In the News

January 2, 2020

 

Credit professionals across the U.S. ended 2019 on a bit of a positive note despite a blip in the latest Credit Managers’ Index (CMI) from NACM. The December CMI combined index reading dropped to 54.6 from November’s 55.5. “The really good news for an end-of-the-year report is the numbers have stayed quite consistent and in reasonably positive territory,” said NACM Economist Chris Kuehl, Ph.D. “The reading this month was a little down from the month before, but compared to the big declines the Purchasing Managers’ Index has been experiencing, the data remains very solid,” he added.

All four combined favorable factors—sales, new credit applications, dollar collections and amount of credit extended—declined in December, so the favorable index dipped from 61.6 to 59.3 month-to-month. Amount of credit extended was the only reading to remain in the 60s, where it’s been the last three months and for much of 2019. The combined unfavorable factors remained the same in December as November at 51.5; however, the devil is in the details. All six factors—rejections of credit applications, accounts placed for collection, disputes, dollar amount beyond terms, dollar amount of customer deductions and filings for bankruptcies—were all in expansion (a score of at least 50). “The most encouraging aspect of the unfavorable data this month is all the readings are in expansion territory for the first time in several years,” Kuehl said. “The turnaround is not spectacular and it will not take much to see these numbers deteriorate again, but for now the data shows companies are in generally better shape as far as their trade credit is concerned. We will see what the data looks like after the first of the year when the retailers determine what those sales did to their profit expectations.”

The favorable factors in the manufacturing sector were a bit of a mixed bag as half went up and half went down. New credit applications and dollar collections each improved slightly in December, but that didn’t stop the score from dropping to 58.9 from 59.7. All six unfavorables were in the expansion zone, including accounts placed for collection and disputes, which climbed above 50. Overall, manufacturing inched upward three-tenths of a point to 54.8 in December. “A bit of a mixed set of messages this month with a nice recovery in manufacturing, but some concerns regarding the fate of the retailer and how this will affect the service readings in the new year,” Kuehl said.

In the service sector, which declined from 56.5 to 54.4 in December, neither the favorables nor unfavorables showed much promise. The favorable readings all declined quite significantly, led by new credit applications falling from 62.6 to 57.6. Amount of credit extended also declined nearly four points. “The real concern here is that sales are up due to all the discounting and specials, but profits are not keeping pace with those revenues,” Kuehl said. In the unfavorable categories, accounts placed for collection and dollar amount beyond terms slipped into contraction territory. Filings for bankruptcies was the lone category to improve in December. “The worry at this point is many retailers already look a little weaker than expected,” Kuehl said, “That does not bode well for after the holidays. Construction seems to be picking up a little as far as residential activity is concerned, but labor shortage remains a huge issue.”

 

 

Credit professionals will gather amid the lights of the Las Vegas Strip for NACM’s 124th Credit Congress & Expo at Caesars Palace June 14-17. Between the endless opportunities for professional networking and educational sessions, creditors will be challenged to think differently and approach problem-solving from new perspectives. 

Credit Congress General Session Speaker Ross Bernstein will further push the limits of creditors, challenging them to think in terms of champions—from the sports world to the business world. 

The award-winning author of dozens of novels and public speeches, Bernstein will welcome creditors to Las Vegas during the General Session. Bernstein explores leadership through the lens of sports, reviewing the many definitions of success and how to be a champion by looking at a variety of sports teams from around the world.

“Being a champion in my world isn’t just about winning it’s about how you play the game and how you do things,” Bernstein said. “It’s about finding success in whatever that metric might look like.”

“Winning” and “success” resembles something different for every team and player, for every company and employee. Bernstein challenges his audience to think about what success means: Is success getting a new customer, or is it keeping old customers? Does being a champion mean resolving difficult problems or mitigating future issues?

Bernstein approaches these topics through what he calls the “Champion’s Code,” which involves learning and building constantly to be the best version of oneself. To explore this code, Bernstein draws on examples people can relate to from around the world. Sports culture resonates with many on a global level, and Bernstein picks standout stories from American football teams, English rugby teams, etc. He steps out of the U.S.-business mindset and integrates more well-rounded perspectives into his speeches to inspire the audience.

“That’s what the Champion’s Code is: It’s about building relationships the right way, and that’s through my passion which is the lens of sports and ties that back to business,” Bernstein said. “I’m not going to tell you how to do it, but I’m going to show you how this company did it, here’s how this team did it and here’s how this person completely screwed up—don’t do that.”

Kicking off Congress this year, Bernstein will leave credit professionals on the theme of education: Creditors cannot grow and learn to be better professionals without constant engagement and eagerness to learn. 

And like sports, there’s always something new.

“I’m always studying and learning,” Bernstein said. “And that’s the beauty of sports: The news for it is never ending.”

 

 

Decades after its creation, electronic invoicing, also known as e-invoicing, is making its breakthrough in the credit department, becoming a more efficient and accurate element of the payment process. Companies that once relied on paper invoices and the postal industry are adopting the latest in invoicing technology to further improve the buyer-supplier relationship. Governments in the U.S. and abroad are not only encouraging, but also embracing the new payment technology, as was the case in Australia and New Zealand.

In February 2019, Australia and New Zealand announced the plan to adopt the Pan-European Public Procurement On-Line (PEPPOL) interoperability framework, an e-invoicing standard that government officials said will “increase opportunities for businesses to integrate with the global trading environment.” According to Technology Decisions, 32 countries in Europe, Asia and North America currently use the framework, which is expected to save Australia and New Zealand more than $30 billion in transaction costs over the next decade. This is a hefty sum considering the countries generate approximately 1.3 billion invoices every year.

John Delaney, managing director of business-to-business (B2B) integration service provider MessageXchange, told PYMNTS that standards such as PEPPOL are essential in strengthening relationships between buyers and suppliers because without them “companies would have to connect to each trading partner separately, which is time consuming and costly.” Australian Small Business and Family Enterprise Ombudsman Kate Carnell previously said paper invoices in Australia cost $30.87 AUD ($21.29 USD) to receive but will only cost $9.18 AUD ($6.33 USD) with e-invoicing.

“Without the standard, the cost to trade would be much higher, and, in my opinion, the uptake of electronic data exchange would be much lower,” Delaney added.

E-invoicing in the U.S. has proven to be just as effective, according to credit managers from across the country. In Houston, Texas, credit professional Martha Hirsch, CCE, said gone are the days her department touches paper or stuffs envelopes. Today, customers get their invoices in a timely fashion, following her company’s decision to implement e-invoicing software about five years ago.

“We haven’t found any detriments [to using e-invoicing],” Hirsch said. “In this day and age, e-invoicing is a necessity. It is so much faster than physically mailing invoices.”

Credit Manager James Sarkkinen, CBA, said his department started using e-invoicing to cut costs on postage and mailing equipment. As an early adopter of the technology, Sarkkinen said customers receive their invoices the next day, while there’s no reliance on staff having to be in the office along with other benefits.

“Many customers will date the invoice when received for processing versus the invoice date,” he said. “This has reduced days beyond terms.”

Robert Hernandez, a manager of credit and collections, wanted to assure credit professionals the invoicing process itself hasn’t changed, just the delivery method. His company currently outsources e-invoicing to Billtrust, which uses a website for customers to access their own accounts, get copies, make payments and file claims.

“[This] has reduced the number of requests for additional invoice copies,” Hernandez said. “Our customers need a faster turnaround to receive their invoices.”

However, he noted, credit managers shouldn’t be afraid to acknowledge there may be customers that still “don’t like to get anything via email.”

 

 

Owners of property encumbered by a mechanics lien often find themselves in violation of loan covenants and under pressure from their lenders. Liens are also a significant hindrance to the sale of the property to an otherwise willing buyer. How best to deal with a mechanics lien depends upon the circumstances, but here is a look at some options.

1. Bonding Over the Claim. In 2016, via amendment of the Illinois Mechanics Lien Act[1], Illinois joined most other states in providing a statutory process for bonding over a mechanics lien. Essentially, once a claim for a mechanics lien has been asserted, an owner or other eligible person having an interest in the subject property may petition the local court to substitute a surety bond in lieu of the property as security for payment of the lien. If the petition is timely filed, and no objection is presented and sustained by the court, an order will issue (1) substituting the surety bond for the property securing the lien claim, and (2) substituting the lien claimant’s right to recover on the bond for claims that could otherwise be asserted by the claimant under the Mechanics Lien Act. The order discharges the lien, and once recorded effectively releases the claimant’s encumbrance on the property. Litigation then proceeds among the claimant, surety and bond principal only. Other persons having an interest in the property who would otherwise be joined in the action are excused.

Some of the intended benefits of this process include (1) earlier release of the lien encumbering owner’s title; (2) simplifying litigation; and (3) providing a source of cash recovery to a successful claimant. 

But there are downsides to consider. First: the size of the claim and bond. The bond must, in addition to other requirements, be in an amount equal to at least 175% of the sum claimed. Often, the bond principal is a general contractor constructing improvements to the property for the owner’s benefit, bound by the terms of its contract to permit no liens by subcontractors or suppliers. Unless a private project is very large, the owner may not have required the contractor to post a payment bond up front. Once the dispute arises, the financial burden on the contractor/principal to obtain a bond in the proper amount may be substantial. The same is true for an owner/principal whose budget for the project did not contemplate the need for a bond.

Second: the principal is jointly and severally liable with the surety for any judgment awarded to the successful claimant – including some or all of the claimant’s attorneys’ fees. A prevailing party clause in the statute provides that if the claimant is awarded at least 75% of the amount claimed, it is entitled to recover reasonable attorneys’ fees up to the penal sum of the bond remaining after payment of the award plus interest. The bond principal, on the other hand, becomes the prevailing party only if the claimant is awarded less than 25% of its claim, in which case the principal may recover attorneys’ fees up to 50% of the claim  –  if it is collectible. Unless the principal is very sure of its position, challenging the claim presents material risk beyond its own legal expenses.

1. Title Insurance. As an alternative to statutory bonding and litigation, an owner/seller can try negotiating for a title policy insurance over the lien (depending on size and other factors), but title companies are under no obligation to offer such coverage and will typically require the seller’s personal undertaking for all related losses in an amount up to two-and-one-half times the size of the claim. Even where this is a viable option for the seller, it may not be acceptable to the buyer, who will generally prefer to take a clean title. 
2. Negotiate a Release. Liens arise because the claimant hasn’t been paid. More often than not, the claimant will prefer cash in hand, even at a discount, over taking its chances in court. The tried and true method of making a deal to exchange cash for the claimant’s release is typically more cost-effective, less disruptive and less risky than litigation – for both sides.

The relative contributions of the parties to the bargain will depend on the circumstances. Did the owner satisfy its obligation to pay the contractor? Even if true, payment to the contractor is not necessarily a complete defense to the claims of subcontractors. If the claimant is a subcontractor, the owner may have the incentive to chip in to a settlement and pursue other remedies against the contractor. Did the contractor make errors that increased the cost of a subcontractor claimant’s work? In that case, the contractor may be taking a haircut. Did the claimant fail to fully perform? If so, a reduction of the claim is in order.   

When settlement is reached, the owner benefits by clearing title to the property; the would-be bond principal, whether owner or contractor, will avoid costs for the bond; all parties will save legal expenses; everybody avoids judgment; and generally speaking, an outcome the parties agree on themselves is better than one imposed upon them by a court. So, when weighing the options, consider taking the practical approach: just deal with it.

[1] 770 ILCS 60/1 et seq.; 60/38.1 (eff. Jan. 1, 2016).

Elizabeth Boddy is a seasoned advisor and trial attorney who regularly counsels clients on construction-related issues, such as risk allocation, insurance, credit agreements, lien and bond claims, and performance disputes.  Elizabeth practices in the Chicago office of Taft Stettinius & Hollister LLP, and she is a leading member of the firm’s construction practice group. For more information, go to www.taftlaw.com/people/elizabeth-j-boddy.