a much more open process where all creditors are going to receive notice of any type of disposition of collateral outside the ordinary course of business.”

Though bankruptcy can provide more transparency than an Article 9 restructuring, if the assets don’t have much worth to them, bankruptcy is not the best decision to make. As a trade creditor, you want to get paid quickly with any assets that are left. And for unsecured creditors, it’s not the best scenario because the assets may not be sold in the foreclosure for enough to ever pay the unsecured creditors. “If you’re a vendor for someone and know that they’re having trouble with their bank, you may want to ask your lawyer to look at whether the bank or another creditor has properly filed their UCC financing statements,” said Thorne. “They may or may not have a security interest so you should make sure everything is done. That is where I think an Industry Credit Group in NACM can be valuable because everyone could have been selling to the same person that’s not paying you.”

A lender can repossess collateral in either satisfaction of the debt or take collateral and hold a public auction or private sale to satisfy the secured debt. You want to create a uniform system to govern the creation and enforcement of security interest, Kesselman said. “Article 9 sale processes should really be used when you have secured debt as an alternative to a restructuring under the bankruptcy code or other state law,” Kesselman added. “Your primary debt will be covered as a secured debt and can be an alternative to winding down and liquidating the company through a process run by an independent fiduciary.”

In a bankruptcy case, the sale process is going to be run through the bankruptcy court and proceeds of the sale would be used to distribute to secured creditors first. Any remainder to fund distributions to unsecured creditors would be done under a process overseen by a bankruptcy court. Article 9 creates a different notice and time requirement depending on the type of transaction that is run by the secured lender. “An insolvent company can file a bankruptcy but, in many cases, companies are liquidated through Article 9 sales where lenders use collateral,” said Bruce Nathan, Esq., partner at Lowenstein Sandler LLP (New York, NY). “A lender can use Article 9 as a remedy for default or collect its AR collateral. UCC Article 9 sales are frequently used as a liquidation device.”

Suppliers have a strong influence on the success of a company. Especially with ongoing supply chain issues tracing back to the start of COVID-19. According to Plante Moran, one of the biggest challenges this year is unpredictable and longer lead times “causing material shortages around the world.” Credit professionals can use their risk management skills on the other side of business to protect their company from faulty suppliers.

Supplier vetting is the process of thoroughly investigating a supplier before deciding to purchase their product or service. During the process, credit professionals work together with the procurement department, who is traditionally in charge of purchasing and buying supplies, to hire the right suppliers. If your suppliers are delivering substandard products to you, your customers will receive low-quality products, which could result in loss of customers and revenue.

Where to Begin?

The first step in the supplier vetting process is similar to how you would check customers—conduct a thorough financial review. For example, “Reviewing supplier financial statements and D&B reports help us see how financially healthy suppliers are, how they pay their suppliers, and if they have suits, liens or bankruptcies,” said Kevin Chandler, CCE, director of financial services at Zachry Industrial, Inc. (San Antonio, TX), who hires suppliers daily as an industrial construction company. “This gives us an idea on how they run their business and if they keep themselves out of trouble. We have other internal groups that look at their safety record, quality of work and capacity to do business.”

It’s also important that proper security measures are set in place in case of emergencies. “After the engineering team approves a supplier, we engage with the supplier with an NDA and our master supplier agreement to negotiate terms,” said Shaun Papperman, CCE, CCRA, CICP, director of order fulfillment at Baltimore Aircoil Company, Inc. (Jessup, MD). “Then, depending on the level of spend, someone from either the engineering quality team or my supply chain team visits them, goes through an entire scorecard of safety, quality and commercial terms to maintain the level of standard that we expect before making a final approval.”

In some instances, performance, refund or payment security is put in place to mitigate supplier risk. Securities can take the form of letters of credit (LC), bank guarantees, various types of surety bonds, guarantee agreements or retention. In the industrial construction industry, you may pay suppliers milestone payments prior to delivery and acceptance of purchased equipment. “In some cases, we take refund security in the form of a LC or bank guarantee that’s guaranteeing refunds of those advanced milestone payments that we’re making to the supplier should that supplier default,” Chandler said. “In other situations, we ask for payment bonds to ensure the supplier we hired will pay their suppliers in an effort to keep our job out of potential risk from liens and slowdowns.” In addition, corporate guarantees and parent-company guarantees are used to minimize risk. The supplier reviews that Chandler conducts allows him to determine what type(s) of security to put into place. Chandler reviews and approves the language of all the security documents put into place along with the strength of the bank, surety or guarantor that issued the security.

What Makes a Solid Supplier?

Aside from a clean track record, suppliers must share the same vision as you. “It’s suppliers that share our long-term views and that are seen as leaders in the market,” Papperman said. “We’re the market leader in what we do and we tend to pair with other market leaders that have high quality and safety standards, are sustainable and competitive.”

When hiring a supplier, you want to see where you fall on their priority list for products, said Marlene Groh, CCE, ICCE, regional credit manager at Carrier Enterprise LLC (Charlotte, NC). “When you first start doing business with any supplier, you’re at the lower end of the priority scale. But being high on their list ensures that things will get done properly.”

Make sure you’re partnering with suppliers that uphold your best interest. “We ensure that we’re partnering with the right people rather than the ones that are working strictly for their own personal gain,” Papperman said. “We guarantee that we’re dealing with customers of high quality, that share our values and have plans for the future.”

How Does This Impact Supply Chain?

Supply chain backlogs impact the speed and quality of products no matter who your supplier is. By selecting qualified suppliers, you ease supply chain risk. “Right now, what we’re seeing on the supplier side is that because they’re limited in their manufacturing and getting product out, they’re choosing lines,” Groh said. “Now, they’re having the resources for a line we did not have to do before. I think the procurement side is so much harder right now with trying to make sure we have the product to sell.”

Supply chain issues impact creditors who have international suppliers, especially those who hire suppliers more frequently. “When supplies don’t arrive at the right time, it makes it difficult to build our facilities within the specific schedule we have committed to,” Chandler said. “This also impacts suppliers financially since we pay them for their products and services. This is why we do annual financial reviews to see how the supplier performed pre-COVID, in COVID and post-COVID. This shows how they manage supply chain issues at any given time.”

Add Value to Your Company

Working with the procurement department in the supplier vetting process makes for a cohesive work environment. You’re both after the same common goal with different skills sets. In the end, business performance and revenue increases.

By participating in the supplier vetting process, credit professionals can add value to the entire order-to-cash process. “Through supplier vetting, the credit department gains more credibility within the company and becomes more involved in the decision-making process,” Chandler said. “Not only will we grow as credit professionals, but hopefully receive the recognition, credibility, and financial compensation for the services we provide.”

Participation is an important part of learning. We have needed to participate throughout our entire lives—whether in school, sports, hobbies or careers. But what is it that makes anyone participate? Is it motivation? Incentives? The question that has grown the loudest from generation to generation is: What’s in it for me?

Credit professionals are given opportunities to have their voices amplified through tools such as surveys, networking and conferences. With these opportunities you must give in order to get. In other words, your participation matters—and how much you put in can determine how beneficial the outcome will be.

Networking provides great educational opportunities and addresses timely issues credit managers currently have, said DeAnna Leahy, CCE, NACM chair and corporate credit manager at Sunroc Corporation (Orem, UT). Credit professionals are more likely to participate in a subject matter they’re interested in or need answers to. “NACM’s Industry Credit Groups are a very important source of information and an effective management tool I can use to help my company minimize risk and make better informed decisions about a customer,” Leahy said. “Participating in voicing our concerns helps us make a decision of what’s best for our company and dealing with the customer in order to minimize the risk our company takes.”

Another way to get involved is by offering your insight through surveys. Most surveys can be done through multiple choices of options to choose from, or can provide a space for you to curate your own questions and answers. “Participation in the Credit Managers’ Index (CMI) survey is especially important,” Leahy said. “It’s a pretty powerful tool that can be used as a leading economic indicator of what’s happening in the economy. So, it’s important to get more participation in that because the more we get, the more accurate the numbers are.”

Participation should reach far and wide rather than stay confined in one space. Credit managers need to know how impactful the CMI tool is and get involved, Leahy said. “We need participation from people all over the country in order to get the full picture,” she added. “A lot of economists from across the country have looked to the CMI as being one of the most important leading economic indicators.”

The hardest part of getting anyone to participate is to show how their participation has a direct impact—but motivation to do so differs from generation to generation. As a leader, this is where emotional intelligence fits into the equation. “By having the knowledge base to share, you see less turnover and less lost productivity when you have emotional intelligence,” said Scott Chase, CCE, CICP, global director of credit at Gibson Brands, Inc. (Carthage, NC). “People must want to respect their leaders in order to do their job at full capacity and participate—and younger generations tend to think from the perspective of their time being valued and what they can get out of it. Participation is motivated in different ways.”

Leahy said participation from younger generations should be presented in a more fun way—through simplified explanations that tie to the bigger picture. “Younger generations coming into the workforce have to know the why behind the importance of something like the CMI.” 

Participation garners transferrable skills of communication and involvement—all the tools you need when building your credit toolbox. The more people who have a voice at the table gives credit professionals an indicator of what’s missing, or what needs to be paid more attention to. Participation provides the elements needed to build and improve the future.

Get Involved with NACM

• To learn more about the Credit Managers’ Index survey, sign up to receive participation alerts.
• Stay ahead of the latest credit industry trends by attending webinars with expert speakers. See the lineup here.
• Become a thought leader and network with others while discussing topics such as technology, construction credit, global credit, performance metrics and leadership. Sign up
• Network in person with other credit professionals at Credit Congress in Grapevine, TX from June 11-14.
• Take FCIB’s Credit & Collections survey each month and offer insight on the countries where your customers are based.