eNews February 6

In the News

February 6, 2020


CMI Begins 2020 with a Bang

—Michael Miller, managing editor

The Credit Managers’ Index (CMI) is off to an overwhelming start to 2020. While other indices such as the purchasing managers’ index are down to begin the new year, the CMI rebounded in January from a down December to reach a nearly three-year high. “Given that credit managers tend to think in the future, this month’s good data may be seen as a harbinger of things to come,” said NACM Economist Chris Kuehl, Ph.D. “Not that everything is likely to come up roses in the next several months, but for the time being the threats seem a little more distant than expected.”

The combined CMI reached a reading of 56.4, up 1.8 points from December, and it is back at levels seen in mid-2019. Much of the gain is due to the large jump in the favorable factors; however, the unfavorables improved as well. The favorables increased almost three points to 62.2, the highest reading since May. All four factors were in the 60s—sales leading the way at 63. This is the first time all four factors are in the 60s since August after just missing out in October and November.

The unfavorables were all in expansion territory (score above 50) for the second month in a row. Dollar amount beyond terms made the biggest gain, standing at 54.2 after being at 51. “There has been a desire on the part of many companies to go into 2020 with a reduced set of credit obligations in order to be better protected should there be some kind of slowdown. This is showing up in the credit data with reduced slow pays and improved dollar collections,” said Kuehl. Rejections of credit applications was the only factor to not improve in January; it remained at 52.

Tariffs, trade wars and other economic factors, such as issues at Boeing, were expected to impede the manufacturing sector; however, Kuehl asked if the January numbers were an anomaly or is the sector in better shape than predicted? All four favorable categories were also in the 60s, and again sales led the way with a nearly six-point swing. While the unfavorables improved, not all sectors did. Rejections of credit applications and dollar amount of customer deductions each declined slightly. Filings for bankruptcies improved 2.4 points. “The important aspect of these readings is nothing like this kind of performance had been expected given all the gloom and doom surrounding the manufacturing sector,” said Kuehl. “This can all change in a heartbeat and there have been times in the last year when there has been such a flip, but for now the news is quite encouraging.”

New credit applications paced the service sector favorables with a 4.4-point climb, yet amount of credit extended had the highest score of 64.5. “While traffic numbers were good and revenue was up, many reported lower profits as consumers tended to stick to discounted goods; there is just not enough margin in these.” Kuehl points out retail did fairly well, mainly due to online merchants and not brick-and-mortars. Unfavorables increased to 52.5 in January from 50.9. Much of the movement can be traced to improvements in dollar amount of customer deductions and dollar amount beyond terms.

“Whether this was an indication of a strong finish to 2019 or a good start to 2020 the data is encouraging,” Kuehl concluded. “Now, all eyes will be on next month to determine which month was the anomaly—the shrinking December or the booming January.”



Letters of Credit Webinar Series—Get the Most out of Letters of Credit

FCIB is kicking off a series of webinars that will help credit professionals understand and use export letters of credit more effectively. Veteran international banker Chip Thomas will share practical techniques and insight.

Feb 13: Understanding the Letter of Credit Process: What Every Exporter Needs to Know

Mar 12: Roles and Responsibilities of Banks in the Payment Process

Apr 9: Letter of Credit Documentation: How to Avoid Discrepancies

May 14: Choosing the Right INCOTERMS for Letters of Credit: Why International Commercial Terms Matter and the Role They Play


Supply Chains, Oil Production Slow Due to Coronavirus

—Andrew Michaels, editorial associate

The coronavirus rages on and economists are learning that operations won’t be returning to business as usual any time soon. In fact, the economic costs of the coronavirus are predicted to exceed those caused by the SARS epidemic in 2003.

As of Feb. 5, CNN reported, the virus has claimed the lives of nearly 500 people and infected more than 24,500 others in 25 countries. Medical experts continue to research treatment for the virus, which has swept across China after emerging in the city of Wuhan in early January. What first began impacting the Chinese economy is now affecting more countries and, therefore, the global economy.

“International companies that rely on Chinese factories to make their products and depend on Chinese consumers for sales are already warning of costly problems,” The New York Times (NYT) reported earlier this week. While many factories delayed production because of the Lunar New Year holiday, experts believe production will remain slow as workers avoid returning to potentially infected areas.

In addition to store closures by top-name companies such as Apple, Ikea and Starbucks, airlines have also canceled flights to China, including American, Delta, United, Lufthansa and British Airways, NYT reported.

According to Foreign Policy, the SARS outbreak decreased China’s growth rate by at least 1%—a decline that may be topped by the coronavirus in part because of the Chinese economy’s growth over the past 17 years.

“The coronavirus is hitting a weaker economy than was the case with SARS,” Alicia García-Herrero, the chief economist for the Asia-Pacific at the French bank Natixis, told Foreign Policy. “[W]e should be expecting a rapid deceleration in growth in the first quarter of 2020, and gradual stabilization for the rest of the year.”

Disruptions to the global economy are particularly troubling when analyzing the virus’ impact on supply chains, said NACM Economist Chris Kuehl, Ph.D., and this is assuming the virus does not spread rapidly outside the Chinese border. NYT used the example of smart TVs that are made from several small components, many of which come from China. Since companies’ production depends on those components and the components aren’t available due to slow or closed Chinese production lines, the smart TV manufacturer reaches a standstill.

“Supply chains are disrupted as China works to contain the outbreak, and many of the parts and assemblies affected are not going to be readily replaced,” Kuehl said. “There is expected to be a major shortage.”

There are also reverse impacts as is the case with oil production in the Organization of the Petroleum Exporting Countries (OPEC) and Russia. Mere weeks after the initial outbreak, NYT reported, the demand for oil in China—which uses 13 of every 100 barrels of oil produced worldwide—dropped 20%. Kuehl said OPEC and Russia are calling for an immediate and deep reduction in oil production due to dwindling demand in China.

“The Chinese have all but shut down internal travel, while the Wuhan region has been more or less quarantined,” he said. “This is factory territory, which means compromised production. The oil sector has been worried about reduced demand anyway, so this just adds to their concerns.”


Honors and Awards

Nominate a Special Credit Professional

Do you know anyone working in the field of credit management whose professional life displays unquestioned integrity, outstanding and meritorious service in the field, and ongoing dedication to the highest standards of the profession? The National Association of Credit Management Honors and Awards have become an important mechanism by which we recognize our colleagues for their outstanding efforts and unwavering commitment. Nominate a colleague now!

NACM’s 2020 award recipients will be honored at the annual Credit Congress & Exposition. Credit Congress is taking place at Caesars Palace in Las Vegas June 14-17, 2020. The deadline for all nominations is February 7, 2020.

Visit www.nacm.org/honors-a-awards.html to learn more and to nominate your choice.

Visit www.nacm.org/honors-a-awards.html to learn more and to nominate your choice.


Changing Credit Management: Adapt or Get Left Behind

—Christie Citranglo, editorial associate

The landscape of credit management continues to change and evolve, switching up what veteran credit managers have been familiar with for decades. More technology and software are finding their way into the credit department, leaving the future of the business-to-business landscape wide open.

NACM’s 124th Credit Congress and Expo at Caesars Palace in Las Vegas will host several sessions related to credit management in transition, tackling the anxieties of creditors’ unforetold future. NACM will unveil the results of its recent Credit Management in Transition Survey during a panel session, along with President Pam Krank of The Credit Department’s session titled, “Surviving and Thriving the Future of Credit Management.”

“Companies need people who are good communicators They need people who are comfortable with data, who will understand these technologies,” Krank said. “A lot of these credit managers are still uncomfortable with technology.”

The use of artificial intelligence (AI) and bots are reducing team size, Krank said. Implementing the use of more software cuts down on more tedious, low-level tasks, reducing the need for more employees in the credit department.

Technology isn’t disappearing, but menial jobs will, so how can credit managers prepare? Instead of refusing to use technology, creditors can develop skills and assets that bring more to the table than technology can offer any department. Some of these skills include better negotiating tactics, communication and problem solving—soft skills that involve critical, creative thinking that AI software cannot do.

“There are fewer people in this process, and for credit managers, it’s trying to figure out, ‘What can I contribute that a machine can’t do?’” Krank said. “Interpretation is something that is still not really well defined or well done. Technology can tell you all the results, but it’s really not going to fix the causes of the problems.”

Instead of refusing to work with the machines, Krank suggests working alongside them in a collaborative, enriching manner. While understanding new technology can be daunting for many, resources for learning software are available and more readily available than many might think, she said.

When a new skill is introduced to a department, if credit managers wish to learn more, they may seek out a class, but classes may not be readily available or within an easy distance. Krank suggests simply looking for the information online: There are many YouTube tutorials and online help manuals free and accessible for credit managers’ use.

“They need to decide now: Are they going to move up into this really exciting automation space using their ability to interpret data and facilitate solutions, or are they going to move down into more of an administrative role in analyzing risk or making collection calls?” Krank said.


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Stay informed with NACM’s and FCIB’s robust content, all in one place. That’s Business Credit magazine, eNews, FCIB’s Week in Review, NACM’s blogs, the Strategic Global Intelligence Briefs by NACM Economist Chris Kuehl, Ph.D., and CMI podcasts on your mobile devices.

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Find the NACM Business Credit app on the Apple App store or Google Play store.

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Who Pays for the Owner’s Nonpayment?

—Tim Ross, Esq.

Contingent payment clauses (“CPCs”), or “pay-if-paid” clauses, have become commonplace in the Texas construction industry. If properly written, they make payment from an owner to a general contractor a “condition precedent” to the general contractor’s obligation to pay its subcontractors, thereby shifting the risk of an owner’s nonpayment to the subcontractors.

In 2007, the Texas Legislature attempted to narrow the use of CPCs by enacting the Contingent Payment Clause Statute (now located in Chapter 56 of the Texas Business & Commerce Code) (the “Statute”), which recognizes the enforceability of CPCs but provides a series of exceptions to their enforcement. One such exception prohibits enforcement of a CPC if the owner’s nonpayment to a general contractor is due to the general contractor’s contractual obligations not being met, unless the nonpayment is due to the subcontractor’s failure to meet its contractual requirements. Seems simple enough, right?

Like most things in the construction industry, the devil is in the details. By way of example, consider a project that is substantially delayed resulting in the owner’s nonpayment. The general contractor fails to meet its obligations due to the delays. If that was the end of the analysis, under the Statute the general contractor’s CPCs with its subcontractors would not be enforceable. However, what if multiple subcontractors caused the delay? Arguably, the CPCs with each subcontractor responsible for any delay would be enforceable under the Statute as those subcontractors failed to meet their contractual requirements.

Despite frequent and recent arguments otherwise, it is important to note that the Statute does not limit the enforcement of the CPCs to only the extent of the damage (in this case nonpayment) caused by the subcontractor. Had that been the Legislature’s intent, it simply could have declared CPCs unenforceable, which it did not do, which would have resulted in each party being responsible only for the damage it caused.

So, what are contractors/subcontractors to do? Here are a few suggestions:

General Contractors

  1. Make sure the contingent payment clause is properly drafted to shift risk of owner nonpayment to subcontractors
  2. Clearly document subcontractor defaults
  3. Have a nonpaying owner detail and document the specific reasons for nonpayment
  4. Don’t withhold payment on non-defaulting subcontractors


  1. Revise CPCs to limit enforcement to damages caused by you
  2. Refute any disputed default notices or claims of failure to meet your contractual requirements
  3. Be diligent in obtaining payment timely

Board certified in construction law by the Texas Board of Legal Specialization, Tim Ross, Esq., has a practice focused on the transactional and dispute resolution aspects of construction law. He works with clients in all phases of the construction process with an emphasis on contract drafting and negotiation, dispute avoidance during construction, field management and administration, project close-out and dispute resolution.


mechanics lien, bond services, mechanics's liens

Construction Credit is Complicated

What's required to maintain and enforce lien and bond rights is complicated, especially when selling in multiple states. Some vendors give away basic lien and bond information for free. That can be helpful, but be warned that there are no shortcuts to fully understanding the complexities of a state's lien and bond statutes.

The STS Lien Navigator digs deeper to provide the answers that will help guide you through the entire process. It's that depth and attention to detail you may not know about that makes the difference. The STS answer line is also available with your Navigator subscription.

For the easiest, most cost-effective professional answer to your construction credit questions, get the help you need with the Lien Navigator.

For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.

For more information, call Chris Ring at 410-302-0767 or visit www.nacmsts.com.