June 1, 2023

NACM’s Credit Managers’ Index slipped 1.6 points in May to 52.2, nearly erasing three months of improvement. This indicates the economy could collapse under the mounting pressure of lingering debt ceiling issues, interest rate hikes and continued stress in the banking sector, said NACM Economist Amy Crews Cutts, Ph.D., CBE.

“The CMI is indicating that a recession starting in 2023 is a strong possibility once again,” Cutts said. “The May CMI survey reversed most of the improvement made since January, and while not exactly disastrous news, there is a clear signal that business conditions are weakening.”

Combined favorable factors fell 3.4 points to 56.3, led by a 5.4-point deterioration in the sales factor index to 53.9 points and a 4.7-point deterioration in the dollar collections index to 57.1. The amount of credit extended factor index lost 2.7 points to 56.2.

Combined unfavorable factors fell 0.3 to 49.5. All but two of the unfavorable factor indexes deteriorated in the May survey; the index for dollar amount of customer deductions improved by 3.4 points to 53.0 and the index for rejections of credit applications improved to 48.7. The index for the dollar amount beyond terms slid 2.4 points to 51.7 and filings for bankruptcies sank 2.1 points into contraction territory.

*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 still have a large backorder log.”
• “Inflation and passed-on price increases of materials are the main reasons for higher sales numbers. Yardage is not up.”
• “We are starting to feel real tension in the lower third of our portfolio.”
• “Our stock sales are flat as we see some price deflation from a year ago, especially with disposable products. We are focusing on collections and reducing terms which we allowed leniency with during COVID to the restaurant industry. Low interest rates made this possible and higher interest rates for our ABL are tightening terms extended.”
• “We have seen an increase in the number of customers who are requesting greater terms.”

Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the May 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.

Commercial bankruptcies have skyrocketed since the historical lows during the height of the pandemic. At 236 corporate bankruptcy filings so far this year, the number is higher than the first four months of any year since 2010 and more than double 2022 levels, according to S&P Global Market Intelligence. They forecast that the U.S. default rate will rise to 4.25% by the beginning of next year, up from 2.5% currently—or to 6.5% if there is a serious recession.

In mid-May, Vice Media Group joined many of major companies to file for bankruptcy this year. “Vice’s bankruptcy documents tell the story in painstaking detail of what happens when the easy-money era comes to an end,” reads an article from Axios. “The first thing that happens when the ultra-easy access to funding dries up is the spigot stops for the companies that maybe shouldn’t be borrowing more anyway.”

Retail companies are some of the hardest hit in the current economic environment because they are susceptible to consumer buying changes. Inflationary pressures, high interest rates and supply chain issues are among the primary factors leading U.S. corporations to bankruptcy. And many finance analysts predict an economic downturn in 2023 that will contribute to even more tightening, said Christopher Ng, Esq., managing partner at Gibbs Giden Locher Turner Senet & Wittbrodt LLP (Los Angeles, CA). “Not to mention the weakened real-estate fundamentals where commercial properties are worth less so there is less desire for a bank to loan against these properties.”

The Problem with Subchapter V

Subchapter V bankruptcy filings increased 81% year-over-year in April, according to Epiq Bankruptcy. Subchapter V is a newer modification of Chapter 11 for small businesses, but it places a larger burden on creditors to collect debt. Only small-business debtors whose total debts do not exceed $7.5 million can file for Subchapter V. The initial debt threshold was roughly $2.75 million, but the CARES Act increased that limit for another two years—and the expectation is that the $7.5 million threshold will become permanent.

“The intent with Subchapter V is to streamline the process, and make it more efficient and less expensive for the debtor,” Jason Torf, Esq., creditors’ rights attorney and partner at Tucker Ellis LLP (Chicago) said during Subchapter V of the Bankruptcy Code: Its Impact on Trade Creditors. “But at the same time, it strips away certain elements of a traditional Chapter 11 that are beneficial to creditors.”

Credit professionals may be sitting on a ticking time bomb without even knowing it. In fact, most (40%) creditors do not know what percent of their portfolio is made up of customers who qualify for Subchapter V bankruptcy, according to an eNews poll—and the 31% who do know the answer say 10% or more of their portfolio qualifies for Subchapter V.

Creditors must be aware of how many of their customers could file using this subchapter because it makes it much more difficult to collect debt. You might even consider placing eligible customers in a higher risk category “because there will be a lot more factors working against the creditor if the customer files,” Torf explained. “There is an additional layer of risk with Subchapter V that does not exist in the traditional Chapter 11 route, and debt recovery is not as successful.”

How to Protect Your Company

From a creditor’s perspective, the key is mitigating risk immediately, especially when you know a customer is insolvent. “When they file for bankruptcy, there is a long checklist to follow,” Ng said. “Learn how to defend yourself in preference claims and make sure that you have as much security as possible with accounts, especially high risk accounts. In those cases, make sure you get alerts or that there’s a way for you to discern when a customer is building up inventory after years of not buying much.”

Revisit your credit policy and credit agreements, tighten your terms and try to secure collateral where possible using letters of credit, security deposits and secured interest. “Monitor your accounts receivable (AR) closely,” said Mike Mandell, corporate collection manager at Ryder Truck Rental, Inc. (Miami, FL). “For a Subchapter V, I recommend people talk to the trustee. I would try to see who some of the other unsecured creditors are to band together to look at how you can get better oversight in the case. I would encourage people to go to different organizations where us as unsecured creditors can all band together. There, you can lobby to get some of the rules changed on Subchapter V because it has not gone well for unsecured creditors.”

In 2022, six out of 10 companies were targeted by fraud attempts in the U.S., according to data from TrustPair. 55% of companies targeted by fraud attempts indicated changes in supplier information on legitimate payment as how the fraud was perpetrated. Fraudsters send an email impersonating a supplier and asking to change their bank account information for example.

“B2B payment fraud affects companies in various ways,” the article reads. “The first obvious impact is financial loss. In 2022, 24% of company’s victims of fraud lost more than $100,000, and 5% lost more than $1 million. Unfortunately, funds are rarely recovered, especially when they stem from international or instantaneous transfers.”

Fraud prevention starts with individual employees, and credit professionals should be especially careful as the overseers of sensitive customer information.

Prevent Careless Clicking

Phishing and email links are one of the most popular ways fraudsters can hack into your company’s databases, said Jay Tenney, managing director at Trade Risk Group (Irving, TX). For example, if a buyer remits to a new bank or a change in address, the fraudster will easily collect the money through the information provided. “Many credit processes and payable procedures will always say to call to verify if any changes of address come through email or physical mail,” said Tenney. “We changed our remittance address around a year ago and were shocked at how few calls we got from customers about our change in address.”

However, some cybersecurity attacks can go undetected for up to three months. If the hacker wants to encrypt all information, they can lock down your entire network. This can impact production not only when you’re trying to clean it up, but also your capabilities to make any money, said John Senneff, director of IT at Marek Brothers Systems, LLC.

“You have to know how long your revenue stream has been out and the loss that has come with it,” Senneff added. “When you talk about the overall loss of a cyber event, it can be millions of dollars. And not being able to make payroll or money can be costly to the reputation of your company and possibly hinder future clients wanting to work with you.”

Companies also can hold basic training practices on what not to click on, red flags to avoid and what to do in the event an employee falls for a fraudulent link. But even with training, it is a matter of identifying and mitigating risk before it becomes a “production-affecting event,” Stenneff said. “If a bad apple data mines a company, they can stay undetected for years,” he added. “In these contracts, the question always is what is the extent of the damage that could be? Always be prepared for higher-risk scenarios.”

Read Contracts Thoroughly

When signing contracts with new customers, it is always important to read all the fine print. “If you see any language in the contract that looks remotely different than what you’ve seen in the past, go up the ladder and get another set of eyes on it,” said Tenney. “Whether you have in-house counsel or the CFO, get them to sign off on the contract as well.”

Impacts of Cyber Liability Provisions in Customer Contracts

Some contracts under cyber liability provisions can include language that holds your company responsible if your customer falls victim to fraud by someone else pretending to use your company’s name. “This provision is assigning risk and liability, but it can be misleading,” Steve Winn, corporate credit manager at Marek Brothers Systems, LLC (Houston, TX). “Even if we’re a solid company and doing everything right, fraud could still happen and could hurt for us.”

If a contract does include cyber liability indemnity provisions, your company could be responsible for financial damages from data breaches that originated from your system (through a phishing email link, for example). A data breach could cost millions of dollars, said Winn. “What we’re seeing is provisions that are in a broader form, with some that only apply if you’re integrating your system with another company’s system,” Winn added. “Secondarily, we have interest requirements that are requiring cyber liability coverage for between $1-$5 million and it’s becoming increasingly hard to obtain at a reasonable price.”

Cyber liability provisions can change frequently as it is a newer concept, Tenney said. “There is not enough case law out there yet to determine what exact provisions should be included in those contracts.”

In any organization, it's essential to have accurate and timely financial data. However, manually reconciling cash and accounts receivable (AR) transactions can be tedious and error-prone, taking up valuable time and resources. That's where the BlackLine Cash Application and AR Intelligence solutions come in—it’s a no-brainer decision for finance professionals looking to save time, reduce errors and gain valuable insights.

Here are five reasons why BlackLine Cash Application and AR Intelligence are a must-have for businesses:

1. Save Time

As your organization grows, so does the volume of payments and AR transactions that need to be reconciled. Manually reconciling these transactions can take hours, if not days, of your time with never-ending searches for remittances and customer account information or data keying to your ERP.

With BlackLine, you can automate this process and free up time for more important tasks. The technology continually learns and automatically matches cash receipts to open AR invoices before feeding the data to the ERP, reducing the need for manual intervention. This means you can focus on analyzing exceptions and addressing customer issues sooner.

2. Reduce Errors

As the volume of payments you process increases, so too does the risk of human error. Manual reconciliation and data processing can be error-prone and lead to rework and inaccurate financial data, which can seriously affect your business. With BlackLine accounts receivable automation, you can reduce errors by automating the process.

3. Gain Valuable Insights

As your organization grows, so does the need for valuable customer insights. BlackLine Cash Application and AR Intelligence can provide you with real-time data on payments and customer trends and changes, giving you the decision intelligence you need to help make strategic decisions. For example, you can identify customers who consistently pay late and take action to reduce payment delays, identify customers who may be a credit risk and take steps to mitigate that risk, or even get a future payment forecast built by data on how your customers have paid you previously.

4. Increase Efficiency

With the expansion of your organization, the need for efficiency becomes even more critical. The time and resources you save by automating the AR process with BlackLine's solutions can be put to better use. For example, you can use the time you save to make more focused collections calls, improve customer relationships or refine your processes.

5. Scalable Solution

A scalable solution that can grow alongside your business, adapt to changing needs and expand customer bases helps ensure long-term success. With BlackLine, you can be sure you’re getting a scalable, automated accounts receivable solution that can provide your business with greater efficiency, accuracy and flexibility. It’s an essential solution for modern financial management.

BlackLine is a Credit Industry Partner of NACM. Connect with BlackLine experts by listening to the latest episode of our Extra Credit podcast, stopping by the Solutions Hub Expo Booth # 507 at Credit Congress, registering for their webinar on June 5 and participating in an exciting research opportunity on AR automation.