August 10, 2023

Bankruptcy, unresolved invoice issues and fraud are the top three causes for credit losses, according to a recent eNews poll. By identifying the root cause of credit losses and establishing measures to mitigate risk, credit professionals can prevent future credit losses for their company.

#1 Bankruptcy

Customers filing for bankruptcy was the biggest cause of credit losses over the last three years (34%), according to the poll. Commercial bankruptcies have skyrocketed in recent months to levels not seen since the Great Recession. Chapter 11 bankruptcy filings increased 71% in July year-over-year, according to data provided by Epiq Bankruptcy.

Even just one customer filing for bankruptcy can have a massive impact on accounts receivable (AR) if that customer makes up a large enough percentage of the portfolio. “We rarely have bankruptcy issues, however, two related companies filed for bankruptcy earlier this summer which resulted in another $90,000 in credit losses,” said Brian Diggs, director of credit at Power & Telephone Supply Company (Piperton, TN).

#2 Unresolved Invoice Issues and Discrepancies

Unresolved invoice issues and discrepancies remain the second highest cause for credit losses over the last three years for 31% of credit departments, mainly due to software or technological advancements. For one NACM member, portals have been a major driver for unresolved invoice issues and discrepancies. “It’s virtually impossible to find someone to correct the issues,” she said.

Rick Wooten, CCE, director of accounts receivable at BG Multifamily (Plano, TX) says the biggest cause for credit losses is billing and invoice delivery challenges as a result of integrating a new billing platform. “Although the platform offered new tools, we did not foresee invoices being billed incorrectly or being sent to the wrong customers,” he said. “By the time the collection team got involved, these invoices were often 60 or more days past due. As in most industries, the older an invoice gets, the more difficult it is to collect.”

#3 Fraud

B2B payment fraud is the third leading cause for credit losses (19%) with the average B2B fraud event resulting in a financial loss of $117,000, according to Capital One. 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.

Despite having safeguards in place, credit card fraud is rampant, said Gweneth Weeks, operations manager at Big D Concrete Inc. (Dallas, TX). “Unfortunately, we’re unable to track these fraudsters since their contact information becomes disconnected or was never accurate to begin with,” she said. “The chargeback occurs after the deadline to send lien notices, so we are very often outside of our rights to file.” Weeks no longer accepts credit cards for non-account orders and the customer must come to her office and pay in cash or with a cashier’s check.

In the last few years, Diggs’ company has lost roughly $80,000 due to fraud. “I received an application mimicking another company with a slight change in the website,” he explained. “We did not notice the identity theft and shipped the product, which resulted in the loss.”

How to Mitigate Risk for Credit Losses

Credit managers can be proactive in mitigating risk by conducting thorough credit investigations and adhering to Know Your Customer (KYC) practices. “Since not every customer is comfortable sending their financials, we ask them to fill out five metrics from their financial statement,” said Brittany Yvon, CBA, CICP, credit manager at OMG, Inc. (Agawam, MA), whose had under $10,000 in credit losses written off in the last year. “The metrics tell me how they run their company, their liquidity, efficiency and profitability. We also keep our aging buckets in 7, 14 and 21 days so if there’s an issue of quantity pricing, like they didn’t receive product, we know within 14 days. That way, we can get that result with the customer up front and we are not waiting until that 30-day mark hits.”

Others, like Wooten, suggest that more credit departments invest in software or technology to protect their company’s largest asset—AR. “The new software we are implementing uses credit scoring to prioritize collections and actively monitors invoices and emails,” he explained. “The customer is assigned a workflow based on credit scores and the higher the risk, the quicker the customer gets to the top of the calling list. These advancements help my collections team focus their time on non-clerical issues.”

Strong creditor-customer relationships are another way to mitigate risk. By strengthening relationships with customers, you open the door for better communication. “We do everything we can to work with the customer so they can be successful which in turn helps us be more successful,” said Theresa Carpenter, credit supervisor at Palmer-Donavin Manufacturing Company (Grove City, OH). “Even after we send out a 10-day demand letter, we ask them to communicate with us because we would rather work with them than for it to go to a collection agency.”

Credit professionals must be wary of potential security, currency or expropriation risk if they have international customers. “I’ve seen an increase in expropriation risk, in which the government interferes with and confiscates from local business and engages in discriminatory practices and expropriation of business, making it impossible for companies to do business in local countries,” said David Kinzel, vice president of structured credit and political risk at Marsh, LLC (Denver, CO) during FCIB’s July Global Expert Briefing.

Kinzel says this risk will only continue with ongoing world conflict. “For some countries, like Russia, it’s a financial tool to have where instead of declaring war, they take all your companies, assets and intellectual property because it’s physically located in their country,” he said. “This will become a more common theme for North Atlantic Treaty Organization (NATO) countries who operate in Russia that could be taken overseas by the local government and eventually become a great credit loss for some companies.”

The onboarding process is like a plate of nachos. Imagine each layer as a step in the onboarding journey that contributes to the successful integration of new hires. First, you must build a strong foundation of company values (or tortilla chips) that sets the tone for everything that follows. But if you skip even just one layer, the whole process (or plate of nachos) could be a waste.

Onboarding is no longer an administrative formality—but should be viewed as a strategy for long-term growth. Onboarding new employees isn't just about completing paperwork and handing out company policies; it's about setting the stage for success and nurturing a sense of belonging. Success comes down to how your company and department define onboarding, said Chris Myers, president and CEO of Professional Alternatives (Houston, TX).

“Each employee joins a company at a different place and learns at a different pace,” Myers said. “Any onboarding process should be well-thought out and well-organized because it is the first experience that they have as an employee of your company. If the process is disjointed or not a priority, that negative message will come through loud and clear.”

The Pre-Onboarding Stage

Many think the process starts after the employee is hired—but it really starts beforehand. It is important to prepare yourself and your team with as much time as possible to adjust. Prior to the employee’s first day on the job, there are a few important steps to take in order to have a smooth process. They should have everything they need before stepping foot into the office (if the position is in-person) or receiving proper equipment if the position is remote.

First, ensure the correct and legal paperwork is signed and returned, as well as other forms with needed details such as emergency contacts, phone numbers, address, etc. Any welcome packets should also be prepared ahead of time so that your new hire comes in knowing what to expect. “Our pre-onboarding phase starts with the very basics,” said Chris Kyriakopoulos, CICP, national risk credit manager at Robert Half International (Frisco, TX). “We prepare the work station set up and let the new hire know ahead of time about in-office attire.”

It is equally important to provide a clean and organized workspace to set a positive tone. Similar to in-person preparation, if the job is remote, managers can prepare with a slideshow or meeting notes to go over the basics of the company culture, rules, guidelines and expectations.

How Long Should Onboarding Last?

Mapping out a timeline for hitting specific goals is a great way to make sure new employees are learning. Using checkpoints to gauge their progress helps both the new hire and you as a manager. For example, ask new employees to complete a project by a specific time, and if their work is not up to the expectation, help them before moving onto the next stage of onboarding.  

Some companies take days to complete their entire onboarding process, while others may take months, even up to a year. It depends on whether a company includes training phases in their onboarding process as well. Leslie Harrison, CGA, vice president of NACM Connect (Rolling Meadows, IL) said her company’s onboarding process can last nearly a year because it is gradual. “It’s not an easy learn but there’s two components when onboarding new hires,” Harrison added. “The cultural component, which is getting to know us, their peers and the executive team on a personal basis. And then there is the learning component where they learn what their job entails. My part is to oversee all of that and we start with welcoming them the first day they’re here.”

In other cases, companies have phases of onboarding split up into several parts. Kyriakopoulos said his company’s onboarding process is split into three phases depending on the level of the credit analyst. Phase one starts with an introduction to different tools the department uses and eventually leads to phase two—the introduction to other functions such as how to use Salesforce and other processes. Lastly, phase three is when the new hire receives a portfolio to work with, and the manager will review their work on the portfolio throughout the day with weekly touchpoints to address any questions or concerns.

“We’ll introduce them to our ERP system and to our credit risk tools, all tracked on a spreadsheet,” Kyriakopoulos said. “Phase two is the meat and potatoes—the day in the life of a credit analyst. We have a teams meeting where the analyst shares their screen and goes through the process of what their daily responsibilities such as guidelines processes, ad hoc requests, credit risk forms, etc. It really depends on the individual on how they’re picking it up, but typically, our phase two could be a couple weeks.”

Finding a Balance

Throughout the onboarding process, new employees should grasp a sense of the company culture and environment. Getting new team members more involved in the day-to-day of how a company operates is essential in their onboarding experience. New employees should shadow their colleagues for the first few weeks, with one-on-ones to help them get a feel for the environment. But new employees should also feel empowered with a sense of independence.

It is important to remember that flexibility is key during this process. As a manager, sometimes it can be hard to figure out how much of a hand you should have when bringing a new employee in—especially managers with a more hands-on or authoritative managing style. You don’t want to do their job for them, or not give enough room to learn. Allowing the new hire to make mistakes is part of the process because people learn through their mistakes, said Kyriakopoulos. “The responsibility ultimately lands on the manager, but you should get an understanding of how your new employee will handle pivoting, stress or feedback.”

Effective communication plays a role as well. Asking for frequent and timely feedback helps to assess if the new employee is truly a fit for the job. An ongoing conversation and questions during one-on-one meetings about the new hire’s experience is key.

Myers said the onboarding process will be different depending on the role the new employee is filling. “Some roles you’re able to get an employee up and running and it’s very process driven,” he said. “There’s not a lot of intuition or decision-making, they have to follow the exact process so you can get them up and running relatively quickly. In other roles, like the credit profession for example, there’s no right or wrong way to handle things and your decision-making processes have to align, which can take longer.”

New employees are following your lead. Their progress is a direct reflection your leadership. Early on in an employee’s development, they may need your management and presence to be stronger or more assertive in order to guide them. Eventually, they will become more self-sufficient and can feel confident taking charge.

So, when is the onboarding process officially finished? “I will manage you until you say ‘I’ve had enough, I got this’,” Harrison said. “I encourage all managers to be there and available as much as possible. Answer the questions, go with them, and when they say they’re okay, let them go. Everyone reaches a level of confidence and comfortability at a different time.”

Any business that is selling a product or service needs to determine whether their customers are exempt from paying tax on those products or services. Depending on the customer, industry and state, the customer may make tax-exempt purchases of property and taxable services that are intended for resale or that will be incorporated into a product for sale. More often than not, the responsibility of determining which customers are exempt from paying sales tax falls on the credit department. This is typically established during the credit approval process.

How Do Businesses Collect Sales Tax?

One of the complicated aspects about sales tax is that each state has its own rules for tax rates, including how to determine what is and is not taxable. The five states with no sales tax, called the nomad states, are New Hampshire, Oregon, Montana, Alaska and Delaware. Alaska, while it does not have state tax, has city and county taxes, making it more complicated for credit professionals who are collecting sales tax certificates manually.

Businesses collect sales tax on either tangible personal property (TPP), a service, software and shipping and handling by using sales tax nexus, the level of connection between a taxing jurisdiction, such as a state, and an entity, such as your business. Until this connection is established, the taxing jurisdiction cannot impose its sales taxes on you.

Types of Nexus:

• Physical nexus: seller has physical presence in the state: office, warehouse, even remote employees.
• Economic nexus: seller meets a set level of sales transactions or gross receipts activity within a state. No physical presence required.
• Click-through nexus: seller meets sales threshold in a state from the activities of an in-state referral agent.
• Affiliate nexus: remote retailer holds substantial interest in, or is owned by, an in-state retailer that sells the same or similar line of products under the same or similar name.
• Marketplace nexus: marketplace facilitators may be required to collect and remit sales tax instead of the individual seller if it operates its business in a state and provides e-commerce infrastructure, customer service, payment processing services and marketing.

Collecting sales tax is a statutory requirement that is in constant flux, changing every few years. It's the responsibility of the credit department to obtain a copy of their customer’s resale certificate or sales tax certificate, a document that allows a business to make exempt purchases based on the assumption the goods will be resold and the sales tax will be paid by the end consumer.

“As a distributer, we’re responsible to collect sales tax unless we’re provided an exemption certificate from the customer,” said Janet Elliott, financial services manager at Werner Electric Supply Company (Appleton, WI). “For our company, our accounts payable is responsible for reconciling all the tax that’s collected and making the payment to the state that we collect tax for.”

Each state has their own specified resale certificates, but companies that are registered in multiple states can use the Uniform Sales & Use Tax Resale Certificate, a multijurisdictional resale certificate form applicable in 36 states. The certificate contains instructions on its use, lists the states that have indicated to the Commission that a properly filled out form satisfies their requirements for a valid resale certificate, and sets forth specific requirements and limitations on its use.

“In the multijurisdictional resale certificate form, the customer can fill out all the states that they qualify for the exemption in,” Elliott said. “However, you have to pay attention to the rules of what each state allows. For example, Wisconsin won’t allow the multijurisdictional form for manufacturing, they only allow it for retail. We had to inform customers in manufacturing to claim exemption in the Wisconsin resale certificate form.”

Depending on the company, other departments may have their hands in the sales tax or resale certificate process before the credit department. “When onboarding new customers, it’s the sales team’s job to get the sales tax or resale certificates to the credit team,” said Korey Geller, tax manager at The Imagine Group LLC (Minneapolis, MN). “But if we don’t get it from them, we invoice them and collect the money with tax or don’t collect the tax. If the customer says it should’ve been exempt, then it goes to the cash receipts team who reaches out to their contact to get a certificate for us.”

Geller’s company also relies on the shipping team as they know where each item is being shipped to, which is where the tax is based on. “If a customer claims they’re tax exempt but the certificate expires, the sales and customer services help get the proper exemption so that we can give it to the auditor,” Geller explained.

Other departments in a company may have access to or receive tax documents, but ultimately the credit department is fully responsible in the tax exemption process. “The customer service team or the projects team might get the tax documents but my team makes sure the document is filled out correctly based on the type of exemption they’re claiming as well as the storage of that document,” Elliott said.

Proper handling of sales tax or resale certificates is vital during a tax audit where the credit department is one of the first places auditors go to. “For our first audit, we had to make sure we were following procedures and got the team educated on tax exemption,” Elliott said. “We looked for exempt purchases and sales tax certificates that drove the exemptions and made sure they were filled out correctly. If they weren’t filled out correctly, then we’d go back and ask the customer to fill it out correctly.”

No matter how uniform your tax exemption process is, there will be customers who will not be as compliant. “Some customers will be set in their ways and complain about how our competitors don’t make them fill out resale certificate forms,” Elliott said. “But it is our job is to make sure we’re accepting the right form."

Interested in learning more about sales tax certificates? Be sure to attend the August Construction Credit Thought Leadership discussion group on Aug. 15 to learn about best practices for handling sales tax certificates.

Now that Congress has officially left the field for halftime (the August recess), let’s review the game:

Tumultuous Battle for House Speakership

House Republicans fumbled the ball at the start with a grueling four-day and 15-vote process to elect the Speaker of the House. While no candidate emerged from the Republican party that could realistically challenge Kevin McCarthy, a small group of hyper-conservative Republicans put up enough of a fight to secure several concessions that they argue will restore order and due process in the House. Finally, the dissidents relented, agreeing to vote ‘present’ and allowing McCarthy to finally earn his Speaker’s gavel just after midnight on Jan. 7.

Democrats Tire of Carrying Presidential Burden

President Biden’s approval rating has continued to drag, floating between 39-42%, as inflation and economic concerns remain the top issue for most Americans. Democrats in both the House and Senate have become reluctant cheerleaders, defending the President's policy proposals while remaining distant enough not to endanger their own re-election. The President also disappointed a large portion of his party when he agreed to negotiate and eventually signed a deal with Speaker McCarthy to raise the debt ceiling in June.

The Manchin Headache

Senator Manchin has been a thorn in the side of President Biden since he first shot down the President’s ‘Build Back Better Act’ in 2021—and that was before he was up for re-election. This year, Manchin has blocked several Biden judicial nominees as well as high profile cabinet picks. His opposition to Biden’s Secretary of Labor Nominee Julie Su continues to hold up her confirmation, which has been pending since March. He also fought against his own party to secure energy permitting reforms in the debt ceiling deal. Now, he has publicly flirted with a potential 2024 presidential run as an independent, which would almost certainly pull crucial votes away from Biden. Despite all of this, Democrats need Manchin to run and win in West Virginia, a State that Trump won by 38.9 points, which is why we’ve seen a major decrease in the number and intensity of attacks on Manchin from his fellow Democrats this year.

Debt Ceiling Game of Chicken

In June, the U.S. economy came perilously close to hitting a brick wall as House Republicans refused to pass a ‘clean’ debt ceiling increase and negotiations between President Biden and Speaker McCarthy went through a series of starts and stops. Fortunately, a deal was reached at the last minute that raised the debt ceiling for two years in exchange for certain spending cuts and rescissions. Neither party was pleased with the deal—a hallmark of successful compromise—and while the deal included an agreement on fiscal year 2024 spending levels, Republicans have already reneged on that portion. Given Speaker McCarthy’s tenuous hold on the gavel, this may be the last major deal this Congress achieves in 2023.

NDAA and Appropriations Drama

Republicans in the House continue to push their party further to the right. Earlier in July they loaded up the typically bipartisan National Defense Authorization Act with partisan provisions rolling back key Biden policies on abortion, LGBTQ protections, and environmental protection. After that, Speaker McCarthy was only able to successfully pass one of the twelve government spending bills before the recess, and in fact sent lawmakers home a day early because he didn’t have the votes to pass the Agriculture appropriations bill as planned. The Senate, meanwhile, steered clear of major issues on the NDAA, but appears to be hung up on the bipartisan FAA reauthorization that easily cleared the house mid-July.

Looking Ahead

Congress comes back to Washington after Labor Day and will immediately be confronted with the looming Sept. 30 deadline to keep the government open. Members and Senators are already saying that there might be a shutdown, as there is no clear pathway forward on either a temporary ‘continuing resolution’ that keeps the government open with level funding, or a bipartisan deal that funds the government through the entire year. Watch for a small economic dip in October should the status quo continue to a full government shutdown.