July 6, 2023

The best credit decisions are made in a team environment and several different departments can provide input. A recent eNews poll revealed 97% of credit teams involve upper management in credit decisions, along with the sales team (26%), treasury (9%) and customer service (3%).

Standard procedures for credit decisions usually start with a customer who requests terms with the sales department, leading the sales team to provide the credit department with a background on the customer along with their projected sales. Because of the risk involved in making credit decisions, credit professionals usually have a helping hand or two in making decisions.

The customer service, sales and the credit departments are all involved in credit making decisions, said Natalie Pearson, CBA, regional credit analyst at TTI, Inc. (Fort Worth, TX). “Very rarely is the decision making strictly credit based,” Pearson said. “We always like to involve the sales teams so they are aware of what is going on, and often they have information that we may not as they have the closest relationships with customers.”

Before creating a decision-making process, it is key to first determine what the end goal is. Some credit professionals work directly with other departments, but others make the final say themselves. “For our foreign division, I do all the research and get the customer’s credit reports, review them and make a recommendation while the CFO does the final approval,” said Faith Padgett, CICP, credit manager at Farm Direct Supply, LLC (Fort Lauderdale, FL). “But to get to that point, it is pretty interactive. I’m always talking to the team and trying to help them visualize the customer and what their goal is when we’re making a credit decision.”

Other departments, such as sales, can provide an extensive history of customers down to their payment patterns and intangibles you may not see in a traditional credit report. The involvement of several departments in making credit decisions reinforces a teamwork mindset and even builds a sense of trust in the workplace. It allows for checks and balances to be in place, said Pearson. “The common goal for us is profitability,” Pearson added. “We always involve other teams to see if it will be worth it in the end to extend terms to any prospective customers that may want a credit term with us.”

Working with others to come to a decision also provides timeliness. It is overall more effective to gather information with everyone’s input rather than all data being gathered by just one department or person. Some credit departments may not have the time to thoroughly review every single customer without help. “We depend on sales for company reviews and that is also their expertise,” said Justin Cowart, credit supervisor at Nucor Yamato Steel Co. (Armorel, AR). “It prevents us from spending time on credit analyses for a customer that we would not want to sell to, to begin with. It keeps us focused on the customers and the applications that have the most potential—ensuring the best use of our time.”

Cowart also said one of the credit analysts on his team sends a recommendation and the trust built over time allows him to be confident in their decisions. “99% of the time, I’m going with my credit analysts’ recommendations,” Cowart said. “Having that trust built up with the folks you’re working with and knowing they’re making sound decisions moves everything along a lot better.”

The U.S. economy is showing resilience despite fears of a looming recession, with gross domestic product growing by 2% in the first quarter of 2023. “Up from the previous estimate of 1.3% and ahead of the 1.4% Dow Jones consensus forecast, this was the third and final estimate for Q1 GDP,” reads a CNBC article. “The upward revision helps undercut widespread expectations that the U.S. is heading toward a recession.”

However, the current labor market remains a challenge as the Federal Reserve continues its inflation battle. The Fed raised interest rates 10 consecutive times since March 2022 to a range of 5% and 5.25%, the highest level since 2006 and its fastest pace of tightening since the early 1980s. Inflation slowed to roughly 4% in April.

The labor market plays a crucial role in shaping inflationary pressures. One key factor is wage growth. When the labor market is tight, characterized by low unemployment rates and high demand for workers, employers often face upward pressure to raise wages to attract and retain talent. Increased wages, in turn, can drive up production costs for businesses, leading to higher prices for consumers. As of May 2023, unemployment sits at a record low of 3.7%. As of April, there were 1.8 open jobs for every unemployed worker, according to the Job Openings and Labor Turnover Survey.

The number of vacant job openings fell by 496,000 in May, the Labor Department said, suggesting a cooling of demand for workers. "But the same report showed the number of workers voluntarily quitting their jobs rose by 250,000—a sign that workers still feel empowered," reads an article from Axios.

“So, I think the strength in the labor market is broad-based,” said NACM Economist Amy Crews Cutts, Ph.D., CBE. “According to the Atlanta Federal Reserve Bank, their wage tracker is up 6% year-over-year. In hourly wages that is a pretty big difference and a big part of that is people who switch jobs, their pay is 6.8% versus the overall 6%. When you switch jobs, you usually get enticed by a promotion and more money than you were getting in your last firm.

Average hourly earnings adjusted for inflation rose 0.3% on the month, the Bureau of Labor Statistics said in a press release. On an annual basis, real earnings are up 0.2% after running negative for much of the inflation surge that began about two years ago. Wage inflation refers to the increase in wages across various industries and occupations. While wage growth is generally considered a positive development for workers, it can pose challenges when it comes to reducing overall inflation.

“Essentially with higher interest rates, it’s an added expense that will pass on to consumers with higher interest rates whether it’s higher credit card rates, mortgage rates or car payments,” said Alex Chausovsky, vice president of analytics and consulting at Miller Resource Group (Naperville, IL).

If the severity of recent worker shortages make firms more reluctant to lay off workers for a given drop in output, “then the recessionary spiral by which falling investment and spending and job losses feed on each other may be short-circuited,” reads a Wells Fargo report.

Labor hoarding is also a result of a competitive labor market. “It remains a candidate-driven marketplace and companies need to be very strategic and competitive in terms of the offers,” Chausovsky said. “Candidates still have options available despite layoffs being high, particularly in the tech sector, as well as in the financial industry, manufacturing and construction. Employers should expect somewhere between 4%-6% to be the competitive cost-of-living adjustments relative to both inflation and what the market is currently seeing.”

But the costs of having to stay competitive may lead to more layoffs in the future. “Labor hoarding will not prevent a recession,” one NACM member said. “The depth of the recession is yet to be determined but it’s not going to be a soft landing by any means. But people should remember that recession is a normal part of the business cycle. We’re going to have periods of slower growth which give some rise to some contraction. It’s all about managing that contraction.”

On June 12, Florida Governor Ron DeSantis signed House Bill 331 into law—which shortens the time period to bring defect lawsuits forward and modifies current private right of action against a contractor for violation of the Florida Building Code. The previous statute stated the time to commence an action began with the later of the date of actual possession by the owner, the date of the issuance of a certificate of occupancy (CO), the date of abandonment of construction if not completed, the date of completion or termination of the contract.

The current and revised statute now says the time to commence an action begins with the earlier of the date of issuance of a temporary certificate of occupancy (TCO), a certificate of occupancy (CO), a certificate of completion (CC) or the date of abandonment if construction is not completed. For the prior statute, the date of completion of the contract was the trigger. “The passage of another recent statute HB 837, which reduced the time to bring negligence actions from four years to two years, may also create complications in projects where there is not a CO, TCO or a CC,” reads an article from Adams and Reese LLP.

“The highlights for me on the bill are computation of time and this allows documents such as liens to have a tolling period until the recording office reopens if they do get closed for some type of emergency," one credit manager said. "The emergency for us a few years ago was COVID and we had some liens expired because the courthouse was closed.”

Come October 1, 2023, the definition of “Contractor,” will include “a licensed general contractor or building contractor who provides construction management services, including scheduling and coordinating preconstruction and construction phases for the entire project, or who provides program management services, which include schedule control, cost control, and coordinating the provision or procurement of planning, design, and construction for the construction project,” according to JD Supra.

The big question is does the owner have a proper payments defense, said Timothy R. Moorhead, Esq., attorney at Wright, Fulford, Moorhead & Brown, P.A. (Altamonte Springs, FL). “Proper payment defenses include the owner recording the notice of commencement correctly, getting releases each time they make a payment and a contractor’s final payment after the end of the project,” Moorhead said. “If the owner does not do that, you can still be owed money but the owner isn’t liable for it and you will not have the lien rights for it.”

For privately owned projects where payment bonds are not needed, you should serve your Notice to Owner 45 days in advance of the first day you provide your labor materials of supplies to the project. The Notice to Owner advises the owner that they are being held responsible to ensure the sender is paid before a payment is made to the general contractor. Under privately owned projects, sometimes the owner will obtain a conditional payment bond from the contractor. The conditional payment bond says a bond is good only if you have paid the contractor for the lien. “A conditional payment bond on the Notice of Owner end will treat us if there was no bond at all,” said Moorhead. “They’ll then notify us if our lien transfers to the bond.”

In order to help with legal protection, there is one extremely important step to complete: documentation. If you are going to take legal action, you have to remember your lawyer must prove the case with tangible evidence—you have to find what you can physically present to a judge to establish your record. “It can become difficult because you really need to look closely at documenting the dates that you are doing your work and supplying materials,” said Moorhead. “Daily logs, records of deliveries and daily superintendent reports, are a few examples of the documentation that becomes very important as we go into the next stage to litigate this problem and actually prove it.”

For more updates on construction and networking with other credit professionals, be sure to join our Construction Credit Thought Leadership Group. You also can watch NACM’s Recession Coming? Protect Payments in Florida with Lien and Bond Claims webinar on demand.

There are two main purposes of a commercial credit application: the first is to support a credit investigation and the second is to create a legally binding contract. But what about creditors who don’t use credit applications? What do they use in place of credit applications to evaluate new customers? Without a signed credit application from a customer, how do creditors protect themselves?

According to a recent eNews poll that asked credit professionals to list the sources of information they use to evaluate new customers, most reported using credit reports (89%) and public searches (66%) as an alternative to credit applications, while fewer used new customer onboarding forms (26%), sales agreements (20%) and order acknowledgements (4%).

“There are some businesses that if it’s less than $10,000 they don’t require a credit application and that’s a disadvantage,” said Matthew Jameson, Esq., attorney at Jameson and Dunagan, P.C. (Dallas, TX). “You’re just on firmer footing in a credit application. It serves as a contract you can then enforce as a form of protection.”

Chantal Rousseau, CCP, corporate credit manager at MPC Canada (Longueuil, QC) uses a combination of credit reports and public searches for evaluating new customers. “We use credit reports and public information to confirm the customer information provided, such as the buying entity and contact information to ensure that we are working with the proper company,” she said. “It also gives us an overview of their credit history and position until we actually get the sales forecast from our sales reps.” Sometimes the information found is sufficient to establish the credit limit and rating, so financials are not always needed, Rousseau added. “It will depend on what type of customer and what are the sales team’s needs.”

Some credit professionals don’t use credit applications because of the industry they work in. “It’s pretty common in the service industry and in construction and since we’re not manufacturers, we do not require a credit application,” said an NACM member, who uses credit reports and customer information forms when evaluating new customers. “We also don’t have revolving accounts or a specific credit limit. We’re looking at more of exposure and a lot of that can be found on the trade lines. So, the customer information form is used to get the legal name of the entity and additional information.”

It also depends on who you do business with when it comes to using credit applications. “We do business with larger companies and a lot of them aren’t going to fill out a credit application,” she said. “They have to go through so many layers in order to fill out those credit applications.”

For others, it depends on the sales volume or product they want to buy. For Rousseau, it is a formal contract or simple purchase orders (POs). “Credit applications are a must to be able to document our due diligence and there are other ways that can be done. But a good credit application will centralize and recap all the needed information all in one document.”

Credit professionals do not need an application to make a legally binding contract. They can use other forms such as sales agreements or order acknowledgments. She uses master service agreement, purchase orders, work authorizations and emails to legally bind her customers. “Of course, in construction we have a huge contract that dictates the terms,” she said. “But it’s mainly a matter of getting the information.”