June 13, 2013
The following is NACM's official response to an Associated Press article about credit and small businesses that ran in several mainstream media outlets last week.
Dear Associated Press Editors,
An AP article that ran in several news outlets, titled "How small businesses can avoid loan rejections" and written by AP small business reporter Joyce Rosenberg, had good intentions and a considerable amount of important information for small businesses seeking to improve their commercial credit standing. However, while it focused on the relationship between small businesses and their banks, it completely ignored the important relationship between small businesses and their suppliers. It is this relationship that defines the commercial credit score for all businesses.
Further, the article missed the fact that Dun & Bradstreet Credibility Corp. (DBCC), whose CEO provided all of the article's quotations, is a by-product of a greater problem regarding consumer and commercial credit. The problem, in short, is that not many people recognize the vast differences between how consumer credit and commercial credit are extended, as well as how consumer creditors and commercial creditors are assessed for creditworthiness.
Regrettably the article failed to note that DBCC's primary product is a credit monitoring service which is sold to businesses for a fee. It's a carbon copy of countless other credit monitoring services offered to consumers by credit bureaus, financial institutions and other companies. While both consumers and businesses can monitor their own credit reports and address discrepancies for free, what DBCC's business model represents is an attempt to take a consumer product, and apply it in a commercial setting.
While this is logical, it's also dangerous because it further blurs the important lines separating the world of consumer credit from the world of commercial credit. If providers of commercial credit reports begin to treat the subject of their reports as though they were consumers, soon enough, legislators will too. Any law or regulation that threatens commercial credit reports will threaten the free and open exchange of credit between businesses, ultimately exacerbating what's already a critical lack of information on company creditworthiness.
There is a data vacuum that exists about businesses in this country, especially small ones. When companies consider providing goods or services to another business, they use whatever information they can to determine whether or not this potential customer will pay its bills on time. These suppliers sell on unsecured terms, meaning they often take no collateral for the goods and services they supply and are the last ones to be paid in the event of their customer's bankruptcy. This makes the financing they provide to small businesses considerably less expensive than traditional lending, and also creates a symbiotic relationship between the supplier and their business customer.
What these companies rely on most before selling to a small business is historical payment data, which answers the question "does this company pay its bills on time?" This data is included in a business' credit report and factored into their credit profile, but often there's too little information to really be of any use in making a decision, especially for small- or micro-sized businesses.
The problem is that too few companies report the payment activity of their customers to providers of commercial credit reports. This is a process that can be done electronically and anonymously, posing little risk to the company providing the information and to their customer. This lack of information sharing has created a scenario where small businesses can't even get a credit profile, let alone a bank loan, and all because no one is reporting their business' behavior.
Instead of paying a fee for a monitoring service that helps a company know and improve its credit report, the companies that sell to other businesses should be reporting their customers' payment history and accounts receivable data to the companies that create these reports. The more businesses do this, the easier it is for their business customers to create a credit profile and, hopefully, acquire more financing to expand. While some of the information in the article is useful, the piece ignores the real problem that's keeping loans out of the hands of America's job creators: the lack of available payment data.
Robin Schauseil, CAE
National Association of Credit Management (NACM)
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The Virginia Small Business Commission, which studies bills and makes recommendations to commonwealth lawmakers, will consider House Bill 2198 at their next meeting on June 26. This sets the stage for a showdown over a bill that NACM believes would have a starkly negative effect on commercial credit reporting.
HB 2198 originated in the Virginia House of Delegates and would require commercial credit reporting agencies to provide the subject of a credit report with information that identifies the source of what the bill calls "negative information" on their commercial credit report. The bill fails to define what constitutes "negative information," which means that a commercial credit report provider might have to identify the source of any trade creditor that shares negative credit references or negative accounts receivable information with the credit reporting agency.
The bill also includes measures that would needlessly codify the right of the subject of a commercial credit report to view their report, which companies can already do, for free, at any reputable provider of commercial credit reports. Another provision in the bill would further weaken the quality of commercial credit reports on Virginia businesses by stipulating that credit reporting companies must respond to the subject of a report's disagreement with a statement in the report by either deleting the item, or by noting that it is in dispute. This would reduce a credit report to "a catalog of uncertainties," said NACM in a letter to State Sen. Frank Ruff Jr. and Delegate Daniel Marshall III, chair and vice chair of the Small Business Commission, respectively.
"Businesses looking to extend credit to other businesses have the right to know whether or not their potential customer pays its bills, and many of them believe that sharing data on a customer, even or especially if it is perceived as negative, is part of conducting responsible commerce," said the letter. "Currently, however, HB 2198 would inadvertently create an incentive for sellers not to report genuine credit histories for fear of reprisal."
NACM has opposed HB 2198 since shortly after its introduction in the Virginia House of Delegates and will be in attendance at the Small Business Commission's meeting on June 26 at 2:00pm EST. The full text of the bill can be found here. If you're a credit professional in Virginia and want to learn more about how you can help defeat HB 2198, please contact Jacob Barron, CICP at firstname.lastname@example.org or by calling 410-740-5560.
- Jacob Barron, CICP, NACM staff writer
Make Better Credit Decisions with Industry Credit Groups
Credit groups are an effective management tool, allowing credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data about the most recent payment practices. The purpose of exchanging information is to help group members separate fact from fiction, so competent and realistic credit decisions about a customer can be made.
Managed and operated by NACM Affiliates nationwide, credit groups:
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equipment and other credit management functions
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Contact your local NACM Affiliate to learn more about NACM credit groups and to find the group for your industry.
Throughout the world, there are many pockets of strength in automotive production. Aside from the supply-chain disruptions caused by a triple disaster, Japan has maintained a prominent position, and the U.S. industry's rebound has been surprisingly strong since two of its "Big Three" manufacturers declared bankruptcy several years ago during the recession. However, such tales of success are looking fewer and farther between among European auto producers and, as such, credit professionals conducting business with these manufacturers or those who are downstream suppliers should be watching the situation very closely for emerging solvency problems.
The ongoing debt crisis in much of Europe continues to put a strain on many industries, even more so for those selling primarily in the European Union. While companies like Mercedes and Volkswagen continue to do well because of their worldwide branding, many others are simply not competitive and probably won't be for some time, said FCIB Europe Economic Advisor Freddy Van den Spiegel. "Brands like Fiat and others, I don't see how they can get out of their position," he said in an interview at FCIB's Annual International Credit and Risk Management Summit in Prague, where he was a keynote speaker. "There is a lot of competition from Asia." He added that increased European legislation designed to address issues like carbon emissions and global warming put European producers, especially in countries like Italy and France, at a distinct disadvantage.
Meanwhile, Stefan Rasche, head of treasury at Czech Republic-based Skoda Auto, said everyone in the industry is keenly focused on falling markets and that "everyone has to deal with it," as margins get pressured. However, Rasche noted that those producing in Eastern Europe are not facing problems as large as those in western and southern Europe because there is less dependence on local buyers. "We're only partially dependent on the local Czech market," he said. "When you have a wider global footprint, it helps you balance off. We're lucky in that regard."
Still, Rasche said it has been critical to put more effort into quality risk management since the consumer base throughout Europe has shrunk due to increased unemployment, or a fear of it. Such fear, and the resulting lack of consumer confidence, isn't likely to recede anytime in the near term given the depths of economic problems in the EU.
- Brian Shappell, CBA, CICP, NACM staff writer
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A couple of interesting bankruptcies filed in recent days highlighted the impact of technology. The first case is evidence of how technological advancements can strain a more traditional way of conducting business, while the other demonstrates that jumping on a new tech wave too early can eventually hurt companies not financially prepared to weather periods of customer indifference.
For the second time this decade, Texas-based NE Opco Inc., which operates as National Envelope, filed for bankruptcy protection. The company, which is the largest envelope manufacturer in the United States, filed for Chapter 11 in the U.S. Bankruptcy Court's Third Circuit (Delaware) citing growing problems as email and social media take the place of traditionally mailed personal letters, birthday and occasion cards, and photographs. The well-publicized financial problems of the U.S. Postal Service previously foreshadowed the potential downward trend facing producers of envelopes and other products tied to the "snail mail" industry.
While technology has increased problems for some manufacturers, advances in automotive production and associated parts aren't threatening to take too much of the market share just yet, at least in the United States. Electric carmakers are currently struggling, as noted by this week's Chapter 11 filing from Miles Electric Vehicles LLP, also in the Third Circuit. Unlike hybrids, consumers have been much slower to jump on the solely electric technology because of perceptions of cost, lack of charging stations or even fear of change. Even though Tesla Motors has shown some market prowess, especially in its home state of California, Miles, Fisker Automotive and other early attempts at electric car brands by more mainstream companies like General Motors and Nissan have yet to show strong returns on investments. It draws parallels to the solar energy industry craze last decade that resulted in numerous bankruptcy filings in recent years, as the number and output of producers far outpaced actual demand. It didn't help that the economy was performing in a poor or even lackluster manner at the time.
Miles was one of two affiliates, along with lithium-ion battery manufacturer Lio Energy Systems Holdings, of Coda Automotive that filed for bankruptcy on June 11. Coda was forced to file its Chapter 11 on May 1 and shuttered automotive production operations after woeful sales. Some media reports estimated that Coda sold only about 100 electric cars despite being founded nearly nine years ago.
- Brian Shappell, CBA, CICP, NACM staff writer
Good Behavior Rewarded
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Business Roundtable's second quarter CEO Economic Outlook Survey showed that business leaders expect a slight improvement in economic output over the next six months, driven by modest improvements in sales and hiring.
The increase in optimism among CEOs was the second in five quarters. Specifically, respondents assessed that U.S. gross domestic product would grow at a 2.2% annual rate in this most recent survey, up from 2.1% expected growth in the previous quarter's survey.
A total of 78% of participants said that they expected their company's sales to increase in the next six months, as opposed to 72% in the first quarter survey. The number of CEOs expecting higher capital expenditures over the next six months did drop by 1% between the first and second quarter, but the number of respondents reporting decreased expectations for capital spending declined by a greater percentage, specifically 3%. Thus, overall, CEO expectations for capital spending over the next six months still managed to increase relative to the prior quarter.
"Survey results show CEOs expect a small increase in overall economic growth this year led by modest improvement in sales and hiring," said Jim McNerney, chairman of Business Roundtable and chairman, president and CEO of Boeing. "Overall, CEOs see the U.S. economy still on a slow road to recovery. Relative to economic conditions, business performance remains strong, but the U.S. government's unresolved long-term fiscal path and an uncertain political environment are key obstacles to more robust economic growth and hiring."
The Business Roundtable also creates a composite index of CEO expectations, similar to NACM's Credit Managers' Index, which increased in the second quarter from 81.0 to 84.3, the highest reading since the second quarter of last year. This mirrored the CMI's May report, wherein the index jumped from 53.3 to 55.6, and specifically the sales figure leapt from 58.3 to 63.0.
To read the full May CMI report, click here.
- Jacob Barron, CICP, NACM staff writer
Do You Know the Law?
The Manual of Credit and Commercial Laws, Volume III: Construction Issues is new for 2013. Language and state laws have been updated throughout the entire volume including:
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During the early part of this decade, Brazil was becoming the belle of the ball of the world's economies, as experts lined up to say positive things about the emerging Latin powerhouse. Now, after only a few years, Brazil is struggling to maintain its luster, while the United States is poised for a rebound and a fellow BRICS nation, India, regained needed stability, according to ratings agencies.
Standard & Poor's (S&P) was not kind in its sovereign credit assessment of Brazil this week, as it moved the nation's rating outlook to "negative" based on escalating debt problems and what is predicted to be the third straight year of lackluster growth. Granted, S&P did not officially lower Brazil's credit rating yet, but noted that a downgrade of at least one notch could be made by early 2015, if not sooner.
Meanwhile, India moved in the other direction, at least in the eyes of Fitch Ratings, which raised India's outlook from "negative" to "stable" on June 12 based on the belief that its government is making the right progress on spending and current budget deficit, as well as "pronounced signs of easing" inflationary pressures. Fitch said "the authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors. The establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects and the government has made it easier for foreign-direct investment to access a range of industries." Granted, Fitch analysts noted they would like to see additional reforms before considering moving the outlook to positive.
Still, arguably this week's biggest ratings-related news came when S&P moved the U.S. sovereign credit rating from an outlook of "negative" to "stable." In late 2011, S&P made the controversial, highly-publicized decision to lower the U.S. credit rating by one notch from the top AAA status, and skewered U.S. lawmakers for not being able to work together without partisan brinksmanship. That seems to have improved in S&P's view, even if slightly. "On the political side, Republicans and Democrats did reach a deal to smooth the year-end 2012 'fiscal cliff,' and this deal did result in some fiscal tightening beyond that envisaged in BCA11 (Budget Control Act of 2011), by allowing previous tax cuts to expire on high-income earners. The BCA11 also has engendered a fiscal adjustment, albeit in a blunt manner."
S&P noted it does not expect the U.S. Congress to make drastic, "disruptive" actions through this year and also applauded the U.S.' ability to absorb economic or financial shocks as well as the ongoing stability of the dollar as the world's leading reserve currency.
- Brian Shappell, CBA, CICP, NACM staff writer
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