eNews June 7, 2018
In the News
June 7, 2018
eNews will take a break next week for NACM's 122nd Credit Congress in Phoenix. The next issue of eNews will be published on June 21, 2018. For the latest credit news, visit NACM's blog.
US Legislation Would Speed up DoD Payments to Small Contractors
Small contractors suffered a huge blow earlier this year when United Kingdom construction giant Carillion collapsed in January, leaving many suppliers without payment. In a response to protect their own, U.S. senators have introduced legislation as a preventative measure that would require the Department of Defense (DoD) to pay small contractors in a shorter period of time.
Several news outlets reported the unveiling of a bill by Sens. Ben Cardin and Mike Enzi on May 22—legislation that would cut the current 30-day payment requirement in half to 15 days. The bipartisan bill would be an amendment to the National Defense Authorization Act for Fiscal Year 2018 (H.R.2810). According to the Library of Congress, H.R.2810 authorizes FY2018 appropriations for the DoD, including operation and maintenance, working capital funds and military construction. The latest legislation also draws from the requirements of the Accelerated Payments for Small Business Act of 2018 (H.R.5337) that requires government entities to pay small suppliers within 15 days of receiving invoices.
“Small business contractors rely on a consistent and reliable flow of income in order to keep their operations running smoothly,” California Congressman Steve Knight said during the March introduction of H.R.5337. “The Accelerated Payments for Small Business Act will help ensure these businesses receive their payments in a timely and accountable manner. This consistency will enable businesses to focus on improving their services and expanding production.”
A former small business owner, Enzi told Sheridan Media timely payments “make a world of difference.” In addition to speeding up payments to small contractors hired by the federal government under the amended legislation, the DoD would also have to quicken payments to large contractors that have small business subcontractors.
Part of the problem with Carillion stemmed from what appeared to be a sudden downfall. However, according to a U.K. construction news website, the U.K. government’s Red-Amber-Green (RAG) risk rating system only increased Carillion’s risk rating three months after its 845-million-euro write-down. RAG rates strategic suppliers’ finances on a scale of most (red) to least (green) risky.
These findings were released May 23 by the parliamentary public accounts committee. The committee’s deputy chair, Sir Geoffrey Clifton-Brown, described RAG as “too slow and clunky” regarding its decision to finally make Carillion a “high risk” in November 2017, two months before it collapsed. The lack of transparency within the company was also a troubling factor.
“The city, in contrast, knew well before July 2017 that Carillion was in trouble,” Clifton-Brown said in a Construction News article, where he addressed Carillion’s downgraded rating from green to amber in February 2016. “Too many government facilities contracts were concentrated in one large firm, giving the impression that it was too big to fail, hence the perception that the government would bail them out when push came to shove.”
Carillion rose from its green risk rating to an amber rating in February 2016, Construction News stated. Although the Crown Representative recommended the rating become red in July and again in September 2017, it wasn’t until October when the company received a red rating and revealed a 1.15-billion-euro half-year loss. The following month, Carillion was labeled a “high risk” by the government, effectively warning other departments against awarding contracts to the construction company.
—Andrew Michaels, editorial associate
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Asia-Pacific Working Through Payment Delays
The Asia-Pacific region is still bogged down with poor payment behavior, according to the latest Atradius Payment Practices Barometer. The credit insurer reviewed the region as a whole as well as eight other locations.
Poor payment behavior and a lack of information about the business or payment performance of customers were among the reasons the proportion of business-to-business (B2B) sales on credit terms declined throughout the region. Australia and Singapore were the only two countries to not see a decrease compared to 2017. The proportion of B2B sales made on credit in the region was 43.6%. Japan and Hong Kong each dipped under 50% in 2018. China offered the lowest amount of sales on credit at 39.8%.
Asia-Pacific businesses are still having a difficult time converting B2B invoices into cash, and bad debt is mostly due to customer bankruptcies or customers going out of business. The region reported roughly 2% of B2B receivables are uncollectable. Other than bankruptcy and going out of business, the age of the debt and collection failures were also stated as reasons for uncollectable B2B receivables.
Late payments continue to be a major factor in the region, despite a slight decline from last year. The proportion of overdue invoices also saw a modest drop in 2018, yet nearly half of those surveyed are dealing with the issue. Days sales outstanding (DSO) remained the same in the region at 40 days. Indonesia, Singapore and India were the worst offenders of late payments, with roughly nine out of every 10 respondents reporting the problem. Japan’s payment delays fared much better, with only 70% of respondents reporting payment delays.
Reasons behind payment delays include insufficient funds for domestic B2B customers and the complexity of payment procedures for foreign B2B customers. The second-most cited reason for payment delays for both domestic and foreign customers was that the goods or services were not what was agreed upon in the contract.
Japan and Taiwan offered customers the longest payment terms (mid-40s), while Indonesia offered the shortest at 23 days. On average, the Asia-Pacific payment duration was 57 days, up from 55 days in 2017. India respondents reported a payment duration of 74 days, the longest in the region. Singapore was the fastest in the region at 43 days.
Electronic invoicing is an option to speed up the payment process. However, less than two-thirds of respondents report they are using e-invoicing. Meanwhile, nearly four-fifths of respondents report using e-invoicing in India, but less than a third of respondents in Japan use the online invoice. The majority of every location, including the region as a whole, report invoices are paid quicker when e-invoicing is used.
—Michael Miller, managing editor
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Price of Base Metals Continues to Rise with High Credit Risk
The price of base metals saw an upward trend the past couple of years, and it is expected to continue to rise through 2019. With a combination of overseas trade wars and the potential end to both the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP), the metals market will likely remain bullish and unpredictable, according to credit insurer Coface and NACM-National Chairman Kenny Wine, CCE.
Since President Trump took office in 2017, the metals market has faced the threat of tariffs and other economic uncertainty as a result of political shifts. This has hiked up the prices of base metals and shaken business confidence and investments—yet the ambiguity has not stunted economic growth.
“If you listen to the news, talk shows … you don’t really see any end in sight,” Wine said. “As long as consumer confidence remains high, the economy should continue to grow, causing pressure on the metals market, which should keep metal prices at or above current levels.”
Wine also said remaining close to the customer is critical during times of economic uncertainty. Determining each customer’s needs and having precise inventory management will be crucial in maintaining a healthy business for suppliers.
And while base metal prices continue to rise, ferrous metal prices will likely continue to drop due to overcapacity and company debts. The net debt ratios in China are higher than in other countries, especially since China relies heavily on large, state-owned enterprises. The U.S. spares no mercy either, with companies in danger of potential corrections in cash flows.
“It’s simple supply and demand,” Wine said. “Metals manufacturing has become global. To keep the pricing constant, demand has to be constant. You may need to find alternate usages for the material or develop new customers in emerging markets.”
For now, credit risk still remains high in the metals market. Growth and profitability across other sectors have remained on track while metal still proves to be stuck in a bullish market, making the credit risk high.
“Credit risk always goes back to the customer’s willingness and ability to pay,” Wine said. “You have to stay close to the customers, too, if they have both.”
—Christie Citranglo, editorial associate
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Online Lending Rescues US Small Businesses
Business credit is the lifeblood of the economy, so it’s only natural for small- to medium-sized businesses (SMBs) to be part of the equation. In 2017, the number of small businesses seeking credit dropped 5%, raising some eyebrows, but economists have recently found that new lending technology is beginning to close the trade finance gap.
Between 2015 and 2017, online lending reportedly increased by 50% among the five leading online lenders, according to NDP Analytics. The Washington, DC-based economic research firm released a report, The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy, in May 2018. The study revealed that the average small business owner was lent nearly $55,500 over the two-year period. Survey sponsors included the Electronic Transactions Association (ETA), the Innovative Lending Platform Association (ILPA) and the Small Business Finance Association (SBFA). Loans amounted to $2.6 billion in 2015 and concluded at $3.9 billion in 2017.
“The credit gap is one of the top challenges for small businesses, especially those with less than $1 million in annual revenue,” the report stated. “While large business lending is growing, small business loans have been declining since 1995, when such loans made up nearly half of all bank loans. The ability to obtain funding is more challenging for small businesses during economic downturns, when external funding is often needed the most.”
The majority of SMBs surveyed said credit availability for expansion was a financial struggle (44%). Another 36% said they were having trouble paying operating expenses, while a quarter were having a tough time paying off debt and 17% couldn’t purchase inventory or supplies to fulfill contracts. Jason Oxman, CEO of ETA, told a news outlet that although online lending won’t replace traditional methods, it will help increase capital for SMBs.
Online lending also reaches businesses on a global scale. On May 21, the Dubai Multi Commodities Centre (DMCC) spoke with OpenGov, a content platform that specializes in information and communication technology, about technology’s role in financial lending. In the article, DMCC CEO Gautam Sashittal compared today’s trading tactics with those used almost 70 years ago.
“Just as the shipping container revolutionized trade in the 1950s, sweeping advances in tech will reshape trade and how we move goods across borders,” Sashittal said. DMCC’s latest Future of Trade report concurred with NDP Analytics’ findings: More banks are rejecting SMBs funding applications as alternative trade finance, such as online lending, rises. Internet access is spreading across the world, and trade technology is estimated to have an economic value of about $45 trillion over the next eight years.
Meanwhile, small businesses remain confident in 2018. A Federal Reserve annual survey released in May found 72% of respondents were expecting revenue growth this year. There was also increased anticipation to hire more employees. Firms with less than $100,000 in revenue struggled the most, choosing not to apply for a loan or other credit for fear of being turned down, but financing was approved for 46% of firms that applied.
—Andrew Michaels, editorial associate
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Pennsylvania Marijuana Facility Sees Third Mechanic’s Lien
A medical marijuana facility in Cumberland Township, Pennsylvania, is late paying its bills. The general contractor filed a mechanic’s lien for nearly $700,000, while one subcontractor filed a lien for more than $204,000. Last month, a second subcontractor filed a lien for over $63,000.
In Pennsylvania, mechanic’s liens take a different route compared to nearly all other states. The commonwealth has what is called the Pennsylvania State Construction Notices Directory, which has been online for roughly 18 months. The directory gives property owners, GCs, subs and others access to project details, such as start and completion dates. Certain protections are also offered to owners should there be an issue of payment.
Owners and owner agents are able to file a Notice of Commencement through the Directory for projects costing at least $1.5 million. Those supplying work, services or materials must file a Notice of Furnishing through the online portal within 45 days of first furnishing if a Notice of Commencement is filed and posted. Owners and their agents have 45 days from the actual completion of the project to file a Notice of Completion for informational purposes only. One way to determine actual completion, as defined by state statute, is as follows: “The cessation of all work on the searchable project for thirty (30) consecutive days, provided that work is not resumed under the same contract.”
If a GC of sub fails to file the correct notice in the Directory, the right to lien is forfeited. It is unlawful for an owner or agent to suggest to a sub to not file the required Notice of Furnishing. When the appropriate steps are done and payment has not reached the subs or material suppliers, a Notice of Nonpayment can be filed. “However, not filing this Notice of Nonpayment will not affect your right to file a lien,” according to the Department of General Services. The reverse is also true. Filing the Notice of Nonpayment does not exempt those from complying with other requirements as spelled out in the mechanic’s lien law.
On private construction projects in Pennsylvania, a formal notice of intention must be served 30 days before the claim of lien is filed, but within five months of last furnishing. Those unpaid can file within six months of last furnishing and serve the notice of filing a claim on the owner within one month of filing the claim, according to NACM’s Secured Transaction Services (STS) and state statute.
—Michael Miller, managing editor
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