In the News

August 22, 2019

Faster Payments Are as Simple as Good Communication


Delinquencies Decline Across US, Credit Conditions Positive


Hong Kong’s Unrest and its Impact on Creditors


Delaware Bankruptcy Court Denies Consignment Seller’s Secured Position Due to Insufficient Notice


Faster Payments Are as Simple as Good Communication

The construction industry thrives on fast payments. For credit managers in the sector, faster payments mean less strain on the creditor-customer relationship. For subcontractors (subs), faster payments increase the likelihood of projects moving ahead as scheduled, while also ensuring material costs and payroll are covered.

Unfortunately, not everyone can always get what they want, and this goes for those in the industry who are currently feeling the strain of late payments. It is uncertain whether an all-encompassing solution will ever come to pass, but creditors and subs alike are looking to improve an essential element of the business relationship as an answer to slow payments: communication.

“Communication is a key element in the collection process, even more so when collecting from subcontractors,” said Chris Ring, of NACM’s Secured Transactions Services. “It’s a well-known fact that material suppliers extend large credit lines on job accounts and the subcontractor often would not be able to pay unless they are paid. So, the first level of communication is the timely and accurate gathering of job information.”

There are several key questions credit managers must ask themselves—questions with answers that could alter the business transaction. Is the customer branching into a different market such as government work where payments are slower? Is the customer looking to expand geographically and take on projects where licensing requirements and/or government regulations may be unknown to them? Is the customer looking to purchase and implement software and/or hardware for operational or accounting purposes?

Slow payments are not new to the scene. A 2018 data release from Contract Simply on U.S. construction payments heard from 1,300 contractors, 88% of whom waited more than 30 days for payment. Of the 88%, nearly 50% of responding contractors said they finally received payment between 60 and 90 days.

“Construction is a $1.2 trillion industry and subcontractors are paying nearly $40 billion in fees to finance projects due to slow payments,” the report states. “These fees are built into their proposals, so expediting payments has the potential to remove an existing ‘cost’ in the current ecosystem. Paying faster, not only has the opportunity to lower project costs, but with better payment tracking all stakeholders can avoid the opportunity for costly and time-consuming liens.”

At construction management software company Procore Technologies, group product manager Danielle Sandoval told PYMNTS.com it isn’t necessarily a credit manager’s basic communication skills that need work, but rather the means by which they communicate a transaction, e.g., invoices. Setting the terms of a sale and comprised of quantities and costs is the invoice. It’s a document that defines the transaction between the creditor and sub. Just as one can have a phone conversation by calling or texting, a credit manager can complete a transaction using a paper or digital invoice. Sandoval said digitizing an invoice system has proven to speed up the payment process because they are easier to fix when project changes arise.

“Since cash flow is the lifeblood of any company, I can’t think of an area that would be more impactful to collaborate expeditiously than in submitting an invoice and getting paid,” she told PYMNTS.com. “If all parties chose to share data seamlessly and timely, all stakeholders would benefit from increased cash flow and greater insight into the health of their project.”

—Andrew Michaels, editorial associate


Credit Congress Call for Proposals

Call for Proposals—Submit Yours Now

The National Association of Credit Management will hold its 124th Credit Congress & Exposition in Las Vegas, Nevada, from June 14-17, 2020. Please visit creditcongress.nacm.org to fill out the form to submit abstracts, proposed sessions and communications pertaining to participating in the program. Submissions must be made using this form.

Please submit ideas by October 1, 2019. Any proposals that are incomplete or are received after this date will not be considered.

Delinquencies Decline Across US, Credit Conditions Positive

Delinquency rates are down across the U.S., and small business credit conditions are positive despite several factors weighing on the economy. According to the Main Street Report from Experian and Moody’s Analytics, seasonality boosted small business (100 employees or less) credit in the second quarter of 2019 after delinquency rates had increased for three straight quarters.

Delinquency rates dipped a tenth of a percent in the 31–90 days past due (DPD) bucket in Q2 compared to the first quarter of 2019. Rates in the 91-plus DPD (severely delinquent) also declined 0.11%. Much of this improvement and the positive conditions for small business lending are due to a solid labor market and demand for small business products among other factors, according to the report. However, there are potential issues that could surface in the agri-business industry. Small ag businesses were the only ones to see a rise in delinquency rates in the 31–90 DPD (moderately delinquent) bucket in Q2 mostly from seasonality.

“Counter to the logic for other industries, Agri-business tends to pull back on spending during periods of lower income rather than lean on borrowing,” the report states. “This could mean that ag borrowing will be low for some time as farmers wait for resolutions on trade policy and commodity prices to rise, to get some certainty about their ability to service borrowings.”

The report also broke down delinquency rates across eight U.S. regions. The Far West, Great Lakes, Mideast, New England, Plains, Rocky Mountain, Southeast and Southwest regions each saw a decline in delinquencies in the second quarter of 2019, but not all sectors were equal. Agriculture in the Far West saw increased delinquencies as did mining in the Mideast and Southeast; transportation in New England and the Plains; financial services in the Rockies; and retail and services in the Southwest. The Southwest, however, showed improvement in ag delinquencies, which improved in Q2, down 20 basis points year over year.

Bankruptcies inched upward in Q2 to “a healthier rate” than that seen when it was a tad lower. It is predicted that when firms exit the market new ones come in—growth since Q4 of 2018 shows—and continue to seek credit, which ultimately leads to increased balances.

“Overall, small businesses continue to display little to no signs of broad based weakness,” states the Main Street Report. “What weakness exists is fairly well confined at either the regional or industry level, and the solid performance that has been the norm for the last several quarters looks set to continue.”

—Michael Miller managing editor


FCIB Summit
Connect With Someone Who Could Impact Your Career

FCIB’s International Credit & Risk Management Summit in Hamburg, Germany, provides an opportunity to learn and grow with like-minded people and industry peers. Be a part of it and hear from the presenters about new techniques and technology while also taking advantage of the many opportunities to ask questions and build on discussions. In the expo, learn about products and services that support your profession by speaking with exhibitors and asking questions about industry trends and today’s business climate.

Strengthen your career and your company by attending this year’s International Credit & Risk Management Summit in Hamburg.

Learn more and register at www.fcibglobal.com/summit-home.html.

Hong Kong’s Unrest and its Impact on Creditors

Protests continue in Hong Kong as citizens speak out against the Chinese government, demonstrations that have been taking place for several months. As the government and its citizens fail to compromise, streets and airports remain flooded with protesters, upending the usual way of life in order to make a difference.

The demonstrations affect several assets of domestic and global life, but the protests also extend to the supply chain for business-to-business creditors. Political upheaval shifts the level of risk a country has, which makes extending credit to customers in these countries a precarious practice. 

According to the most recent FCIB International Credit & Collections survey of Hong Kong, during July of 2019, fewer creditors extended credit to customers in Hong Kong, and the majority favored zero- to 30-day terms, followed by 31- to 60-day terms. During October 2017, 86% of respondents said they would extend credit, versus only 78% opting to extend in July 2019. Payment terms saw one of the most dramatic spikes, with 35% of terms in October 2017 favoring zero- to 30-day terms versus July 2019’s 61%.

The average days beyond terms saw an uptick as well, jumping from 11.2 days in October 2017 to 19.4 in July 2019.

While the protests remain a contributing factor to credit risk in Hong Kong, NACM Economist Chris Kuehl, Ph.D., said their effect is not quite as drastic for creditors and like most political divides, the issue remains complicated. Since Hong Kong is less of a manufacturing center and more of a finance center, the main impacts remain in banking⁠—to a point.

“It’s probably a combination of things. As you’re beginning to see that even before all of this blew up, people were just anticipating something,” Kuehl said. “The trade war has been going on for a while; there’s no incentive at this point on either side to buckle.”

The Chinese economy has been showing signs of slow down recently, and complications with the U.S. have also increased risk in Hong Kong. Adding in protests and political unrest further agitates the region. “Political tensions have heightened the necessity to know the customer and stay on top of possible challenges that could disrupt doing business in China,” said a respondent to FCIB’s China Credit & Collection survey last month.

The Hong Kong conflict will likely see long-term changes, Kuehl said, depending on if China will shut down the protests by means of violence. China remains in an uncertain state, and with countries like the U.S. provoking further risk, Hong Kong may continue to remain unstable for time to come. 

“Establish good working relationships with your customers. Secured with letter of credit,” one survey respondent said of Hong Kong. “Do your due diligence. Know who you’re selling to,” another said.

⁠—Christie Citranglo, editorial associate


Fall Conferences

Network and Learn With Credit Professionals in Your Region

NACM's fall conferences are a wonderful opportunity for members to network and share news, information and tips with fellow credit professionals from their respective geographic regions.

Central Credit Conference
September 11-12, 2019
Orlando's Banquet & Event Center
Maryland Heights, MO
Hosted by: NACM Connect - Gateway Region

All South Credit Conference
September 22-24, 2019
Hyatt Regency San Antonio Riverwalk
San Antonio, TX
Hosted by: NACM Southwest

Western Credit Conference and CFDD National Conference
October 23-25, 2019
Sheraton Portland Airport Hotel
Portland, OR
Hosted by: NACM Commercial Services in partnership with CFDD National

For more information and to register, contact the local Affiliate or visit nacm.org/regional-conferences.

Delaware Bankruptcy Court Denies Consignment Seller’s Secured Position Due to Insufficient Notice

An April 12, 2019, Delaware Bankruptcy Court decision in the Sports Authority Chapter 11 case (In re TSAWD Holdings, Inc.) is an important reminder for sellers of goods on properly obtaining security in the goods they sell to insure payment from the customer. 

Manufacturing companies constantly evaluate the credit risk of selling goods to their customers. The business goal of increasing sales and revenue is tempered by the reality that not all customers will pay as agreed. Companies utilize a number of tools to hedge this risk including terms of sale, credit limits, credit insurance, and some form of security. Particularly when sales volume is significant, companies often sell goods to customers on a secured basis by obtaining a security interest in the goods sold. 

Article 9 of the Uniform Commercial Code (UCC) (regarding secured interests and transactions) defines this arrangement as a purchase money security interest, or a PMSI. Consignment agreements may be deemed to be a PMSI, such that consignment sellers must comply with the Article 9 PMSI requirements for the consignment agreement to create a valid first priority security interest.1 The security interest should include inventory as well as products and proceeds. 

In the event the customer becomes insolvent or files a Chapter 11 petition, whether or not the seller of goods has a valid first priority security interest is critical. If it does, the seller will be a secured creditor to the extent of the value of the collateral (including consigned inventory) in the customer’s possession at the time of the Chapter 11 filing.

If the collateral value equals or exceeds the amount owed, the seller should realize a 100% recovery. If the seller does not have a perfected security interest in the goods sold, the customer’s secured lender with a blanket lien on all assets will assert that its lien attaches to the goods sold as a first priority security interest. Moreover, the customer’s Chapter 11 estate will assert its priority as a hypothetical judgment lien creditor over an unperfected security interest. In this case, the seller will be a general unsecured creditor, a class of creditors that often receives little or no value in Chapter 11 cases.  

The recent Sports Authority ruling denied the seller a valid security interest in goods sold under a consignment agreement because it did not meet the Article 9 requirement regarding notice to creditors with competing security interests in inventory. In Sports Authority, the seller in fact provided proper notice to Bank of America as the administrative agent for a syndicate of lenders under a 2006 term loan with Sports Authority. However, in 2015, Wilmington Saving Fund Society, FSB (WSFS) became the administrative agent under the term loan, pursuant to an assignment from Bank of America to WSFS.  

The parties amended and filed a UCC-3 financing statement assignment reflecting the change in December 2015.  The seller filed a UCC-1 financing statement to perfect its PMSI on goods sold in January 2016. The seller provided notice to Bank of America, not to WSFS. The seller argued that the actual knowledge of Bank of America should be imputed to WSFS based on principals of agency law. However, the Delaware Bankruptcy Court rejected this argument and ruled that the lenders' liens had priority because the seller failed to properly notify WSFS of its PMSI.

If the consignment transaction was initiated prior to the December 2015 assignment from Bank of America to WSFS, the seller may have relied on a UCC records search prior to December 2015 that would not have disclosed the WSFS assignment. The lesson learned is the seller should update the UCC search at the time of its own UCC-1 filing. If the assignment to WSFS had occurred after the seller’s UCC-1 was filed, the seller’s notice to Bank of America would have been sufficient. However, best practices for sellers should include periodically updating UCC searches, particularly for substantial exposures, and consider supplementing PMSI notices to competing holders of security interest in inventory and accounts receivable. Sellers often utilize third-party vendors to manage UCC filings and notices to competing holders. For customers with large exposures, it is worthwhile to independently verify that the PMSI requirements have been met. 

1 Under UCC 9-324(b), a PMSI has priority over a blanket lien on all assets including inventory if (1) the purchase-money security interest is perfected when the debtor receives possession of the inventory; (2) the purchase-money secured party sends an authenticated notification to the holder of the conflicting security interest; (3) the holder of the conflicting security interest receives the notification within five years before the debtor receives possession of the inventory; and (4) the notification states that the person sending the notification has or expects to acquire a purchase-money security interest in inventory of the debtor and describes the inventory.

Reprinted with permission.

David H. Conaway, Esq., is a partner in Shumaker, Loop & Kendrick, LLP’s Charlotte, North Carolina, office and is Chair of Shumaker’s Bankruptcy, Insolvency and Creditors’ Rights Practice. He is also Co-Chair of Shumaker Manufacturing and Shumaker Global. David has broad experience in handling commercial matters involving customers, vendors and the supply chain, in the U.S. and internationally.


mechanics lien, bond services, mechanics's liens
Believing Everything You Hear Can Cost You

It may appear that some companies offer you a low rate for Notice-to-Owner services. But is the advertised price the true invoice cost? Let's see ...

Some companies charge you a priority fee. WE DON'T!
Some companies charge you more for larger projects. WE DON'T!
Some companies charge you for incomplete information. WE DON'T!

By the time you add on all the hidden fees, you'll find that NACM Secured Transaction Services is NOT more expensive!

To learn more, call Chris Ring at 410-302-0767 or visit nacmsts.com.