In the News

September 12, 2019

Collecting After a Natural Disaster: People Before Businesses

Upcoming Holiday Season Requires Credit Managers’ Attention

Toyota Manufacturer Hit With $37M BEC

Subcontractor Negotiating Tips for AIA Documents

---

Collecting After a Natural Disaster: People Before Businesses

In the wake of Hurricane Dorian, business-to-business credit professionals still expect to collect their receivables on a variety of projects. But with damage and disarray in the affected areas, creditors can predict difficulties when attempting to get paid. Exercising best practices can mitigate risk—having a good lien and bond claim process, a good credit application, personal guarantees and security interests—but practicing empathy can help even further.

Matthew Jameson, Esq., with Jameson and Dunagan, P.C., will be leading a session titled “Hurricanes, Tornadoes and Earthquakes, Oh My! Collection Techniques After a Natural Disaster” on Sept. 23 at NACM’s All South Credit Conference, covering what creditors and collectors should be mindful of when collecting from customers recently devastated by natural disasters. Hurricane season will continue through the end of November, and with the constant threat and symptoms of climate change, natural disasters will likely continue to affect regions in the U.S. and worldwide.

“Your customer may have been completely wiped out. … It’s not just business. You’re dealing with a personal element to all of this,” Jameson said. “These people who are in these affected areas, not only is their business possibly wiped out, it may also mean their homes are wiped out, or maybe there’s a family member who was injured. It’s a different deal because these people may have lost everything.”

Instead of calling a customer and asking for money just after a natural disaster, Jameson advises creditors to value compassion for their customers over collecting. Reaching out to customers and checking in on their homes and families will yield better results than calling and demanding cash from past due invoices.

While collecting from the customer may be the first priority on the creditor’s mind, paying that outstanding balance likely is not the first priority for the customer. Making the customer aware of empathy on behalf of the credit department will likely put the customer at ease and make collecting easier in the near future.

Beyond compassion, Jameson advises creditors to keep deadlines in mind. Customers will likely need more time—depending on the severity of the disaster, it may take several months for a customer to return to normal operations—to pay after a natural disaster, but deadlines for filing liens do not allow for any leeway.

“Those deadlines are hard and fast, and you have to stick to those deadlines. If you miss them, you miss them,” Jameson said. “Even though you may not want to be sending out lien notices because a hurricane came through, you still have to send out those notices. If you don’t, you lose your lien.”

Deadlines do not change, but creditors should be mindful of mail operations and other possible disruptions in the supply chain. Mailing out completed paperwork to the appropriate official can be a challenge if the mail-carrying process is riddled with hiccups. If a document must be in an official’s hands by a certain date, creditors should be prepared to mail papers out with extra time for delays.

Creditors should be patient during natural disasters, giving their customers time while adhering to deadlines and usual responsibilities.

“You almost may want to focus on how to get these customers back to us and back on their feet; that may be the most important part,” Jameson said. “No one is going to get paid right now; what we want are these customers coming back to us and not our competitors.”

—Christie Citranglo, editorial associate

BUDGET NOW!

Be sure to budget NOW for NACM’s 124th Credit Congress & Expo at Caesars Palace.  
The Special registration rate of $799 will be available till December 6. Hotel rate will be $185 per night + taxes/fees.

Registration will open soon!

Upcoming Holiday Season Requires Credit Managers’ Attention

No matter how the rest of the year pans out, the retail industry tends to shine during the holiday season when shoppers flock to the malls and mom-and-pop shops alike for end-of-the-year spending. A recurring roadblock for brick-and-mortar stores has been online shopping as websites like Amazon become more convenient for the average shopper. However, according to some economists, the 2019 holiday shopping season will raise new concerns for retailers, in turn, changing operations in the credit department.

Less than a month away from the start of the fourth quarter on Oct. 1, Wells Fargo analysts are compiling their predictions on the basis of past trends. The holiday shopping season typically begins the weekend of Thanksgiving and continues through the New Year when retailers receive returns. On Aug. 26, CNBC reported on a note from Wells Fargo Senior Analyst Ike Boruchow to clients in which he described the upcoming quarter as “bearish,” despite companies’ acceleration in sales.

“We see risk ahead—a group with downward momentum on fundamentals calling for accelerating trends three months from now, with building inventory in the channel, an unfavorable holiday calendar ahead and likely headwinds coming from tourism and weather,” Boruchow said in the article.

Boruchow cited a shortened timeframe between Thanksgiving and Christmas as well as weather forecasters’ predictions of a warmer winter season. While shoppers will lose almost a week between the two holidays, warmer weather will hurt companies that rely on the cold for winter preparation and/or apparel sales. Strike three for retailers will come in the form of the U.S.-China trade war, which Boruchow said will hurt U.S. tourism.

In a chain reaction of events, NACM Economist Chris Kuehl, Ph.D., said, credit managers will feel the impacts on retailers if these predictions come to fruition. The good news is retailers are already anticipating a slower retail season and adopting the same strategy they’ve had the past few years: going in with light inventory. Kuehl said the majority of sales and discounts are likely to happen before Thanksgiving, therefore, almost guaranteeing a slower December as everyone has already completed their shopping.

“This is going to impact the credit manager most directly in that the bulk of their requests for credit have already taken place,” he said. “The retailers have already gotten the stuff in place that they want, and they’re going to sell it and be done with it. There probably won’t be a lot of, ‘Oh my, we’ve sold out of something and need to rebuild our inventory.’”

Another issue won’t arrive until after the holidays when retail bankruptcies and slow-pays begin in January and February. Many credit managers have probably already prepared themselves, Kuehl added, by shortening their terms to make sure they’re the first in line to get paid. It is in their best interest to also determine the shape of brick-and-mortar stores to gather a better understanding of whether consumers will purchase online or in-store.

“At this time, people who deal with retail and credit know the drill: It’s business as usual for the next month or so,” Kuehl said. “Then, everyone watches to see how the big clients did and if they’ll be able to handle their obligations after the holidays.”

—Andrew Michaels, editorial associate

Network and Learn with Credit Professionals in Your Area

Plan to learn, expand your professional network by meeting colleagues from your geographic area – there’s still time to register!

All South Credit Conference
September 22-24, 2019
Hyatt Regency San Antonio Riverwalk
San Antonio, TX
Hosted by: NACM Southwest

Western Credit Conference and CFDD National Conference
October 23-25, 2019
Sheraton Portland Airport Hotel
Portland, OR
Hosted by: NACM Commercial Services in partnership with CFDD National

For more information and to register, contact the local Affiliate or view regional conferences.

Toyota Manufacturer Hit With $37M BEC

Protection is on the minds of all credit professionals along with questions such as, “Will I get paid? When will I get paid? What risks am I taking on with this customer?” Creditors must ensure, through different channels, that payment for goods, products and services is received, but they must also check that customers are on the up and up. In 2019, fraud is becoming even more difficult for credit professionals and others to manage. There are a number of reasons for this including technology and the accessibility of information.

“You should practice risk management in any relationship between your company and any other entity,” according to “Vendor Vetting: Why Screen Your Service Vendors,” a presentation at NACM’s Credit Congress this past May. While the session focused on vendors, it is still important for credit departments to be aware of risks with their customers and their customer’s customer. “Regulators expect a company to practice effective risk management regardless of whether the company performs the activity through a third party.”

Last month, a subsidiary of a car component manufacturer for Toyota was hit with a $37 million business email compromise (BEC) scam. Toyota Boshoku Corporation announced Sept. 6 it was involved in a fraudulent payment scheme that attacked a European subsidiary.

“[T]rain your staff to require third-party validation for any financial transaction or introduce payment procedures requiring multiple sets of independent eyes,” said Tim Bandos, vice president of cybersecurity with Digital Guardian, in an SC Media UK article about the Toyota scam. “Malicious individuals are abusing the fact that junior staff implicitly trust their seniors and act quickly as instructed. You must put in place processes and beliefs, so that when unordinary requests come through, they should be questioned.”

According to the FBI, BEC and email account compromise (EAC) continue to grow as fraudsters remain active and target businesses, large and small. Between June 2016 and July 2019, more than $26 billion was exposed to BEC/EAC scams, states the FBI’s report released this week, and these cases are only the more than 166,000 reported incidents to the Internet Crime Complaint Center (IC3). HR and payroll funds are often targeted by phishing emails requesting changes to direct deposit accounts. There were more than 1,000 BEC payroll complaints between Jan. 1, 2018, and June 30, 2019, resulting in a reported loss of $8.3 million.

Earlier this week, the Department of Justice announced 281 arrests in global BEC schemes, including 74 arrests in the U.S. Operation reWired also seized nearly $3.7 million. A similar operation in June 2018 resulted in 74 arrests and the seizure of roughly $2.4 million.

The FBI suggests using more than one verification for changes to account information as well as being alert to hyperlinks and URLs in emails. It is important to make sure the links take the clicker to the expected location.

—Michael Miller, managing editor

You Need To Understand What’s Behind the Numbers in Financial Reports

Our Financial Statement Analysis 2: Credit & Risk Assessment course will help you do just that! Learn from our expert instructor, George Schnupp, CCE, and be surrounded by your peers in a classroom environment.

This course will teach the credit professional:

• How to analyze and interpret financial statements leading to quality credit risk assessment
• The steps required to document a credit line recommendation
• Topics such as investments, ratio analysis, inventories and valuation methods, credit risk assessment and more

This program is also a requirement for earning your CCRA designation as well as a great preparatory course for the CCE Exam.

Register here for Financial Statement Analysis 2: Credit & Risk Assessment, which is offered at NACM-National in Columbia, MD during the week of November 4-7.

Have questions? Please contact This email address is being protected from spambots. You need JavaScript enabled to view it. or 410-740-5560 for more information.

Subcontractor Negotiating Tips for AIA Documents

Article 1: The Subcontract Documents

Article 1 of A401 contains six sections. §1.1 lists the documents comprising the Subcontract. §1.2 sets forth the Subcontract integration/merger clause, providing that the Subcontract supersedes prior negotiations and agreements. §1.3 generally states that AIA Document A201-2017 (“A201 General Conditions”) constitutes the General Conditions governing the Subcontract. §1.4 requires that Subcontract amendments be made in writing. §1.5 disclaims any contractual relationship between any entities other than the General Contractor and the Subcontractor. §1.6 obligates the General Contractor to make the Subcontract documents available to the Subcontractor before executing the agreement.

Most of the foregoing sections are fairly typical and should not require extensive editing. Of the six sections, §1.6 is the one on which the Subcontractor should primarily focus.

As context, under A401 Article 2, the Subcontractor will: (i) be bound by the A201 General Conditions; and (ii) assume towards the General Contractor all obligations that the Contractor assumes towards the Owner. Accordingly, the Subcontractor should remain mindful of its obligations under the A201 General Conditions to review contract documents and site conditions, to take field measurements and to report any errors, inconsistencies or omissions discovered to the Architect (or in the Subcontractor’s case, to the General Contractor). See A201, §3.2.2.

It is therefore in the Subcontractor’s interest to study and understand the full extent of its exposure under any restrictive provisions flowing down from the Prime Contract. The Subcontractor can protect this interest with a few simple edits to §1.6, none of which should be controversial:

• §1.6: Upon request, the Contractor shall provide the Subcontractor with a complete set of the Subcontract Documents make Subcontract documents available for subcontractor before executing the Subcontract …

Article 2: Mutual Rights and Responsibilities

A401 Article 2 makes the Prime Contract and A201 General Conditions terms flow down to the Subcontract. With respect to reviewing site conditions under §3.2.2 of the A201 General Conditions, the Subcontractor must review the A201 General Conditions carefully to understand what terms are flowing down (and thus, what its rights and obligations are). Two examples help illustrate this:

First, under A201 §2.1.2, the Owner must, within 15 days of receiving a written request, give the General Contractor information necessary to evaluate any mechanic’s lien rights. But under A401 §3.3.6, the Contractor has 30 days to provide this same information to the Subcontractor.

Second, under A201 §2.2.1, the General Contractor is entitled to receive information about the Owner’s ability to fulfill its financial obligations under the Prime Contract. Because this provision flows down for the Subcontractor’s benefit (pursuant to A401 Article 2), the Subcontractor is entitled to receive information about the General Contractor’s ability to fulfill its obligations under the Subcontract.

The upshot is that the Subcontractor should submit its written requests for A401 §3.3.6 lien information and A201 §2.2.1 financial information before signing the Subcontract or no later than once the Subcontractor begins its work.

As one final practical tip, the Subcontractor may negotiate a change to the beginning of A401 Article 2, making Article 2 applicable only to the extent Contractor has furnished Subcontractor a copy of the Prime Contract and other Contract Documents requested by Subcontractor. This edit gives the Subcontractor some level of protection against voluminous Prime Contract documents, thereby providing the Subcontractor some basis to argue (if it has to) that the Subcontractor did not intend to assume obligations it did not know about, but which otherwise impacted the Subcontractor’s work.

Reprinted with permission.

David Salton, Esq., is a partner in the litigation practice group, international arbitration and construction sections of Porter Hedges. His practice focuses on representation of owners, general contractors, subcontractors, suppliers and other commercial entities in construction, government contracts, oil and gas, trademark infringement and other commercial disputes.