October 6, 2009
According to the results of NACM's September survey, email is quick and cheap, and many customers have started to warm to for vendor-buyer communication, but when a creditor wants results, they go to the phones.
When asked "How do you conduct your collection communication?" 51% of all respondents said they used the phone in their collection communication and far less, 17%, relied on email. Only 4% of participants said they used mailed letters in their collection communication while 28% answered "other." The high percentage of "other" respondents, taken with the survey comments, showed that while the phone is the most popular medium for collection communication, most creditors use a combination approach that leverages multiple forms of contact.
"The best way to collect is by the phone," said one respondent. "It is easier to speak to the customer, and I can usually tell if the person is telling the truth. I also always keep notes on the date, time and the person I am talking to, which helps a lot when you can read back to them if needed." While it takes more time and costs more money, most respondents noted that a phone call leaves an impression on the debtor that makes it much harder to ignore. "We've found that verbal requests for payment are a far more effective collection tool," said another respondent. "It's too easy to throw away a letter or delete an email."
Some respondents noted that they tailor their collection communication to the size of the debt. "It depends on the amount of the invoice, days outstanding and account type," said one respondent. Other respondents noted that their efforts depend on the size of the client. "We have major organizations as our clients, so email works," said one participant. "Only limited calling is required; just to resolve disputes and such."
Despite the low percentage of email respondents, some participants did note that emails are actually used in their organizations to turn up the heat on debtors, after phone calls have proven ineffective. "Our communications are done 98% by phone. Only when we cannot reach someone or the customer requires it do we send email collection notifications," said one respondent. Others noted that their collection procedures are set up to start with emails and end with other forms of communication when the account becomes further past due. "I will typically email our customer initially with a 'read receipt' so I know when they open the email. If these attempts prove to be futile, I will then give the customer a call," said one respondent. Another participant added that they go even further than phone calls when trying to reach an especially delinquent customer. "In general, email for routine or initial contact, phone for more complicated issues or when escalating collection, and U.S. mail for more formal communications, such as final demands," the respondent said. "If I don't achieve the results promised on the phone, I generally follow up with a letter sent via fax or snail mail, sometimes certified. Those generally bring swift results," said another respondent.
Check out the November/December 2009 issue of Business Credit magazine for a full wrap-up of this survey. Click here to get your subscription started today.
Jacob Barron, NACM staff writer
NACM's October Monthly Survey is Now Live!
This month's survey is NACM's annual poll of what credit professionals are concerned about for the coming year. The recession has left many things uncertain for 2010. What worries you the most?
Respondents earn .1 Roadmap points toward an NACM certification and are automatically entered into a drawing to win a free teleconference registration! Click here to participate today!
The small business sector is continually hailed as the driver of the U.S. economy and the lynchpin to recovery. At the same time, it is recognized as the largest and riskiest sector to do business with. About 99% of businesses in the United States are considered small firms, representing some 26 million enterprises, but their payment behaviors are often a mystery, going uncaptured by the nation's credit bureaus.
A double-edged dilemma is forged from this lack of transparency: small businesses are seen as less attractive potential partners while small businesses themselves are made more vulnerable to risks.
Firms, both large and small, are failing from coast-to-coast at alarming rates. Business bankruptcy filings have surged more than 65% over last year and consumer bankruptcy filings continue to race toward 1.4 million by year end. Delinquencies from small businesses have increased at mind-numbing rates since the middle of 2007, and accounts sent for collection have arched upwards just the same demonstrating that commercial creditors must be monitoring their customers and utilizing tools like credit scoring.
"Traditional credit bureaus tend to go to larger companies that have a lot of customers; big accounts receivable (A/R) trade tapes," explained Jim Swift, CEO, Cortera, Inc. "And they build their data repositories with that information and then they build their scores on top of that data."
Swift said that the major challenge right now is that credit bureaus are only gathering data from a tiny fraction of the nation's total businesses. The country's largest and most active companies supply their A/R tapes to various bureaus, but not every business can be represented. Millions upon millions of transactions done from one small business to another are slipping through the cracks. "If I'm a small manufacturer and I've got 50 or 75 customers, no one really wants to deal with my trade tape," said Swift. "And there are millions of companies like that."
One route to conquer this lack of information is blended scoringâ€”using the small business owner's consumer report combined with the business' commercial credit reportâ€”but that approach has its own obstacles.
"Owners hate that," said Swift. "When you force a personal guarantee on someone, it's painful. It may be great for the lender in some cases, but I think it's an impediment to lending in a lot of cases. If we can keep it confined within the business itself, I think it's a greater benefit for everyone."
"Think about it: you're getting penalized because the system is broken and it doesn't allow for that information to be captured," said Alex Cote, vice president, Marketing, Cortera. "They may have a perfectly great credit track record with other small businesses, but that's missing from the typical report; therefore you have to do a personal guarantee. It makes no sense."
Industry credit groups, like those offered by NACM Affiliates, allow business-to-business creditors to get together and share information about customers. Historically the most successful approach, it allows creditors to recognize the first warning signs of real problems. This information is the foundation of credit scoring itself. Technology has brought about advancements and these interactions have been pushed more and more to the wayside, and now, technology has the ability to leverage this tool on an even grander scale.
The world today is awash in social networking. And it's not just for individuals: almost every company is trying to figure out how to utilize networking sites like Twitter, LinkedIn and Facebook to boost their profits or enhance business partnerships. Cortera is currently exploring a similar option in its Cortera Credit Exchange, by allowing business partners to rate and review each other in a community platform where industry credit group meets traditional credit scoring model meets social networking. The company hopes the Credit Exchange will allow creditors to gain better insights into the performance of their smaller customers.
"What we're trying to do is to take the traditional view to credit scoring, because there's certainly merit in the way that it has been done for that last 20 or 30 years," explained Swift. "But also reach out and pull in this information from the small companies, whether they're interacting with a large business or a series of smaller companies."
Matthew Carr, NACM staff writer
It's Credit Words Time!
It's time to submit your credit stories for this year's Credit Words Contest. Earn cash and Roadmap points if you're a winner and Roadmap points if we publish your story. It's been a really tough year; we know you have stories to share about how you've made it through the worst business environment you may have ever seen. This is just one topic of many so be creative.
Submission deadline is November 2. Read contest rules and get more information about the contest in the September/October issue of Business Credit, or by clicking here.
Even though the U.S. Securities and Exchange Commission (SEC) recently approved measures to more stringently regulate the credit rating industry, and specifically nationally recognized statistical rating organizations (NRSROs), Congress has now waded into the fray to regulate the industry with proposed legislation that would codify what NRSROs can and cannot do and give the SEC greater authority to punish violators. Paul Kanjorski (D-PA), chairman of the House Financial Services Committee's Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, recently circulated a discussion draft of a bill, called the Accountability and Transparency in Credit Rating Agencies Act, following a September 30 hearing.
Specifically, the legislation would alter certain sections of the Securities and Exchange Act that govern accountability for ratings procedures and other hot button issues in the industry. It would also establish new tenets like collective liability for credit ratings, whereby all NRSROs would share oversight and liability for the information used by each organization and any violations, and remove statutory references to credit ratings in federal statutes, in the hopes of reducing reliance on the ratings themselves. The SEC would be tasked with reviewing ratings annually, as well as the policies, procedures and methodologies of NRSROs, and to ensure that the NRSRO has "established and documented a system of internal controls, including due diligence for determining ratings, that it follows such systems and its disclosures are consistent with such system." Additionally, the new legislation would clarify the SEC's right to apply fines to violating NRSROs should they fail to sufficiently oversee their operations. Supervisors of NRSROs would also be subject to sanctions should they fail to properly perform their own due diligence.
One of the major issues for regulators is the presence of conflicts of interest in the credit rating industry. Since ratings are paid for by the party seeking the rating, many have noticed that this leads to an environment where the highest-paying customer can get the highest rating. Additionally, many members of credit rating agency boards were compromised by their relationship with the entities their company was rating, again leading to a situation where entities and instruments could be rated to maximize their profitability and not to give an accurate portrayal of their worth. "Each NRSRO, or its parent entity, must have a board of directors with one-third independent directors whose compensation will not be linked to the performance of the NRSRO and whose non-renewable term will not exceed five years," said the draft. These independent directors would govern the development, maintenance and enforcement of processes for determining ratings and addressing conflicts of interest. They would also oversee the ways in which employees involved in setting ratings were compensated and promoted.
Representatives from the industry itself have been largely receptive to SEC and congressional attempts to increase the transparency of their ratings, but objected to certain parts of the new legislation. "Moody's is opposed to provisions in the discussion draft that would impose a collective liability regime on all NRSROs," said Raymond McDaniel, chairman and chief executive officer for Moody's Corporation, one of the three major NRSROs along with Fitch Inc. and Standard & Poor's. In his prepared testimony for the hearing on September 30, McDaniel questioned the validity of any measure that would expose credit rating agencies (CRAs) to litigation and overall liability. "To begin with, there is simply no truth to the popular notion that CRAs are somehow 'immune' from liability," he said. "No less than any other market participants, CRAs have potential liability, for example, if they knowingly make false statements, engage in fraudulent conduct, or issue opinions that they do not genuinely hold. Moody's and other NRSROs are in fact being sued as we speak in numerous cases in federal and state courts around the country. So, under the existing law, there is already substantial accountability."
McDaniel also objected to the proposed legislation's attempts to fight rating shopping, where those paying for credit ratings shop around for the best quality rating. The act would require disclosure of any preliminary ratings received by an entity, which McDaniel believes still wouldn't deter users from rating shopping. "Issuers could present 'what if' scenarios to CRAs, thereby avoiding any trigger for disclosure, or completely bypass CRAs that are perceived to have a more conservative methodological approach," he said.
More information on the hearing and on the legislation can be found on the House Financial Services Committee's website (http://financialservices.house.gov/).
Jacob Barron, NACM staff writer
Distressed Business Services
Many NACM Affiliates are involved in a national network to provide assistance in the rehabilitation (if possible) or liquidation (if necessary) of businesses in severe financial difficulty.
While courts can take several months or more to start a reorganization plan, NACM Affiliates can assist in getting a plan approved in as little as 30 days. Most helpful is the knowledge that experienced professionals are ready to step in at the most difficult time. NACM Affiliate staff members can serve as secretary to creditors' committees, provide other needed advisory services and are fully aware of the prevailing laws and regulations relevant to each situation.
Click here to learn more about NACM's Distressed Business Services.
The debate about climate change has been anything but subtle. The battle lines have been clearly drawn and the stances that the U.S. Chamber of Commerce and other organizations have taken have both energized and exasperated their members. The House climate change bill, Representatives Henry Waxman (D-CA) and Edward Markey's (D-MA) "American Clean Energy and Security Act of 2009" (ACESA), which had the principal focus of reducing and regulating greenhouse gas emissions through economic incentives and efficiency programs, barely eked out a victory in June.
The Senate has been working on its own version, and Senators John Kerry (D-MA) and Barbara Boxer (D-CA) introduced the Clean Energy Jobs and American Power Act at the end of September. Much like the House version of the bill, the Kerry-Boxer legislation looks to slash carbon pollution and stimulate the economy by creating jobs in the clean energy sector.
"Our addiction to foreign oil hurts our economy, helps our enemies and risks our security," said Kerry. "By taking decisive action, we can and will stop climate change from becoming a 'threat multiplier' that makes an already dangerous world staggeringly more so."
Taking a step beyond Waxman-Markey, the Senate bill targets a 20% reduction in greenhouse gas emissions by 2020 and 80% by 2050 from 2005 levels, which the senators state is the minimum scientists judge necessary to avert a climate disaster. The bill accomplishes these goals through a Pollution Reduction and Investment cap-and-trade system that initially targets a set number of 7,500 facilities. That's approximately 2% of U.S. businesses, and the legislation primarily targets "major polluters" that create more than 25 thousand tons of carbon pollution per year, while exempting all farmers. Under the legislation, instead of using a "command and control" model where the government tells individual companies where and how to reduce pollution, companies can buy and sell pollution vouchers, enabling the private sector to seek out the most cost-effective path forward.
To support job creation claims, the senators used findings from the Pew Charitable Trusts, which reports that 10,000 new clean energy businesses were launched in California between 1998 and 2007. During that period, more than 125,000 jobs were created and the sector generated jobs 15% faster than the California economy as a whole. With that as a launching pad, Boxer claims the latest economic study predicts up to 1.9 million new jobs in America will result from the bill.
"We must seize this opportunity, or others will move ahead," said Boxer. "This is our time. Global warming is our challenge. Economic recovery is our challenge. American leadership is our challenge. Let's step it up right now. Let's not quit until we have fulfilled our responsibility to our children and grandchildren."
Of course, the legislation has its opposition. "Requiring 20% emission reductions by 2020 is unrealistic and harmfulâ€”it is simply not enough time to deploy the carbon capture and storage (CCS) and energy efficiency technologies we need, period," said Senator John D. Rockefeller IV (D-WV), chairman of the U.S. Senate Commerce, Science and Transportation Committee. "Our nation cannot survive without energy from coal and any viable climate policy must solidify our future by focusing on technology to make coal cleaner faster." The American Petroleum Institute (API), a major dissenter of the House climate change legislation, also charged that the Waxman-Markey approach would actually cost two million American jobs and would drive up gasoline prices.
"Boxer-Kerry leaves key elements unaddressed of how it intends to constrain carbon emissions," said API President Jack Gerard. "Unfortunately, it appears to be following the pattern the House followed, which resulted in a political bidding process that picks winners and losers." Gerard believes that a Senate bill should encourage expanded use of natural gas, preempt Environmental Protection Agency (EPA) climate regulation under the Clean Air Act and provide equal treatment across the U.S. economy, rather than zeroing in on utilities, manufacturing and the energy sector.
David P. Tenny, president and CEO of the National Alliance of Forestry Owners (NAFO), lamented that the Kerry-Boxer legislation was marred by missed opportunities to take full advantage of the carbon offsets private, working forests can provide. "Our nation's forests remove enough carbon from the atmosphere each year to offset 10% of all industrial emissions, and 84% of the carbon removed by all land uses comes from forests," said Tenny. "Private working forests should be our front line for reducing [greenhouse gases]. The fact that responsibly managed forests play a critical role in removing carbon from the atmosphere is beyond dispute both domestically and internationally."
Matthew Carr, NACM staff writer
MLBS Lien Navigator
Lien laws are continuing to evolve and change. Both Pennsylvania and Arkansas debutted changes to their statutes in recent months. Texas recently adopted considerable changes that affect minor lien notice errors or omissions and their relationship to the Fraudulent Lien Act. Colorado has passed legislation that affects two sections of the Colorado Revised Statutes and ultimately all lien waivers entered in the state as of July 1, 2009.
For construction credit professionals, tools like NACM's MLBS Lien Navigatorâ€”a credit professional's guide to notice, lien, payment bond and suit time requirementsâ€”gain prominence in this changing environment. MLBS Lien Navigator is already the leading source of information on when action needs to be taken to protect lien rights across the 50 states and D.C. and is updated as new regulations are passed and affect lien rights.
Members who are interested in learning more about the benefits of NACM's MLBS Lien Navigator and who would like to try a free demo should click here.
"This topic has been very popular this year and for a couple years with our economic downturn," said Susan Fee, M.Ed., a licensed professional counselor and popular NACM presenter. "A lot of people are suffering." In her latest NACM-sponsored teleconference, "How to Bounce Back from Disappointment," Fee offered unique tips to credit professionals hoping to move beyond layoffs, lost accounts and other common sources of disappointment found in today's economic environmentâ€”and get back into the game.
Firstly, Fee adjusted her teleconference's title, noting that it might be a little misleading. "Really, this is about bouncing forward," she said. "When you hit a bump in the road you hear people say, 'I just want things to go back to the way they were,' but the point is that this is your new normal. The successful person doesn't try to return to the way things were, but integrate it and move forward." Fee also noted that those who try to put everything in their life back to the way it was before they were struck by disappointment tend to do more harm than good. "The longer you try to grasp and make everything the way it used to be, the more it slips away," she said. "They should be bouncing forward. It is a choice on how to adapt to the situation."
For many in today's working world, Fee noted that this is the first time they've been faced with challenges. Many belonging to the younger generation haven't had the chance to live and work through a recession, so this period of time can be rife with disappointment for them. Moreover, because they've never experienced it, they may not know how to deal with it. "This is a skill, and a skill is practiced," she said. "Some people, they haven't had a lot of disappointment and this is the first time they've really struggled, so this is their first opportunity to really practice this skill." For higher ranking, older professionals supervising these individuals, Fee noted that letting them feel a little stress may not be a bad thing in the long run. "If some of you are managers and you put fires out all the time, now you're really finding out that it's better to let people have a little disappointment so that they can practice resiliency," she said. "When we hit that bump in the road, it's a learning lesson."
Ultimately, Fee noted that overcoming disappointment comes down to a willingness to learn, accept the situation and make the best out of what's available. "It's a willingness to accept different," she said. "It's how you choose to respond, and hopefully you can build up your resources so that you can go with the flow, not let it knock you down."
For more information on NACM's teleconference series, click here.
Jacob Barron, NACM staff writer
Financial Statements for Beginners
Have you ever been in a position where you requested a financial statement from a new or existing customer, actually received one and weren't sure what to do with it? Tune in to NACM's latest teleconference, "Financial Statements for Beginners," to find out! This session, led by Doug Darrington, CCE, will cover the basic components of a financial statement, including the balance sheet and profit and loss statement, and focus on what makes up assets, liabilities and stockholder equity. Darrington will also discuss how to analyze fundamental and practical financial ratios that will give users a quick look at the financial health of the company as well as serving as another tool to make an informed and intelligent credit decision. To learn more, or to register, click here.
The United States is in an era where the economy is the number one topic of discussion, and the practicality and viability of leading indicators is often argued and questioned. Recent figures have added to the ongoing debate/discussion.
The nation's unemployment spiked to 263,000 last month, far more than the anticipated 180,000. The news unsettled already timid investors, dragging down stocks, and after four straight months of increases, new orders for manufactured goods slid in August by 0.8%, a $2.8 billion decline. This was a sharp about-face from the 1.4% increase seen in July. Shipments of new orders of manufactured goods were also down after two consecutive months of increases, falling 0.3%, or $900 million, another turnaround from a 0.3% increase in July.
New orders of durable goods continued to drop, falling 2.6%, a decrease of $4.4 billion, to $164.1 billion. Durable goods orders have been down two of the last three months, and the August decrease followed a 4.8% increase in July. Inventories for manufactured durable goods continued to push their way downward in August, sliding another $4.5 billion, or 1.4%.
In the midst of these declining figures, however, there were also glimmers of potential. For example, in August sales of new single-family homes edged up 0.7%, suggesting that the housing market is getting its feet back under it; since the low hit in January, home sales have risen 30.4%.
Personal income also inched upwards in August, increasing 0.2%, or $19.3 billion, while disposable personal income (DPI) increased $15.5 billion (0.1%). Personal consumption expenditures (PCE) leapt up $129.6 billion, more than a percentage point. All of this activity triumphantly points toward the emerging recovery.
"The recent growth in consumer spending, along with the gains in housing activity, exports and industrial production, suggest that the economy is beginning to expand after contracting in four consecutive quarters," said U.S. Commerce Under Secretary for Economic Affairs Rebecca Blank. "There is a long road to recovery still in front of us, but expanded consumer spending in nearly every category indicates that consumers are feeling more confident."
She added, "Further stimulus spending should strengthen economic gains and promote growth in additional sectors in the coming months."
Giving credence to that philosophy is the Commerce Department's third estimate of real gross domestic product (GDP) for the second quarter, which showed marked improvement over the first quarter. In the revision, the agency saw real GDP drop 0.7%, a slight tweak from the previous estimate of 1%. Nonetheless, it was better than the analysts' expectation of a 1.2% decline and a far cry from the 6.4% bottoming out seen in the first quarter.
Mark Doms, chief economist for the Commerce Department, said that it was evident that the economy has begun to stabilize. "The economy is moving in the right direction," said Doms, adding the company line, "And further stimulus spending should support this momentum in the coming months."
Republicans continue to be opposed to further stimulus spending and zeroed in on unemployment as the hallmark of the economy's failure. "Since President Obama signed his stimulus bill into law, millions of Americans have found themselves out of work," charged House Republican Whip Eric Cantor (R-VA). "Every job lost represents a family in economic crisis. Continued job loss does not equal success despite claims to the contrary, and the American people deserve stronger economic leadership. Families across the country are struggling to cut costs and cope with a tough job market, and they see a massive disconnect between that reality and the President's claims of success and continued spending."
Matthew Carr, NACM staff writer
Look for the "A" Players
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C4F: Employment Connections for the Business Credit Community
The combined CMI for September rose to 49.8, bouncing back from a nearly stagnant August on the strength of some dramatic improvements in dollar collections and in reductions in accounts placed for collection and dollar amount beyond terms. September saw the biggest improvement in these sectors in almost a year and that bodes very well for this quarter. Throughout the last year, the most distressing numbers seemed to be in these categories, which is expected in the middle of a recession. Even companies surviving the downturn were likely falling behind in bills or choosing to delay payments in an attempt to preserve cash flow. Now there is some sense that customers are starting to catch up and get current with their creditors.
The rate of dollar collections has not been this positive since September 2008, just as the economy started to seriously bottom out. The number of accounts placed for collection has declined and is lower than any point since last summer. Dollar exposure is also the lowest since summer 2008. These index readings suggest that there is a marked improvement in credit performance. "In order for the CMI to move into expansion territoryâ€”above 50â€”it will take the coalescing of three trends in credit: more credit availability, more sales that require the acquisition of credit and more prompt and regular payments on credit granted," said Dr. Chris Kuehl, NACM's economic analyst. "There has been some movement in sales and some positive movement in terms of credit availability, but up to this point there hadn't really been positive news regarding payment on that debt. Now all three factors seem to be moving in a generally positive direction."
This development is consistent with some of the general economic observations made over the last few weeks. The Federal Reserve's Open Market Committee (FOMC) made it clear that they thought the recession had reached an end and that the focus could now shift to recovery. Although recent Conference Board data showed a reduction in consumer optimism, a recovery of some consumer confidence as reported by the University of Michigan may have influenced the FOMC opinion. There has also been good news in the housing sector in addition to data showing that some manufacturing industries have started to grow. Still, there remains plenty to worry about: from high unemployment to the state of commercial realty to future threats of inflation.
The CMI was expected to crest 50 in this month's survey, but the availability of credit was not quite what was hoped and the final number was just a fraction under the point that signals expansion. With the combined index now at 49.8, Kuehl is confident that the fabled 50 point will be reached and reported in October's survey.
This report, complete with tables and graphs, and the CMI archives may be viewed here.
Source: National Association of Credit Management
To view past eNews issues or to visit the NACM Archives, click here.