April 28, 2009
While most companies across the U.S. are looking to cut costs and approach spending decisions with a "do more with less" philosophy, it's important to remember that tougher economic times aren't the time to underestimate the importance of proper workforce training. That was one of the tips offered by Don Gregory, chair of Kegler, Brown, Hill & Ritter's construction and litigation practice, in a podcast presented by the American Subcontractors Association (ASA).
"It perhaps gets lost sometimes in an economic slowdown," he said. "But challenging economic times are the wrong time to ignore training."
As companies in all industries, including construction and manufacturing, face today's grim prospects, they should recognize that their customers are facing the same cash-flow shortages that they are, meaning more buyers nitpicking deductions, more bankruptcy filings and preference claims and more slowdowns in payment. A company whose workforce remains ill-prepared to manage these tasks may ultimately face a tougher time throughout the current recession.
Additionally, educational programs that offer a glimpse at current and future trends, like NACM's upcoming Credit Congress, can help a company emerge from this crisis more profitable than it was at the start. "Examine what kinds of training opportunities might be an important investment in your company's future, your workforce's future," suggested Gregory. "When there is some time, invest in that training, perhaps in an area that will bring new work or work with a bigger profit margin. Train for your current, and more importantly, your future markets."
In the end, it's important to remember that there's no substitute for solid credit management and the best way to ensure that is to ensure the highest quality education for your workforce.
NACM's 113th Credit Congress, held this year in Orlando, FL, will offer members of the B2B credit community a number of different educational opportunities that focus on everything from new, cost-reducing technologies and credit management fundamentals to financial analysis and legal protection from bankrupt customers. For more information on this year's program, or to register, click here.
Jacob Barron, NACM staff writer
NACM Designee and GSCFM Alumni Event at Credit Congress
This year's designee and alumni event is being held at B.B. King's Orlando. This is a great networking opportunity in a great atmosphere. B.B. King's Orlando offers a variety of great Southern comfort food fused with flavors from around the globe and features nightly entertainment by the B.B. King All Star band. Other highlights include hand-painted table art by Memphis folk artists and musician portraits by Lamar Sorrento.
Click here for more information on this and other networking and optional events at this year's Credit Congress.
Despite the fact that the appetite for U.S. goods has waned as the rest of world grapples with recession, foreign trade is still seen as a keystone to recovery and there are ongoing government campaigns to get more companies involved. Currently, less than 1% of U.S. firms are identified as exporters. As companies are seeing dollar signs in foreign markets and more companies are turning toward making the plunge overseas, there is a knowledge gap that needs to be filled, because even veteran exporters can be confused by the process.
In international trade, the documentary credit cycle is worthy of unparalleled importance. Security agreements like letters of credit (LCs) are what get exporters paid by enabling an importer to offer secure terms of payment. Unfortunately, the process is complex and failure can be rooted in mundane mistakes as simple as a missing period or comma, a premature expiration date or the inability to produce a particular document when asked. An estimated 70% of all LCs submitted to banks for payment are initially rejected due to incorrectly issued documentation, resulting in payment delays, additional fees and even nonpayment in some cases. Discrepancies in LCs typically occur due to a lack of education, but trade creditors can secure the upper-hand by authoring concise and clear document instructions.
"It doesn't matter if we're talking about an integrated circuit or helicopters; the language we're going to talk about is all the same," said Danielle Austin, Export Trade Associates, LLC, during the NACM-sponsored teleconference "Export Letters of Credit: The Importance of LC Instructions."
"It's really great when we have our own LC instructions," said Austin. "It's so vital that we are learning this today because when I dealt with importers and exporters at Bank of America, my importers only took me 30 minutes, two session each, before they were off and running with those LC applications. But on the export side, they needed a lot more hand-holding." She noted it was usually years before exporters fully grasped the intricacies of the process.
During her presentation, Austin provided a detailed breakdown of some sample LC instructions and displayed copies of forms that she often uses. She recommended that trade creditors develop a relationship with a global bank for their LCs, but warned that there isn't always the luxury of calling them up and asking an expert for help.
One of the easiest ways to avoid problems is to streamline the way a document is formatted. For example, if in the LC guidelines, under the section of documents required, there are a lot of options and a column to request copies, customers will start checking boxes, demanding copies of items like certificates of origin and insurance policies. The fact is, those options don't need to be provided, and the surest way to reduce the number of documents and the chance for more discrepancies is to simplify.
"I don't want to give my customer all of these options," said Austin. "I want to give my customer exactly how I want it issued. That's the most important thing. When we talk about letters of credit, everybody rolls their eyes because they are so completely frustrating, but this is how, number one, we can start reducing your discrepancies."
Austin also explained that addresses need to be uniform and credit managers need to be sure that stealthy matters like bank charges are for the account of the applicant. Austin's mantra on any fees coming from the customer's side is, "Why should we pay to get paid?"
Matthew Carr, NACM staff writer
Red Flags Regulations Simplified
After a six-month delay, the May 1, 2009 deadline for companies to be in compliance with the Federal Trade Commission's (FTC) "Red Flags Rules" is just about here. The regulations will require most creditors and financial institutions to adopt a written program to detect, prevent and mitigate identity theft in connection with the opening of a covered account or any existing covered account. NACM and the FTC have been working diligently over the last year to ensure that business creditors are aware of their responsibilities and what the regulation will require of them to put into place. On April 29th, Wanda Borges, Esq., Borges & Associates, LLC and Bruce Nathan, Esq., partner, Bankruptcy, Financial Reorganization and Creditors' Rights Group, Lowenstein Sandler, PC, will go into detail about the responsibilities of business-to-business creditors in developing and implementing their company's Red Flags Rules program.
Members interested in solidifying their knowledge of the FTC's Red Flags Rules and ensuring their company is in compliance can register for the teleconference here.
Following consultation with an assembled team of experienced credit professionals and bankruptcy practitioners, NACM's Bankruptcy Work Group recently submitted its suggested changes to the U.S. Bankruptcy Code to staff members at the House Judiciary Committee.
Following the introduction of a bill to alter Title 11 of the Bankruptcy Code by Rep. Jerrold Nadler (D-NY) and at the request of Judiciary Committee counsel, NACM set to work on making suggestions how to make the Code more conducive to economic recovery. Nadler's bill is called the Business Reorganization and Job Preservation Act of 2009, H.R. 1942, and would eliminate a trade creditor's right to a 20-day administrative priority claim under Section 503(b)(9) of the Code, alter Section 366 on Utility Service, amend Section 365(d)(4) on the deadline to assume or reject nonresidential leases to favor retail debtors and reduce trade creditor reclamation rights by restoring Section 546(c) to the form it was in prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005.
The Bankruptcy Work Group found several of these changes objectionable and, in its suggested language, improves administrative claim rights by providing for immediate payment of administrative claims filed under Section 503(b)(9), maintains current reclamation rights and preserves the BAPCPA's previous language on utility service rights. The suggested language also shifts the burden of proof in a preference claim from a creditor to a trustee, alters Section 366 on executory contracts to make it more favorable to unsecured creditors and changes sections dealing with venue to be more favorable to unsecured creditors in both preference cases and bankruptcy filings.
Overall, the new language submitted by the Bankruptcy Work Group aims to restore the balance between debtors and creditors as well as the balance between unsecured and secured creditors, which has been unfairly tipped toward secured debtors. Inclusion of this language in the Bankruptcy Code would also aim to make unsecured creditors more likely to extend financing to struggling businesses in their hour of need, hopefully enabling ailing debtors to maintain jobs and reorganize properly.
Stay tuned to NACM's eNews and Business Credit magazine for more updates!
Jacob Barron, NACM staff writer
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The United States is not alone in being held under thumb by an economic downturn. The world is buckling under the weight of a credit crisis that has stymied nearly every country's economy. Leaders from around the globe have looked toward adopting a unified approach, drafting policies in the hopes of igniting sparks of recovery while pumping in volumes of cash that approach the obscene to free blockages of illiquidity. Two years into the quagmire, the light at the end of the tunnel may finally be in sight.
According to economists with the International Monetary Fund (IMF), the near-term will remain bleak, but the first sure signs of recovery should be seen early next year, though being able to apply the adjective "normal" is likely much further away.
"The world economy is being pulled by two opposite forces: the first one is pulling the economy down; the second is pulling the economy up," said Oliver Blanchard, economic counselor and director of research, IMF. "For the time being, the first clearly dominates."
As countries from every hemisphere wrestle with the grip of recession, spending has been pulled back as confidences are shaken. International trade, which has kept the U.S. afloat, continues to unravel and the collapse of demand has led to sharp cutbacks in production and a dramatic decline in exports. According to the IMF, global gross domestic product (GDP) fell heavily by an unprecedented 6% in the last quarter of 2008. And, as far as the organization can tell, it likely declined almost as fast in the first quarter of 2009. For most advanced economies, the IMF is forecasting negative growth for the rest of the year.
"But we see the balance shifting as the year progresses," said Blanchard. "We expect growth in advanced countries will become positive again in 2010 and return to something like its normal rate around the end of 2010."
Worldwide unemployment will trail hand-in-hand with the world's sagging economies, and is expected to peak at the end of 2010 and then begin to decrease after that.
"Just looking at the global picture, overall, we expect the global economy to decline by 1.3% in 2009, year-over-year," said Blanchard, "the weakest performance by far of the whole post-war period. Growth would return in 2010, helped by strong policies, but would remain just under 2%, so still below what we would see as a normal growth rate for the average for the year."
The effect on developing countries over the next two years will continue to be felt through contracting export volumes, lower prices, slowing domestic demand, declining remittances and foreign investment, reduced access to financing and shrinking revenues. As such, developing world growth is projected to fall from an average of 8.1% in 2006-07 to 1.6% in 2009. Because their average growth rate is typically higher than advanced countries, emerging economies will see positive growth much earlier, probably at a point sometime later this year, but a return to normal will ultimately be dependent on what happens in the advanced economies.
"This is not the time for complacency, and the need for strong policies on both the macro and especially on the financial fronts is as acute as ever," warned Blanchard. "But with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of the year, and unemployment can start decreasing by the end of next year."
Matthew Carr, NACM staff writer
Protect Your Assets, Get the Best Working for You
Unemployment claims are on the rise, but credit and finance professionals are more important for your company's bottom line than ever. Protect your assets, keep your credit positions and fill them with high-quality talent.
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C4F: Employment Connections for the Business Credit Community
Some of the sharpest minds in the world of international credit management recently gathered at the Drake Hotel in Chicago, IL for FCIB's International Credit Executives (I.C.E.) conference. Attendees were treated to a wealth of rich networking opportunities in the Drake's elegant facilities as well as the top-grade educational opportunities FCIB is known for.
This year's keynote speaker was John Caslione, president, founder and CEO of GCS Business Capital LLC and co-author of Chaotics: The Business of Managing in the Age of Turbulence, which is set for release next month. In his presentation, which was named after his highly anticipated book, Caslione discussed why the effects of the current recession will be felt for years after it officially ends. "These trends are converging and the rules are changing dramatically in ways that a lot of us may not realize yet," he said. "The world economy has entered a new economic stage: from normality to turbulence. This turbulence is going to beget something called chaos." Caslione noted that the new normality for the global economy will be less predictable and that, in future turbulent times, management and company mistakes won't be so easy to live down and their effects will be magnified.
As far as the causes for this noted shift away from normal economic cycles, Caslione pointed to global economic interconnectivity, a noted rise in protectionist sentiment and short-sighted management policies. "One of the problems we've had is that we've pursued short-term profitability too fast and for too long," he said. "We are negligent to make the short-term investments now to build a strong company for the long-term. We were trying to push too aggressive a growth too fast and the system buckled."
Other presentations reiterated, and questioned, some of Caslione's suggestions, giving the conference's program an exciting sense of back-and-forth and illustrating how complex a task it is to define the current crisis and how best to move forward. Chris Kuehl, NACM's economist and managing director of Armada Corporate Intelligence, moderated "The Big FCIB World Economic Debateâ€”How Deep and How Long?" with panelists, Darin Narayana, chairman and co-founder of ANSRSource, Byron Shoulton, vice president, international economist at FCIA Management Co., Inc., and John Walsh, vice president at International Banking Group-U.S. Bank. The discussion between the four speakers was lively and collegial, eliciting much in the form of audience participation. Other sessions were just as interactive, offering attendees thorough discussions on bankruptcy systems around the globe, best practices for risk management during a global credit crisis from best-in-class credit and collection practitioners, region-by-region analyses of market conditions and an annual roundtable forum that provided answers to the attendees' pre-submitted questions.
Through the generosity of the event's sponsors, several networking events were also offered, including a cocktail hour, networking lunch and dinner at the world famous Drake Bros. restaurant.
For more information on FCIB and their other educational and networking opportunities, visit www.fcibglobal.com.
Jacob Barron, NACM staff writer
Business Credit Compensation Survey
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The United States is a country of change. Technology has brought about evolutions in the way business is conducted and how customers can be reached. With each passing decade, companies operate more effortlessly across state and country lines without ever physically having to have an office in any of those places. For states and municipalities, this represents lost revenue in corporate taxes, and with the economy struggling and many states facing staggering budget shortfalls, the efforts to recapture some of those funds are ongoing.
Historically, a corporation has been required to have a physical presence in a state to be subject to most types of tax. That has started to change as states have aggressively sought to affirm their right to a slice of corporate income.
Last summer, the House Committee on Small Business held hearings on Business Activity Taxes (BAT), which are interstate taxes imposed on out-of-state businesses, where the businesses usually have a physical presence in the taxing state. It has been a cost of doing business for some time, though entrepreneurs are still often caught unaware. The concern for nearly the past 50 years has been the lack of uniformity in taxes as they vary from state to state and the whole idea of "physical presence" came under fire even before the Internet age. Some states are imposing BATs on businesses that merely have customers within their borders.
In 1992, in the case of Quill Corp. v. North Dakota, the U.S. Supreme Court held that states are limited to imposing use taxes on multistate businesses by the U.S. Constitution's Commerce Clause "nexus" standard that the business must have some sort of physical presence within the taxing state. But because the decision was narrowly defined, it has been interpreted not to apply to income or franchise taxes. So states have continued to stretch and pull at this nexus limit, trying to define any economic connection as presence.
The National Association of Manufacturers (NAM) is calling on the Supreme Court to stand firm in its decision in the similar case of Capital One Bank v. Commissioner of Revenue of Massachusetts. The case revolves around these ongoing efforts by states to impose business taxes on out-of-state corporations. NAM has accused the state of Massachusetts of adopting an "elastic" substantial nexus test, which would permit the state to tax income on any business with simply customers within its borders, even if the business lacks any real or tangible personal property, employees or other contacts. This is a step beyond the Quill Corp., where the state declared the presence of computer disks as justifiable "physical presence."
"Multistate businesses face the prospect of taxation not only in 50 states, but also in thousands of localities authorized to impose corporate income, franchise and other business activity taxes," said NAM in an amicus curiae brief to the Supreme Court. "In the absence of a physical presence rule, multistate businesses will face significant costs in trying to determine the jurisdictions in which they face potential tax liabilities and the applicable rules of those jurisdictions. Some may be unable to ascertain accurately their tax liabilities at all."
High courts in West Virginia, New Jersey, South Carolina and Massachusetts have all declared that the Commerce Clause does not prevent the states from imposing income and franchise taxes on businesses that have no actual physical presence in the states. And the obstacles facing multistate businesses are the lack of uniformity from state-to-state, even in terms of tax base.
"Most states use federal taxable income as a starting point, but five states do not," said NAM, citing, without a physical presence rule, "businesses will have to monitor every state and locality in which they have any type of commercial profile."
In its own brief to the Supreme Court, the Tax Executives Institute (TEI) sided with NAM and other concerned groups. TEI cited the case of National Bellas Hess, Inc. v. Department of Revenue of Illinois in 1967, where the Supreme Court ruled that a sales and use tax could not constitutionally be imposed on a vendor whose only contacts with the taxing state were through the mail and by common carrier.
"More than 40 years ago, this court held that under the Commerce Clause of the Constitution an enterprise must be physically present in a state for the state to subject the enterprise to taxation," submitted TEI. "Regrettably, the states have taken this court's clear guidance and blurred it through inconsistent, vague and over-broad standards creating uncertainty where there rightly should be none."
NAM and TEI are continuing to push back against the attempts of states, seeking a bright-line, physical presence test of the Commerce Clause nexus.
Matthew Carr, NACM staff writer
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With two bills in each house of Congress and vocal support for reform from President Barack Obama's administration, legislators are moving quickly on legislation that would aim to halt abusive credit card practices. While these efforts are geared mainly toward consumers, the ramifications could be felt in the world of small businesses, many of whose owners rely on personal credit for goods and services.
Passing through the House Financial Services Committee by a vote of 48 to 19 was the Credit Cardholders' Bill of Rights (H.R. 627), introduced originally by Rep. Carolyn Maloney (D-NY). "This landmark legislation helps level the playing field between cardholders and card companies," said Maloney. "For too long the relationship has been one-sided; but markets function best when all sides know what they're getting intoâ€”and these deceptive practices need to be stopped. The Credit Cardholders' Bill of Rights brings more transparency to the contractual relationship and gives consumers the tools they need to responsibly manage their own credit."
The legislation would outlaw "any time, any reason" interest rate increases and would also prevent card companies from penalizing on-time payers, prohibit the use of excessive fees and mandate the ways in which credit card companies allocate payments. A similar bill in the Senate, authored by Housing, Banking and Urban Affairs Committee Chairman Chris Dodd (D-CT) and called the Credit Card Accountability, Responsibility and Disclosure (CARD) Act, was also recently introduced. "I welcome President Obama's support for our efforts to crack down on abusive and predatory credit card practices," said Dodd. "We will only fully recover from this economic crisis when we put an end to the abusive practices that continue to drive so many Americans deeper and deeper into debt. Reforming the way credit card companies do business is the right the thing to do for both our families and the economy."
Capitol Hill has recently lit up with activity on credit cards. Aside from the proposed legislation, President Obama recently met with executives of card issuing companies to discuss upcoming changes and Dodd, along with fellow Senator Charles Schumer (D-NY), called on the Federal Reserve to freeze credit card interest rates until more stringent rules can be implemented.
Jacob Barron, NACM staff writer
Study Shows More Than 2.1 Million California Small Business Jobs Will Be Lost Over the Next 3 to 4 Years
New study results show more than one-third of all California small business owners took out risky or toxic mortgages such as Alt-A, Alt-A ARMs, Option ARMs, Interest-Only and Subprime, etc. to get cash for business expenses during the peak of their home values from 2004 to 2007. As the first wave of mortgage resets hit, small business owners will be at-risk of "payment shock" and default as their monthly mortgage payments skyrocket. The toxic mortgage resets began in the 4th Quarter 2008 and will continue through 2012. "The resulting defaults will be the cause of the 2nd 'Tsunami' Wave of Foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners by surprise. In California, these inflated mortgage payments will threaten more than 2.1 million small business jobs," said Prof. Samuel Bornstein.
The California Small Business Toxic Mortgage Survey is the first to provide compelling evidence of California's small business involvement in the toxic mortgage crisis, foreclosures, and job loss. The survey was created and analyzed by Prof. SamuelÂ Bornstein and JungÂ Song, CPA of Bornstein & Song, CPAs & Consultants, as part of their small business research which they have been conducting since 2000.
"I purchased my home in 1999 for $235K," says Keith Capsuto, owner KC Photography & Music in Oxnard, CA. "Within the first three years it had a value of $650K. I did the foolish thing of buying the home with an ARM loan to save money for business expenses. Up to the turnaround in the real estate market, I had been doing a fair amount of business, but it dwindled off sharply and by 2008 I was almost bankrupt. Now in 2009, business is about gone! I am eight months behind on my mortgage with credit cards up to the hilt from business expenses. I am attempting to work with my mortgage company and am on the brink of filing for bankruptcy."
This survey confirms the research of Bornstein and Song and highlights the fact that "Small business holds the key to a solution of this crisis and must be addressed in order to mitigate the nation's foreclosures and job loss." The survey determined that a significant number of California small business owners are at-risk of losing their homes to foreclosure and their businesses to failure at the resetting of their toxic mortgages. "The resulting job loss will contribute to California's spiking unemployment and cause further financial distress to California's economy," according to Bornstein.
"Small business owners are the key to our nation's future success, as they create roughly two-thirds of all new American jobs," says Darren Waddell, vice president of MerchantCircle. "It's very important that we work to highlight issues that they face collectively as a group and bring it to the attention of our elected officials."
"It is a tragedy when an individual borrower defaults on the mortgage and loses his/her home. The tragedy is magnified when the borrower is a small business owner employing from 1 to 21+ employees. The loss of jobs related to mortgage default and the resulting business failure will further weaken our economy and prolong the recession," said Bornstein.
- 34.9% (1,173,900* At-Risk) CA small business owners used risky or toxic mortgages or refinancing to get cash for business expenses. These mortgages are at-risk of default at reset.
- 29.9% (1,005,700* At-Risk) CA small business owners are "very worried" about their monthly mortgage payment due at reset. They are at-risk of "payment shock."
Estimated job loss for CA small business owners who are "very worried" (2009 to 2012):
- Low: 2,100,500
- High: 3,272,300+
- 28.7 % (965,300* At-Risk) CA small business owners are at-risk of "payment shock." They do not know the monthly mortgage payment that they will be required to pay at reset.
- 17.9 % (602,100* are at immediate risk of default) CA small business owners are delinquent, having missed 1 to 3 or more monthly mortgage payments at this date. More delinquencies are expected in the upcoming resets in 2009 to 2012.
Estimated Job Loss for CA small business owners who are now delinquent:
- Low: 1,461,400
- High: 2,582,500+
*Based upon 3,363,476 CA small business owners, according to 2007 report prepared for the Small Business Administration's office of Advocacy.