eNews April 2

In the News

April 2, 2020


COVID-19 Pandemic Slashes March’s CMI

—Christie Citranglo, editorial associate

March’s Credit Managers’ Index (CMI) began to feel the effects of COVID-19, seeing drops that have not been this dramatic since 2008’s Great Recession. Nearly every favorable factor this month fell out of expansion (a reading above 50) into contraction. NACM Economist Chris Kuehl, Ph. D, said the credit managers will be “crucial players” during this economic environment. Relationships developed over the years will be key as businesses struggle to stay afloat in what could turn into months of uncertainty.

The combined CMI score dropped down to 49, falling into contraction for the first time in several years. Declines will likely continue, Kuehl said, and more records will likely be set since the Great Recession. The favorables saw the biggest hit in March, dropping from just over 62 to over 46. Unfavorables saw a crash as well, but the effects on the unfavorable factors have not yet emerged.

“The full impact of the business shutdown has not been felt,” Kuehl said, “although it will likely start to manifest in the weeks to come and in the next iteration of the CMI.” 

In the favorables, sales saw the most drastic drop, coming in at 39.5 after reading at 64 in February. New credit applications and dollar collections also saw massive drops, sitting now in contraction territory. The only reading that did not fall under 50 in the favorables was amount of credit extended, which went from about 64 to just over 53.

The unfavorables have not shown much shakeup in the data just yet. Rejections of credit applications remained mostly stagnant going from about 54 to about 53, and disputes even saw an improvement from just about 50 to about 52. Bankruptcies, similarly, did not see much of a move, shifting from 53.2 to 53.3. Kuehl noted this will likely be the last in the unfavorables to see any movement. 

“The interruptions in business activity have developed in just the last two to three weeks; this is showing up in immediate data such as sales and credit applications,” Kuehl said. “... The accounts placed for collection remained very close to where it had been before as there has not yet been time for many customers to get in trouble.”

The manufacturing sector felt the impacts of the pandemic before the service sector—given factories in countries like China shut down long before the U.S. saw anything close—but the service sector felt the brunt of the pandemic. Manufacturing fell about six points to just under 50 while service fell about 8 points to roughly 48.

“The credit manager will have to decide what the likely fate of their customers might be,” Kuehl said. “If they are doomed, the only course is to get as much of what is owed as possible. If they think the situation will improve soon, they will be inclined to wait it out and keep the relationship intact.”


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Managing Lien Deadline Dates in Uncertain Times

—Michael Miller, managing editor

The entire world has been turned upside down due to the outbreak of the coronavirus. It’s impacted companies large and small and individuals rich and not so well off. Friends and family members are getting sick from the pandemic and the death toll is rising. And this is just over the last couple days. Experts predict the outbreak and economy could worsen before it starts getting better despite the “flatten the curve” actions laid out by government officials, health care leaders and businesses.

In the workforce, some businesses have been considered essential while others have not, and some work is essential depending on the location. Construction is one of those industries that has been on both sides of the fence—essential in one location and not another, or completely shut down. This has often left those in the field perplexed, especially when it comes time to file and send documents while working on a project.

“In times of economic uncertainty, the decision to file a mechanic’s lien must be made swiftly,” said Chris Ring of NACM’s Secured Transaction Services in his recent webinar on the coronavirus and how it will impact construction. “Just as critical is knowing the date the lien needs to filed.”

Deadlines are pretty straight forward in some states—serve the lien within X amount of days from last furnishing—however, in some states it’s not as clear cut. “You have to understand the mitigating factors that determine the deadline,” Ring added. One of the many construction challenges for lien claimants is accurately calculating deadline dates. This is due to the fact that money on the project could be drying up quickly depending on the type of project and its location. Several examples of this are in the most-impacted coronavirus states.

On California private projects, determining the lien deadline depends on which documents have been filed or not by the owner. Claimants have 90 days from completion of the entire project; however, if the owner files a notice of completion or a notice of cessation, the original contractor now has only 60 days, while other claimants have 30 days after the recording of the owner’s documents.

Other states, such as Washington, are hybrid lien states, i.e., full price for commercial projects and unpaid balance for residential projects. In full price states, owners can’t use the defense that they have already paid the general contractor, and as long as everything is done accurately, the owner can be forced to pay twice. For unpaid balance states, owners can use that defense to prove they paid the general contractor prior to the lien being filed.

New York and Massachusetts are also under the microscope due to the effects of the coronavirus, specifically in New York City and Boston. The long deadline dates in New York paired with the fact it’s an unpaid balance state means, “It’s going to be very unlikely that within that timeframe the owner hasn’t already paid the general contractor for work,” Ring said.

During this uncertain time, the best advice is to not wait to submit liens—don’t wait until the last minute even if there isn’t a global pandemic. “Submit liens for recording a minimum of three weeks prior to deadline date,” Ring suggested.

View the webinar, “Managing Lien Deadlines Dates.”

View the webinar, “Managing Lien Deadlines Dates.”


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Credit Departments Adapt to New Work Routine During COVID-19

—Andrew Michaels, editorial associate

Workplaces around the world are rapidly adjusting their daily operations amid the COVID-19 outbreak. While some remain open for business, others are closing, operating with only essential staff or implementing work-from-home policies. Although operations vary between companies, credit managers will see their new routine create a ripple effect across the profession long after the pandemic is over.

As of April 1, there were more than 163,500 cases of COVID-19 reported throughout the U.S. Several states across the country have closed nonessential businesses and/or ordered citizens to shelter in place or stay at home, with many more states sure to follow suit in an effort to bend the curve. Whether it’s at the direction of their company or a personal decision to work from home, Bectran Business Development & Implementation Manager Dominic Biegel said changes to credit departments’ operations will most likely begin with their payment methods. Paper invoices and checks, for example, aren’t reliable outside the office.

“This is a wake-up call for credit managers,” Biegel said. “They didn’t realize they weren’t ready or that their current practices weren’t sustainable in today’s world. Especially with everyone working from home, it’s going to be difficult for old-school payments like checks.”

Sudden shifts in operations may steer more people to online processors, he noted. For instance, some tools, such as those offered by Bectran, allow credit managers to work through an online payment portal where customers can pay via ACH or credit card. If departments are already using an online payment portal where customers can log in and submit their credit card information, that will allow the company to apply the cash that much easier than if they were doing it through a check.

Meanwhile, the same tools allow credit managers to log in on their home computers and view incoming credit applications and make any necessary collection calls.

“I’ve talked with a lot of companies, and they’re having trouble working from home because a lot of them don’t have laptops; they still have desktops,” Biegel said. “COVID-19 can change pretty much anything in credit.”

Last month, NACM conducted its own survey on the coronavirus’ impact on credit departments, which revealed nearly 73% of the more-than-500 respondents are in a department that is working remotely because of the outbreak. Prior to COVID-19, the majority of respondents (more than 42%) said they only worked remotely on rare occasions, followed closely by more than 38% who said they never worked remotely.

Several respondents (more than 44%) said their companies had no emergency work-from-home plan in place prior to COVID-19—with only about 17% having a comprehensive plan.

With the state-mandated shutdown in Ohio, Corporate Credit Manager Janet Nutt said GLT Companies is still waiting to see how customer payments will be affected. GLT Companies is deemed an essential business because they are a material supplier to many other essential businesses such as hospitals, power plants and automotive. 

“We have instituted split shifts along with working remotely when possible,” Nutt said. “There are just two of us in the credit department, and we wear many other hats that include the need for one of us to go into the office most days to collect and deposit checks. The most difficult thing I am encountering right now is the cash forecasting, as I try to reach out to our customers to see if they are still in operation and whether working remotely is going to affect their ability to cut checks.”

Nutt said everything is changing on a day-to-day basis for everyone. While she sees her company’s major distributors and customers continuing to pay as usual, the customers already in distress are reaching out to request extended terms or not reaching out at all with the hope that GLT Companies will assume they are not open for business.


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Preparing for a Slowdown in Accounts Receivable Collection Due to COVID-19

—Randall Lindley, Esq., Gwen Walraven, Esq. and T.J. Hales

As the Coronavirus (COVID-19) outbreak and response continues to develop in the United States, businesses should expect to potentially experience delays in payment and collection of accounts receivable. Businesses can diminish the impact of these delays by walking the line between demanding strict compliance with the terms of credit extended and remaining flexible with customers. In this difficult time, businesses should anticipate a potential balancing act between preserving relationships with customers and the enforcement of contract rights for cash flow purposes.

Businesses will want to ensure cash flow from accounts receivable remains as stable as possible. But customers paying toward an amount due may request extensions or cease payment altogether due to COVID-19-related issues. Businesses can enter into payout agreements with such customers to mitigate the risk of outright nonpayment and to attempt to stabilize cash flow. A payout agreement can modify the payment schedule to decrease or eliminate customer’s payments for a set amount of time, temporarily reduce or eliminate interest payments and penalties or modify other payments terms to ensure the customer keeps making acceptable payments toward the amount due. If a business is interested in entertaining payout agreements or alternative payment arrangements, it is important that the business communicate such willingness to the customer. Customers too often take the “ignore it and it will go away approach.” Being proactive about a willingness to work with a customer going through a financially challenging time may be the difference between collecting and not collecting.

Business will also need to ensure their legal rights to collect amounts due remain intact. For some businesses, this will mean sending letters to customers and guarantors reminding them of their obligations to pay or demanding payment of amounts due. For others, this will entail filing lawsuits, filing liens, enforcing security agreements or engaging in other legal processes. With any event, paying careful attention to the tone and wording of communications and legal papers will help businesses ensure that taking necessary steps to preserve their rights does not alienate customers or harm longstanding commercial relationships.

Further, businesses should keep close watch on delinquent accounts or any they expect will become delinquent and move quickly to preserve their rights. While courts and administrators around the country have canceled or delayed many legal proceedings due to COVID-19, in at least some states, they retain discretion to require compliance with deadlines imposed by statutes of limitation, contracts and other rules. With video-conferencing, email and e-file capabilities, courts and administrators still may be able to resolve disputes and render judgment without the need for in-person interaction.

There is little doubt the response to COVID-19 presents businesses with challenges in ensuring payment and collection of accounts receivable. Businesses can work to mitigate the associated risks by remaining focused on the dual goals of maintaining stable cash flow and customer relationships. By balancing these (sometimes) competing interests, with the right tools and guidance, businesses will weather the COVID-19 storm.

Randall Lindley, Esq., Gwen Walraven, Esq. and T.J. Hales of Bell Nunnally & Martin LLP in Dallas, Texas.