August 3, 2023

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Customers Are Struggling to Pay, July CMI Shows

Annacaroline Caruso, editor in chief

NACM’s Credit Managers’ Index fell 2.6 points in July to 52.4, nearly erasing the jump seen in June. The decline can be linked to major drops in three factors—sales, dollar collections and dollar amount beyond terms, said NACM Economist Amy Crews Cutts, Ph.D., CBE. “The weakening in these three factors paint a somewhat bleak picture of companies trying to manage cash flow and protect margins,” Cutts said. “Volatility generally is bad for the economy, and credit managers are seeing that in how their customers are trying to manage their invoices, asking for extended terms or going beyond terms until they get collection notices before paying up. Other economic indicators are quite strong, but the CMI indicates that businesses are still under significant stress.”

Despite the volatility, however, Cutts said the economy remains in an overall strong position to avoid a full-blown recession. “The Credit Managers’ Index year has been see-sawing between ‘recession is about to start’ and ‘business is good’ levels since the start of this year,” she explained. “Sales are slowing, but remain healthy. But the share of respondents seeing falling sales has moved from 22.4% in March 2021 to 44.4% in July. New credit applications are slowing, so new and existing businesses are not seeking to grow as quickly as they had been but the applications that are received are being approved at roughly the same rate as before the banking crisis.”

The combined index of favorable factors fell 4.1 points to 56.4, led by a 6.3-point drop in sales to 55.6. Dollar collections fell 5.4 points to 56.2. Amount of credit extended lost 3.4 points to 56.8, a 10.3-point drop year-over-year.

Combined unfavorable factors lost 1.5 points to 49.8, led by a 5.7-point drop in dollar amount beyond terms, which is now deep in contraction territory at 46.1. This is the lowest value for this factor since August 2022. Accounts placed for collection remained in contraction territory at 48.2.

For the last 13 months, the index for accounts placed for collections has been in the contraction range below 50 points, “meaning credit managers are referring more accounts to collections each month,” Cutts said. “Now we are seeing the number of accounts going beyond terms finally matching this trend, with a large increase in delinquent accounts in July. From February through June, the factor index indicated that fewer accounts were going beyond terms.”

*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:

  • “April through June has been topsy turvy.  We had a slight rebound in May but a drastic drop in sales for June. Customers continue to struggle with cash flow due to liquidity issues, higher interest rates and slower paying clients.”
  • “We are still working through backorders from supply chain shortages.”
  • “More private sector companies had payment issues over the last few months.”
  • “State of California and Utah Medicaid reimbursement delays materially impacted delinquency.”
  • “We are coming off two back-to-back record months.”
  • “The reason why our sales numbers are down is due to supply chain issues that continue to backlog the order board. Once we ramp up production, we will have some record sales months.”
  • “Our biggest issue is still in hiring and retaining new employees.”

Participate the CMI every month for the next 12 months and automatically be entered to win ONE of FOUR $250 gift cards in 2024. Sign up to receive monthly CMI survey participation alerts. For a complete breakdown of manufacturing and service sector data and graphics, view the July 2023 report. CMI archives also may be viewed on NACM’s website.

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What Credit Professionals Can Learn from Social Media Influencers

Kendall Payton, editorial associate

In the modern-day world of social media platforms, influencers have become some of the most prominent figures within the marketing and advertising industries. Think about a video you may have come across of someone sharing cooking tips, style trends or do-it-yourself (DIY) projects—if an influencer captures your attention or presents an idea in a relatable way, it may spark motivation for you to try that exact same recipe, outfit or project.

It may be difficult to think that there are any similarities between social media influencers and credit professionals, but some influencer characteristics are key to becoming a leader in the B2B credit industry. “I look at influencers and leaders as having the same traits,” Chris Doxey, CAPP, CCSA, CICA, CPC, president and owner of Doxey Inc. said during an NACM webinar, Credit and Collection as an Influencer: An Interactive Roadmap. “Some of the most important traits is having passion, being able to communicate well and sharing knowledge.”

The opinions of successful influencers are sought out and they are asked to make deeper contributions on a company wide basis, Doxey said. “You know when you’ve arrived because you’ll see a lot of invitations and be asked to present your best practices to large audiences.”

Here are the steps credit professionals can take to adopt an influencer mindset:

Know Your Audience

You must identify your audience in order to engage accordingly. Building your brand and identifying your niche are the foundational steps to have influence on others. But influencers are not exclusive to social media. Credit professionals can become influential to those around them—including colleagues, customers and upper management. 

For credit professionals to get a seat at the C-suite table, it is essential to be prepared. Credit leaders can build influence across the entire industry. Using social media platforms to promote or market different programs such as mentorship, education and networking groups are a way to build your audience and lead others in the industry. “It’s an area NACM is starting to capitalize on to help revitalize our industry—the how and why we do it,” said Scott Michelsen, CCE, ICCE, corporate credit director at Kenworth Sales Company - Salt Lake City (West Valley City, UT). “It plays a huge role in guidance for the next generation who is more social media savvy. Professionals need all the support they can get.”

Become a Master Communicator

The easier the information is for the C-suite to digest, the more likely it will be considered, said Ray Yarborough, CBA, CCRA, CICP, senior accounts receivable manager at Connexity, Inc. (Santa Monica, CA). “Whether it’s an AR dashboard everyone has access to or identifying ways to communicate your recommendations and concerns, you have to do so in an effective manner,” he added. “It’s not as effective to send them your concerns in 20-page report or an email that’s 10 paragraphs long. The more concise you are, the better chance you have to get buy-in.”

Following your words with action is a foundational way to build a rapport of trust with others around you. Trust is how the best influencers can easily guide others because it lays foundation of mutual respect. Those who you want to influence must be confident in your decision-making as a leader, skillsets and recommendations. They will be more likely to listen to someone who is reliable. Leaders who hold a passion for their career and want to share that knowledge with others can have a great impact on their industry.

Collaborate With Others

Though it may seem as if the responsibility of influence falls only on leaders themselves, it is still a team effort. You must know how to work with others in order to reach a common goal. For example, you can take the initiative to hold meetings with upper management or the sales department.

“Usually, my team will need my help with certain issues, but other times they’ll become my boss where they may need me to be the one to reach out to someone in the company or to a customer,” said Michelsen. “There is this mutual understanding between my team and upper management that they can ask us questions and we will follow through with answers. It is a wonderful dynamic.”

Leaders who are open to hearing their team’s ideas or plans have a deeper influence on others. “Some leaders like to make an example of others and put them on the ‘wall of shame’,” said Michelsen. “When there’s an issue, I pull someone to the side to address it and it’s a much better approach.”

Great Leaders Embody the Influencer Mindset

As a credit professional who has moved between credit and sales, Martin Smith, CCE, credit manager at Ash Grove Cement Company (Bradenton, FL) said the number one way a leader has influence over others is through trust.

“In my case, it’s being in the same industry for decades,” said Smith. “You have a certain amount of legitimacy you acquire through time and being a person who does what they say they will do. Communication is key, whether in credit or sales. You do not have to be edgy to collect money or aggressive to be in sales. Everything builds from trust and integrity.”

Influencers need to develop networking and marketing skills as well as emotional intelligence and genuine empathy for those who look up to them. “The networking aspect of social media influence is what credit managers can really learn from,” said Yarborough. “Whether it is company events, making efforts to interact with people you normally would not or making yourself known, it’s the times outside of the office where you truly get to know people. Once you know people on a more personal level, they are more likely and willing to listen to what you have to say versus an email or call from someone they have never interacted with.”

For more opportunities to network, you can join any of our Thought Leadership Groups to connect monthly with other professionals in the trade credit industry. You may also be interested in NACM’s upcoming webinar on Collaborating Effectively.

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Detect Fraud Red Flags Using the Five C’s of Credit

Jamilex Gotay, editorial associate

B2B payment fraud remains top of mind for credit professionals as it contributes to severe financial losses, operational disruptions and reputational damage for businesses. According to Capital One, the average B2B fraud event can lead to a financial loss of $117,000. And a PwC report found that nearly half of all businesses have experienced fraud, corruption or some other form of economic crime within the last two years, with external perpetrators driving the most considerable risks. A recent eNews poll revealed that 19% of the largest credit losses over the last three years were a direct result of fraud.

Fraudulent activity is not always easy to catch and by the time it’s discovered, it may be too late. Fraud in the B2B trade world can take many forms, including fake invoicing, business email compromise, payment redirection, internal fraud and supply chain fraud. By following the five C’s of credit—character, capacity, capital, collateral and conditions—credit professionals can better detect fraud red flags and mitigate risk for their company.

Character is the willingness of a debtor to pay its obligations and imputes a level of ethics, integrity, trustworthiness and quality of management that is provided or available to the business customer. Ask, how willing is the customer to share information? How diligently does the customer complete the credit application? Are there unknown or unverifiable references? If customers show a lack of character, then fraudulent activity is likely.

For example, financial statement irregularities and misrepresentations in financial or business information are types of B2B payment fraud intended to show good character and financial wherewithal. The same applies to bust-out fraud, also known as sleeper fraud, where the fraudster makes on-time payments to maintain a good account standing with the intent of bouncing a final payment and abandoning the account.

Capacity is the inclination or propensity of a business to operate profitably and its ability to pay trade creditors, banks, employees and others as those debts become due. It is finding out if a customer has the capacity to run a business. How is the management in the company? Are they making enough margin? How fast are they turning their AR? Do they service their debt? Weakness in these areas not only show lack of capacity but more reason to commit fraud.

In many instances, the rapid speed and huge quantity of assets removed shows a creditor that a business was being pillaged solely for the purposes of enriching its owner, and there was no intent to keep it a going enterprise, and pay creditors.

Capital is the value of a customer’s business in excess of all liabilities and claims is referred to as its equity and net worth, represents its financial strength. This means conducting an evaluation of owned assets and determining whether they are free and clear of liens. Do they have a loan? Is it in default? “All this is available on most credit reports,” said Eve Sahnow, CCE, corporate credit manager at OrePac Holding Company DBA OrePac Building Products (Wilsonville, OR) during a Credit Congress 2023 session, When and If to Help a Distressed Customer. “How much of your customer base is involved in a private equity firm and how many of them are within that private equity firm?” Fraudsters can hide their dishonesty with same-name scams, unsolicited orders, undisclosed changes in ownership and hidden ownership.

If the cash flow of a customer is not adequate, credit professionals may request a second source to secure payment in the event of default called collateral. Collateral is an item of value that can be seized from a debtor in the event of its inability to pay. For example, using a property that can be pledged to satisfy a debt. But requesting collateral differs by state and region. If the company does not have collateral in which to repay in time of default, that is a red flag for B2B payment fraud.

“We filed our first Uniform Commercial Code statement (UCC-1) about 10 years ago,” Sahnow said. “We filed it soon after the credit report showed they were in default on an SBA loan. Before filing the UCC-1, we went back to our customer and asked for a letter from their bank, stating that the loan was current. Six months later, they filed for bankruptcy and sued us for preference payment. So, what did I do? I took all our correspondence and I sent it to the trustee.”

Conditions are external events, occurrences, phenomena and factors that may interrupt or otherwise disturb the normal flow of business that credit professionals consider when examining a new or existing customer’s credit. Some examples of Conditions are:

  • National, regional or local economic environment.
  • State and federal government regulations.
  • Weather phenomena (hurricane, ice storm, drought, flood, etc.).
  • Catastrophic events (fire, explosion, terrorist attack, etc.).

When detecting B2B payment fraud, trade creditors must evaluate what conditions will affect their customers by region and industry. For example, the interruptions in the payment chain in the retail industry differ from those in the construction industry. “One of the conditions we always look at is the quality of the general contractor (GC) that our subcontractor might be looking to work with,” said D'Ann Johnson, CCE, credit manager at A-Core Concrete Cutting, Inc. (Salt Lake City, UT) during the session. “We also pay attention to our customer’s contract with that GC to see if they’re accepting those terms and if they’re agreeing to a pay-when-paid or pay-if-paid clause.” By keeping close watch on external events and how they can impact your customers, fraudulent or not, can minimize risk for B2B fraud. 

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Bonding Off Liens: How Does it Work?

Kendall Payton, editorial associate

Bonding off, also known as “bonding around” liens, is a term used when a general contractor, owner or even in some cases, a subcontractor, are required to keep a property lien-free.

A lender could make the requirements of a loan that the property be lien free. If anyone decides to lien the job, the lender could suggest or demand to bond around the lien. A property loan may requirement that it be maintained lien free.

Another instance could be a dispute between the general contractor and subcontractor about the scope of work or the value it presents. If a subcontractor files a lien on the property, there could be a provision in the contract between the owner and contractor stating if a subcontractor has filed a lien on the property, the construction lien has to be removed. Ultimately, the contractor will be able to continue the project and then bond off the lien. 

Mechanic’s liens secure payment for materials and services needed for a privately owned piece of property. They are filed against legal pieces of property and can end with a lawsuit to force liquidation on the piece of property at a sheriff’s sale, in order to pay off all parties who have liens on the property. However, bonds are instruments put in place to pay in the event of non-payment. “Payment bonds are reserved for public jobs because you can’t file mechanic’s liens on public pieces of property,” said Chris Ring of NACM’s Secured Transaction Services. “Occasionally, when a bond is put in place to bond around a lien, one of our member customers will mistakenly think that the same rules apply for claiming against a payment bond. Bonds put in place to bond around a lien must be reviewed to determine what has to be done to affect a claim. They are two distinct creatures.”

There are slight differences between bonding off a mechanic’s lien versus a contractor’s payment and performance bond. When the contractor has a payment bond and performance bond, your claim is not against the property, but rather the claim on the payment bond itself is issued by the contractor. Bonding off your lien means you have lien rights—but after the lien is recorded, it is taken off the property, and secured with any type of security.

Bonding around liens is typically talked about in a positive light because of the granted opportunity to receive payment. The bond provides assurance that there are funds are available to pay any existing liens if necessary. Legal action to bring suit and foreclose on a mechanic’s lien can be costly and in rare cases can take years. Claiming against a bond that has been put in place to “bond around” a lien is typically less costly and less time consuming.

Most state statutes legally allow owners or general contractors to bond around liens as well. All statutes require the amount of the bond to be 100% of the lien value. For example, if a lien is filed for $20,000 total, the bond around the lien needs to be put in place for at least the same amount. Most importantly, all states allow either the property owner or general contractor to bond around a lien once a lien is filed, said Ring. “I’ll get a call or an email from a customer a couple of times a year when their lien has been ‘bonded around.’ After I consult with them about why this happened and their remedy to claim against the bond, their concern subsides.”

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