In the News
April 12, 2018
From Creditor to Detective: How to Determine Liability After Construction Disasters
Working in the construction sector can be a dangerous financial game for several different parties in the aftermath of a disaster. The fallout of a construction job can rain havoc on credit managers should they not take the necessary steps to determine where they stand and how to move forward.
Chris Ring, of NACM’s Secured Transaction Services (STS), likened the credit manager’s role to that of a detective, who must assess who is potentially at fault in an unexpected tragedy. A creditor’s first objective is to ask, “How bad is it?” In the case of a public project, credit managers should make sure they have all the necessary documentation to keep the job account secured, including who the general contractor (GC) is, a copy of the bond and security from nonpayment.
Then, it’s time to talk to the customer. Ring explained the process using the example of the pedestrian bridge collapse at Florida International University on March 15. The collapse claimed the lives of six people and injured several others, one of whom has filed a lawsuit against the design-build team, FIGG Bridge Engineers and Munilla Construction Management, as well as the engineering companies, according to an article in the Miami Herald.
“[Credit managers] need to talk to as many people as they can to figure out what happened because, especially with a bridge collapse like that, there’s more than likely going to be finger pointing in regards to where the fault lies,” Ring said. “Is it the designer? Is it the installer? Perceived or real, who has dirty hands on this project?”
From a contractor’s perspective, Jim Fullerton, Esq., of Fullerton & Knowles PC, in Northern Virginia, said builder’s risk insurance might come in handy in regards to natural disaster-related damage. According to Adjusters International, this form of insurance protects a person’s or organization’s materials and equipment if it’s lost or damaged from a covered cause.
Lawyers are coming out of the woodwork to collect for affected families after the bridge collapse, Ring said; however, that doesn’t necessarily mean they’ll only go after those at fault. If a large company was somehow involved and has “deep pockets,” chances are that they’re on the lawyers’ radar. Ring noted that payment becomes an issue when a project, like the pedestrian bridge, becomes stalled. When that happens, nobody is getting paid until everything is sorted out.
For the creditor, the size of the job also matters when it comes to getting paid. In a hypothetical example, Ring said a credit manager who extended $2,000 worth of materials is in a different situation than another creditor who extended $2 million in materials.
“At that point, how much are you really going to be worried about that $2,000? Probably not a whole lot,” he said. “It hurts to write off $2,000, but the fact of the matter is that if you have a good relationship with that customer, they’re going to pay you regardless of what’s happening.”
Meanwhile, the creditor who extended $2 million is much less likely to get paid, especially if they’re working with a subcontractor, who financially can’t afford to pay.
—Andrew Michaels, editorial associate
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27054. A Cautionary Tale of the 4 Cs of Credit in the Age of Electronic Transactions and Social Media—The 4 Cs: Credit, Contracts, Collections and Connected
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The internet has expanded the landscape of credit, contracts and collections by requiring credit professionals to now be connected (the fourth C) like never before. With electronic B2B transactions and social media becoming increasingly prevalent, credit professionals first need to be aware of the risks of moving from paper credit applications, terms and conditions, contracts and other documents and pen and paper signatures to their electronic equivalents and the problems that could arise in the event of a dispute or default that leads to litigation. Credit professionals also need to know what they can and cannot do in utilizing the vast amount of information provided by social media as credit evaluation and collection tools.
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Mobile Lending Booming for Small Businesses
People are always on their mobile devices. You see it everywhere you go—shoppers making online purchases, tourists taking photos or business professionals conducting video conferences. So, it comes as no surprise that mobile devices have entered the realm of commercial lending, allowing borrowers to not only apply for and receive lines of credit, but also make payments using their handheld devices. In the past four years, mobile lending tools have surged among small business owners, which global financial services, technology and data platform Kabbage, Inc. reported goes hand-in-hand with embracing new technology in the commercial credit industry.
According to a recently released report by the online lender, Kabbage said the number of mobile loans accessed by small businesses skyrocketed between April 2014 and February 2018 with an increase of more than 360%. Total dollar amounts also increased more than 1,220%, the report noted, which was comprised of data from nearly 150,000 small businesses.
“The growth in mobile lending is evidence of an enormous change occurring in this industry,” Kabbage Chief Revenue Officer Victoria Treyger said in a press release. “Small business owners are increasingly digitally savvy and are adopting new technologies faster than ever before.” The online lending company gives small business owners access to up to $250,000 in credit through its mobile app.
This growth is accompanied by a small uptick from January to February in the Biz2Credit Small Business Lending Index. The latest results show large and small banks approving 25.4% and 49.2% of small businesses’ loan requests, respectively—both up one-tenth of a percent month-over-month. The Kabbage report cites quick and easy access as a driving factor behind interest in mobile lending.
Mobile apps have garnered the attention of small businesses in the U.S.; for example, Bank of America’s (BoA) mobile service for small- and medium-sized businesses (SMBs) that launched in the summer of 2017. BoA reported that their app helps SMBs find the best loan and determine how much their payments are each month, while also granting real-time access to specialists for any questions.
The U.S. isn’t the only country experiencing such interest in mobile lending. Global financial nonprofit Accion reported on April 3 that a new lending startup in Latin America, currently operating in Mexico and Peru, extends short-term credit to small businesses for inventory via mobile devices. The article states that the lending technique is particularly beneficial for retailers to “fund and broaden their inventories.”
Meanwhile, in Kenya, another mobile lending app was designed with farmers in mind. An April 9 article in Fast Company magazine reported that the recently released app allows farmers to receive microloans and buy supplies, like seeds and fertilizer, effectively benefiting their property yields.
“The ongoing success of Kenya’s mobile loans industry can be credited to use of technology to develop credit scores for borrowers, and using this information to rate their creditworthiness,” a separate article stated in Business Daily Africa on April 1. “At the heart of lending is the customer data used. It acts as the security for these unsecured loans and a significant part of how risk is measured.”
—Andrew Michaels, editorial associate
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Turkey Dealing with Construction Payment Problems
One of the fundamental goals of a construction creditor, and all credit professionals, is to help protect one of the company’s largest assets—its accounts receivable. In doing so, creditors are here to make sure the business gets paid. However, there are instances when construction payments are slow or not occurring at all. This is more commonplace in construction than some might imagine, and it is not endemic to the United States.
According to a recent article from Reuters, Turkey is also dealing with a construction payment slowdown. High interest rates and cash liquidity are among the problems given for payment issues in the industry.
“There is a problem with collections. Contractors either can’t sell or can’t get their money,” said Ferdi Erdogan, chairman of the Association of Turkish Building Material Producers (IMSAD) at a conference this month, according to Reuters. “Material producers also can’t get their money. … Material producers then try to push their suppliers. This chain isn’t sustainable, it will clog at some point,” he explained.
This is also seen with the U.S. construction chain. If contractors aren’t getting paid by the owner, then subcontractors and their suppliers likely aren’t either. Reuters noted payment terms are also lengthening in Turkey in the private and public sectors.
According to the most recent FCIB International Credit & Collections Survey on Turkey (February 2018), nearly 20% of respondents reported payment delays are increasing, and two-thirds mentioned there has been no change. Creditors have also increased the timetable of payment terms granted. Those extending terms of 31-60 days increased slightly from 47% to 53%, while creditors with payment terms of 61-90 days also increased by 6% compared to the September 2017 survey. Payments on average are 18 days beyond terms.
Construction costs are on the rise as well in Turkey. The January construction cost index and building cost index each increased by about 5%, according to a release from the Turkish Statistical Institute in late March. A separate release reported on the overall economic confidence in March, which has steadily declined each month since August. The construction confidence index saw the sharpest drop in March, with a nearly 6% dip from the previous month.
Construction problems should not be taken lightly in Turkey as the industry was nearly 10% of the country’s gross domestic product growth last year, noted Reuters. Construction projects have also gone unfinished due to financial difficulties. “Contractors are receiving orders for new jobs, but cannot start working because they can’t put together the financing,” said IMSAD Economic Advisor Can Gurlesel in the Reuters article.
Reasons for payment delays include culture norms and customs as well as cash flow, said FCIB survey respondents. The foreign exchange rate was also mentioned, while others recommended receiving payment in advance to avoid any issues after shipment.
—Michael Miller, managing editor
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Consumer Durables Credit Risks Differ Around the World
Credit risks, financing and business conditions in the consumer durables sector are relatively stable in the United States. Credit insurer Atradius reviewed the consumer durables markets in a dozen countries earlier this month and took a deep dive into the three categories as well as the payment atmospheres in each location.
Within business conditions, profit margins over the last 12 months and sales were stable and improving, respectively, in the U.S. Nonpayment over the last six months and for the next six months were each stable; however, insolvencies are deteriorating under the credit risk category. This has led banks to pull back their willingness to provide credit, but the sector still depends on bank finance and has a high indebtedness rating. Atradius noted that long-standing retail chains are highly indebted, which could lead to an increase in insolvencies this year.
Within consumer durables, household appliances, furniture and electronics are expected to continue growing in the next couple years. The consumer durables retail sector accounted for over 10% of insolvency filings in 2017 despite solid sales output. Payments in the sector on average take 60 to 90 days.
Quite the opposite of the U.S. is the Netherlands, which has an improving nonpayment culture as well as a positive outlook for insolvencies over the next six months. Sales and profit margins are also improving. Nonfood insolvencies are expected to decline by as much as 4%, yet they are still higher than other trade sectors, explained Atradius. Nonfood retail payments take an average of 60 days. Among the weaknesses for the Dutch consumer durables retail sector was limited access to loans, especially for smaller businesses. Banks also have a low willingness to provide credit in the Netherlands.
Conditions in the United Kingdom are far less optimistic with deteriorating trends in nonpayment and insolvencies. Much of this can be tied to the U.K.’s decision to leave the European Union. While payments in the consumer durables retail industry only take 45 to 60 days, it is expected to worsen this year.
Meanwhile, in Germany, nonpayment credit risks and insolvencies are stable across the board as are profit margins and sales. Payments typically range from 30 to 60 days, but that can increase to 120 depending on the retailer.
The payment duration in the industry in Indonesia mirrors that of Germany. Payments and insolvencies in Australia are predicted to remain stable, yet the former can range from 30–120 days. Payments on average in Spain and Italy take 60 to 90 days with the latter expected to see “the credit risk environment for consumer durables retail to remain challenging in 2018, with further rising insolvencies due to the ongoing competitive pressure,” stated Atradius.
The credit insurer also reviewed France, India, Poland and Vietnam.
—Michael Miller, managing editor
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