eNews July 12, 2018

Manufacturing, Retail Sectors Bear Brunt of US Trade Tariffs

Credit managers are taking a more cautious than callous approach to new investments in the manufacturing and retail industries, noted NACM Economist Chris Kuehl, Ph.D., in the June Credit Managers’ Index (CMI) report. Defensive investment isn’t uncommon but is becoming more frequent on the heels of the ongoing trade spat between the U.S. and other countries. Some economists believe the endgame could drive consumer confidence down in the coming months.

One of the latest trade disputes between the U.S. and the European Union (EU) involves Wisconsin-based motorcycle manufacturer Harley-Davidson (Harley). Following the U.S. administration’s implementation of tariffs on European steel and aluminum in early June, the EU retaliated with a 25% charge on U.S. imports—a direct hit to the motorcycle manufacturer. Shortly after, Harley announced it would move the production of motorcycles shipped to the EU to its overseas plants to avoid further loss.

A CNBC report on the company’s regulatory filing stated Harley would suffer incremental costs of $30 to $45 million throughout the remainder of 2018 as a result of the tariffs. The EU accounted for more than 16% of Harley’s sales in 2017.

“Ramping-up production at its overseas international plants will require incremental investments and could take at least nine to 18 months,” the CNBC article stated. Harley is expected to share more of its new production plans later this month.

“If the steel tariffs remain in place and the various other tariff barriers are erected as asserted by the Trump White House, there will be a reaction from those affected by the hikes in raw materials and commodities,” said Kuehl. “The majority will try to raise prices to cover these additional costs, but that is certainly not an option for many companies. They will have to shift production to some other country as Harley has decided to do. With every such move, there will be nervousness.”

The trade war with China also continues to escalate. President Donald Trump’s $34 billion tariff on Chinese goods took effect July 6, and the administration’s threat of tariffs on at least an additional $200 billion looms. The National Retail Federation (NRF) shared its concerns with Bloomberg this month, specifically how the tariffs could hurt the holiday shopping season. The outcome hinges on a new trade agreement, which if not reached, could impact 80% of Chinese imports, such as shoes, clothing, smartphones and toys.

David French, NRF’s senior vice president of government relations, told Bloomberg that tariffs could set off a chain reaction, beginning with higher prices and causing a dip in consumer confidence. However, the June Gallup poll concluded that consumer confidence in small business is holding steady (67% having a “great deal/quite a lot” of confidence), while a quarter showed the same level of confidence in big business.

“The retailers are not seeing the evidence of that supposed confidence,” Kuehl noted. “Part of the reduction in spending may be related to seeing inflation at the gas pump and in areas like air travel and restaurant meals. This trend could cause some revisions in the very optimistic assessments of the second quarter’s growth.”

—Andrew Michaels, editorial associate

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Open Banking Begins to Expand Beyond the UK

The U.K. became the pioneers of Open Banking about six months ago, slogging through legislation and refining a new way of online banking and payments. Banks and financial technology (FinTech) companies globally have begun to think about adopting an Open Banking model, leading the way to more transparent data and more use of artificial intelligence (AI) to determine creditworthiness.

Open Banking refers to users having access to a network of financial institutions’ data by means of using application programming interfaces (APIs). The “Open Banking Standard” provides a template for how financial data should be made, accessed and shared by use of AI and online networks. The U.K. has been implementing Open Banking—after passing necessary governmental legislation—for six months, and other countries in the world are beginning to reconsider their standards.

Trade Ledger, an Australian-based organization that gives banks a digital space to analyze supply chain data as well as underwrite trade financing to small- and medium-sized businesses (SMBs), is one of the first companies outside of the U.K. experimenting with Open Banking. After announcing its expansion into the U.K., Trade Ledger looks to try Open Banking in an area that is governmentally regulated—an expansion that may extend to other markets and FinTech companies in the future.

Open Banking, while relying more heavily on AI and the internet as a resource, will also allow companies to better determine the creditworthiness of SMBs. Open Banking digitizes account data, utilizing algorithms to crunch the information, providing companies with a comprehensive source of financial history, according to The Open Banking Hub. This system will allow lenders to learn more about the affordability of their client and their ability to pay back debts.

Transparency and the use of technology are the main appeals to this new system, especially for credit managers. While Open Banking is being regulated in only the U.K., moving on to an international scale seems likely, given the success thus far. Australia continues to reform data security legislation, notably with the Privacy Amendment (Notifiable Data Breaches) Act 2017, effective February 2017. The Australian British Chamber of Commerce’s Australian British FinTech Cyber Catalyst (ABFCC), which was held earlier in July, discussed Open Banking beyond the U.K. Some of the countries mentioned included Germany, some Scandinavian markets, Mexico, Canada and the U.S.

While Open Banking is still in its early stages, the possibility of it spreading beyond the European and Australian markets continues to be likely. Its use of AI and online networks for payments—which online payments continue to prove to be the future of loan payments—attracts the attention of banks and lenders alike.

—Christie Citranglo, editorial associate

Connect, Network, Learn and Share

Regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and networking with fellow credit professionals from their respective geographic regions.

Central Region Credit Conference
September 13, 2018
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Hosted by: NACM North Central

Western Region Credit Conference
October 10-12, 2018
Salt Lake City, UT
Hosted by: NACM Business Credit Services, Utah & Arizona

All-South Credit Conference
October 21-23, 2018
Clearwater Beach, FL
Hosted by: NACM Tampa

For more information and to register, contact the local Affiliate.

Houston Tower Stands with Millions in Liens

Millions of dollars have been left unpaid following the construction of a new Houston mixed-use tower. According to the Houston Business Journal, as of earlier this month, the amount stands at more than $30.5 million in liens from unpaid contractors. The project was expected to cost $350 million but ended at $400 million. The tower is home to a luxury hotel as well as office, residential and retail space.

Among those still waiting for payment is Tellepsen Builders, one of the general contractors for the project, which is owed roughly two-thirds of the outstanding invoices. Tellepsen filed its lien in January, two months prior to the tower’s opening, and amended the lien in June.

“Despite the fact that the luxury hotel has been open since March 2018, the owner, Landry Development, has failed to pay us and several of our longtime subcontractor partners in a timely manner,” said Tellepsen in a statement.

“Tellepsen was unable to perform under their contract forcing us to significantly reduce their scope of work and bring in other contractors to complete the work Tellepsen was unable to perform,” said Landry’s Executive Vice President of Development Jeff Cantwell in a statement. “Unfortunately, there are some subcontractors caught in between our Tellepsen dispute and we are doing our best to get the subcontractors paid as quickly as possible,” he added.

Unfortunately, this is common in the construction industry: A payment conflict due to an invoicing error, the work performed, etc. can affect others outside the conflict—as seen above where subcontractors are going unpaid because the owner has a dispute with the general contractor. And, if subcontractors are missing payment, odds are their suppliers are as well.

Private construction lien statutes vary from state to state. Texas has strict, recurring guidelines to follow for those looking to perfect a mechanic’s lien. Depending on where an entity fits within the construction chain, different items must be considered.

For those contracting with the prime contractor, such as a company like Tellepsen, a notice must be served to the owner and prime contractor no later than the 15th day of the third calendar month after each month which saw materials or labor furnished. So, if materials were delivered in January, the third-month notice to owner must be served by April 15.

When contracting with remote contractors and suppliers, a notice must be served to the prime contractor no later than the 15th day of the second month after each month of furnishing. A third-month notice must also be served. For example, work done in January would require a second-month notice by March 15 and a third-month notice by April 15.

For those with a contract with the owner (Tellepsen), a lien must be recorded no later than the 15th day of the fourth month which had materials or services furnished. Others must follow a similar but different timetable to maintain lien rights and/or foreclose, should it go that far.

—Michael Miller, managing editor

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Small Businesses Must Learn to Dodge Ever-Changing Scams

Scams are like storms: It’s tough to know if and when they will strike, but knowledge and preparation is the best combination to prevent any extensive damage. Just as smaller homes might be more susceptible to strong rain and winds, small- to medium-sized businesses (SMBs) are more at-risk to these fraudulent schemes.

The Better Business Bureau (BBB) and Federal Trade Commission (FTC) collaborated in a Small Business Scams Survey, released in March, to examine the types of scams seen and the preventative measures utilized by roughly 1,200 small businesses in the U.S. The study defined a scam as “a dishonest way to make money by deceiving people through misrepresenting, concealing or omitting facts.” The majority of respondents (71%) were CEOs or owners of a small business, followed by managers, vice presidents, directors and other employees.

A dozen different scams targeting small businesses were reviewed in the study; however, the four business scams most prevalent in the credit industry included Bank/Credit Card Company Imposters (impersonators seeking credit card/bank information), Fake Checks (money wiring), Fake Invoices/Supplier Bills (paying for supplies that were never ordered) and Social Engineering and Phishing (cyberattacks). More than 50% of respondents said they had at least heard about these scams, with 67% saying there is more risk of falling victim to scams today than there was three years ago. Only 30% said the risk is the same, while 3% said there is less risk.

“Even though the majority of small businesses (58%) agree, or strongly agree, that their company’s risk of being scammed is low, approximately six out of 10 also agree, or strongly agree, that they are concerned about business scams,” the study said. When asked about concerns among individual companies, the loss of money, reputation and business were the highest.

From one respondent’s perspective, scammers are “becoming more professional,” which makes them harder for companies to spot. The first step toward scam awareness is acknowledging it can happen to you—something more companies need to do, as suggested by the 82% of respondents who said other businesses were “most likely to be scammed” as opposed to their own. If a company falls for a scam, talk about it. Rather than sweeping it under the rug or feeling ashamed it happened, the impacted company will benefit its employees and other small businesses by sharing what happened and how to prevent it from happening again.

In addition to talking about scams, the study said limiting the number of people authorized to pay invoices or place orders is highly effective as well as training employees on how to detect a scam. More than half of respondents said they were likely to adopt such measures.

“All employees are fully trained to deal with all possible risks to our company operations,” a respondent said in the study. “We have a very effective set of policies in effect which must be adhered to by every employee every day.”

“Ask proper questions to prevent it,” another respondent said. “Stay in good communication with clients.”

Over the next year, 43% of small businesses anticipate being the target of a scam, but those odds aren’t set in stone. Meet with your employees today and develop a plan that could protect your business from any storm.

—Andrew Michaels, editorial associate

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Nigerian Government Repaying Contractors

A pair of African nations is dealing with a similar problem, yet only one government is taking action to alleviate the issue moving forward. Construction payments, or lack thereof, can often overtake a project and dilute the overall picture. This is true around the globe, and some countries have started introducing and passing legislation to fix the issue. The United States has the Miller Act to protect those working on a federal project. Canada, the United Kingdom and Australia have also begun making changes to help move payments along in a timely manner.

In Nigeria, millions of dollars are unpaid by the government for federal construction projects. According to the Federation of Construction Industries (FOCI), in 2015, its members were owed over 500 billion naira, with one company alone being owed 70 billion naira. This has since changed, FOCI Chairman Nasiru Dantata told the News Agency of Nigeria this month at the 62nd Annual General Meeting of the Federation.

“Actually for now the situation is different, most of our members have gotten a substantial amount of their outstanding debts paid and also many of our members are being patronized by the current administration on new jobs,” said Dantata. “I do not have the accurate figure because not all construction companies are members of FOCI, but from the over N300bn ($830 million) we presented to this administration, I believe more than half has been paid.”

Meanwhile, Kenya’s similar problem of government nonpayment remains unsolved. This is mostly due to corruption, according to a recent article from Reuters. “The alleged link between corruption and nonpayment of government invoices was made explicit in May, when dozens of officials and business people were charged with involvement in the theft of nearly $100 million of public funds,” stated Reuters.

In the most recent FCIB International Credit & Collections Survey for Nigeria (March 2018), respondents reported an increase in payment delays compared to the 2017 survey. Payment terms, which lengthened somewhat in 2018, are still generally within 60 days.

As with many cross-border transactions, country risk is a top priority for sellers. “Considering the high level of country risk, it is advisable to restrict your exposure to secured payment terms only,” said one respondent. Other recommendations made by members were to monitor the weak currency, ask for payment in advance and be wary of fraud.

—Michael Miller, managing editor

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