January 20, 2022
|I. Common Excuses for Nonpayment and What to Do About Them|
|II. Inflation and Supply-Chain Disruptions: A Dangerous Duo|
Common Excuses for Nonpayment and What to Do About Them
Bryan Mason, editorial associate
Customers that don’t pay on time often provide excuses when it comes time to follow up. “We never received an invoice” was the No. 1 answer (88%) for not paying on time, according to a recent eNews poll. The second most-common excuse (78%) was “We cannot pay until our customer pays us.”
Other excuses included:
- The invoice is incorrect. (45%)
- The materials were damaged or defective. (35%)
- Other filled-in excuses. (18%)
- We never received the order. (15%)
- Our systems are down. (13%)
So, what’s the best way to respond to these excuses and what measures can you take to limit the number of excuses you receive? Several credit professionals pointed out it starts with knowing your customers’ businesses and maintaining continuous communication.
Find out if the customer’s excuse is legit and whether your company needs to correct something, said Andreas Schmitt, director of group credit management at Rational AG (Germany). Get to the point where you can say, “Now that this has been clarified, when can we expect the payment,” he said.
If a customer claims it never received an invoice, immediately resend it, said Tim Pearson, credit manager at Bama Concrete Products Company, Inc. (Alabaster, AL). More than 50% of his invoices go out automatically, but his department manually resends those that customers say they didn’t get to make sure they are received.
Schmitt resends them via email and again asks when payment will be made. Always try to finalize your follow up with an agreement on an exact payment date, he added.
If payment is for a large project and a customer says it cannot pay until its customer pays, Betsy Rhodes, CCE, treasurer at Metal Specialties, Inc. (Odessa, TX), tries to work with her customer to maintain a positive working relationship. For example, this could mean establishing a payment plan.
Pearson, however, monitors a customer’s situation closely after it notes that it cannot pay until it receives payment. For him, that sometimes means putting more pressure on the customer by sending notice letters throughout the process.
Some of the other excuses provided by credit professionals included:
- The accounts payable department has COVID so no one can do anything.
- We are changing accounting systems.
- Another company is buying the customer’s company and the new owner is reluctant to pay.
With these types of situations, Rhodes suggests contacting customers weekly to ask follow-up questions that might get you paid—even if it is only because they want you to stop contacting them.
Knowing your customer can help avoid some of these situations. “If you know your customer’s financial situation is rather weak and it is involved in a big project where its customers usually pay after 60 days, it does not make sense to grant a payment term of only 30 days,” Schmitt said. “Know your customer’s business and grant terms that are challenging but also fair and achievable.”
Check credit reports and with trade groups and industry groups, Rhodes said. “I put more stock on that than credit references on credit applications.” It also helps to establish and maintain a positive working relationship from the start, she continued.
“Do not just communicate with your customers when they are past due—let them know you appreciate their orders and their business,” she said. “When we have a new customer and the invoice is sent to them, we will call them and ask ‘Did you get it? Did we do everything you wanted us to? Is there anything we can do to make your job easier?’”
Before selling, credit professionals also can push for establishing payment bonds, Pearson said. “This makes everyone on the job aware that you are applying pressure for them to pay.”
Schmitt suggested three additional steps for reducing the number of excuses from customers by sending:
- Invoices electronically—use emails with pdf attachments instead of sending invoices via snail mail.
- Regular account statements—add a friendly comment such as “Please check your postings against this statement and come back to us in case of deviations, so we can clarify this before running into overdues.”
- Pre-mature reminder—for the well-known late payers, call a couple of days before the due date of substantial invoices.
Inflation and Supply-Chain Disruptions: A Dangerous Duo
Annacaroline Caruso, editorial associate
Businesses are currently under financial pressure from all sides, but the combination of inflation and supply-chain disruptions is making life especially difficult for companies worldwide. Inflation remains well above the Federal Reserve target rate of 2%, driven by new Covid variants, booming demand and supply constraints.
“The supply-side constraints have been very persistent and very durable,” Federal Reserve Chairman Jerome Powell said in a Senate Banking Committee hearing last week. “We're not really seeing a lot of progress.”
The Fed plans to raise interest rates this year in an attempt to lower inflation, but doing so will only ease the demand side. Fixing supply-chain disruptions is the real key to cooling inflation, Powell said, but it is out of the Federal Reserve’s control. “We can affect the demand side; we can’t affect the supply side,” he said during the hearing. “[Easing supply bottlenecks] is going to be a big part of getting inflation back down.”
Inflation will likely remain high until late 2022 or early 2023, so companies will need to navigate long-term inflationary pressures, said Antje Seiffert-Murphy, CFA, market representative for trade credit at Hannover Re, in an NACM webinar, How Inflation and Supply Chain Constraints Impact Corporate Risk.
“Inflation is going to stay with us for a large portion of 2022 and will play a large role in increased corporate risk,” Seiffert-Murphy said. “For example, a company that has a high ability to pass along those increasing costs is in a much better position to manage margins than a company with less pricing power.”
Credit professionals also should look at other factors when determining how well a customer will handle an extended inflationary period such as the type of product the company sells, variable vs. fixed costs and stability of margins, Seiffert-Murphy explained.
“A conversation with your buyer around their experience in 2021 and expectation for 2022 will give you valuable insight in regards to their ability to pass on costs, how the company is managing input costs and how they are countering inflationary pressure,” she added.
Supply-chain disruptions will not only keep high inflation around longer, but they also will add another level of risk. Supply constraints can deteriorate accounts receivable, force companies to use up more credit line and make it challenging to keep an appropriate level of inventory.
“There becomes a risk of under or over stocking inventory, both of which would hurt your customers’ profits,” Seiffert-Murphy said. “With overbuilding an inventory, there becomes the risk of write-offs if the product becomes obsolete. Also, with liquidity tied up in inventory, it won’t be available to use elsewhere if needed.”
Watch the webinar on-demand to learn more about how inflation and supply-chain constraints are impacting corporate risk today.
What You Should Know About Public-Private Partnerships
Bryan Mason, editorial associate
Public-private partnerships (P3) will likely increase in popularity due to the passage of the 2021 infrastructure bill. Do you know how these projects differ from other procurement methods? Avoid the common pitfalls that can result in unfavorable outcomes.
“A large number of public and federal jobs this year will be P3 projects,” said Connie Baker, CBA, director of operations for NACM STS. “It is important to develop departmental procedures before these jobs start so your company is protected. If you wait until you are past due to gather job and payment bond information, that could mean a bad-debt write off for customers that are not creditworthy of the job order.”
Projections for these types of projects differ from other types of projects. You cannot file a mechanic’s lien on government projects, said Chris Ring, of NACM STS. Also, P3 projects are funded by private investment money so a payment bond is not required—unless the state has passed P3 legislation that requires general contractors to post a payment bond to protect subcontractors and suppliers in the event of nonpayment, Ring explained.
Credit professionals should proceed carefully, Baker said. “Without P3 legislation that requires payment bonds, suppliers and subcontractors could be selling to their customers on an unsecured basis,” she said. To date, there is no payment bond legislation for federal P3 projects “so there will most likely not be a payment bond on all federal projects that are being funded by a private entity,” she added.
Subcontractors do not always know whether a project is a P3 project, Baker warned. “It is important to add a question on your job sheet that asks whether the job is P3,” Baker said. “All public jobs should be researched regarding funding.” For example, you can locate news articles on the projects.
In addition, be aware of state statutes in relation to P3 legislation, Ring cautioned. “Many local governments use enforceable P3 legislation. Construction credit professionals must be familiar with local statutes. If the local statute is written to support a payment bond being posted, they must push to obtain a copy of the payment bond and preserve their rights.”
It is important to obtain payment bonds before releasing orders, Baker said. This allows creditors to know their company is secured.
If you are a construction credit professional seeking to learn more about public-private partnerships, register for NACM STS’s complimentary upcoming webinar, Understanding Public Construction Credit in Preparation of the Appropriation of Infrastructure Funds, 3 p.m. ET, on January 26.
Farmer Profit Margins to Tighten in 2022 as Commodity Prices Drop
Annacaroline Caruso, editorial associate
2021 was a booming year for the agriculture industry; but as we head deeper into 2022, the market is expected to cool significantly. “Agriculture was one of those sectors where we didn’t really see a slow down with Covid,” said Chad Hart, Ph.D., associate professor of economics at Iowa State University (Ames, IA). “If anything, we were one of the first sectors to rebound, with lots of international demand that led to record high exports throughout the last two years.”
However, those patterns are expected to slow down this year. According to a Fitch Solutions webinar, Agribusiness Key Themes for 2022, a combination of increased production costs (fertilizer, energy, labor, etc.), decreased demand and low commodity selling prices pose some of the largest risks to farmer profit margins this year.
“We expect farmer profitability to decline in 2022,” said Samuel Burman, senior commodities analyst with Fitch Solutions, during the Fitch webinar. “In the U.S. we expect that quite a few farmers will shift away from planting corn to planting soybeans because soybeans don’t require as much fertilizer. We also expect a lot of farmers to leave the sector because many are retiring and the jobs don’t appeal to many younger people, resulting in increased labor costs.”
Experts predict farmer profitability to fall to the 2017 level, which is a steep drop. Farmers on the livestock side will take a larger hit than those on the crop side, Hart explained. However, both will see less profitability the deeper we get into 2022. “In the second half of this year, profits will break even at best for livestock farmers,” he said. “On the crop side, margins will also tighten, especially if we get another good-sized set of crops which brings prices down.”
Fitch Solutions expects agricultural commodity prices to drop as much as 11.8% year-over-year in 2022, following the robust 26.3% rebound from 2021. “We are mostly pessimistic in 2022 on the price of soybeans, corn, sugar and wheat primarily because higher global production should alleviate the near-term tightness in prices,” reads Fitch Solution’s report.
Building an Automated Reconciliation Process
Speaker: Channing Monti, Fiserv
Duration: 60 minutes │ Complimentary
Understanding Public Construction Credit in Preparation of the Appropriation of Infrastructure Funds
Speaker: Chris Ring, NACM Secured Transaction Services
Duration: 30 minutes │ Complimentary
Mechanic’s Liens and Payment Bond Claims in Connecticut
Speaker: Paul Fitzgerald, Esq., Michelson, Kane, Royster & Barger, P.C.
Duration: 60 minutes
Making It Easier in Mississippi: New Lien Laws & Statutes Benefit Subcontractors and Suppliers
Speaker: Trey Copeland, Jernigan Copeland Attorneys, PLLC
Duration: 60 minutes