July 15, 2010
The National Association of Credit Management (NACM) has reaffirmed its support to potential Bankruptcy Code reform, especially as it applies to small businesses and preference statutes, in a new letter to Capitol Hill lawmakers.
Receiving the letter were staff members in the offices of lawmakers on the Senate Judiciary Committee, most notably Sen. Sheldon Whitehouse (D-RI), chairman of the Subcommittee on Administrative Oversight and the Courts, and Sen. Jeff Sessions (R-AL), ranking member of both Whitehouse's subcommittee and the full judiciary committee.
The letter, which originated in NACM's Government Affairs Committee and was eventually approved by NACM's Board of Directors, addressed requests for specific legislative steps the Senate could take that would make bankruptcy work better for small businesses. Whitehouse initially raised the issue in March in the hearing, "Could Bankruptcy Reform Help Preserve Small Business Jobs?" NACM also sent a letter to Whitehouse's office in the wake of this hearing, and used this most recent second letter to clarify and expand on its prior positions.
"As previously discussed, both in our prior letter and by witnesses in the March hearing, small businesses should not be allowed to languish in the bankruptcy process, much to the detriment of the business itself, the bankruptcy estate and the creditors. Therefore, the deadlines for these filers should be shortened, such that a debtor has the exclusive right to file a plan for 120 days after its Chapter 11 filing, and a plan must be confirmed no later than 180 days after the Chapter 11 filing," said NACM in the letter. "Should no plan be confirmed within such 180-day period, the Bankruptcy Code should direct the bankruptcy court to enter an order converting the case to a Chapter 7 liquidation unless the debtor can show substantive circumstances which would warrant more time."
Most notable for the world of B2B credit management, however, was NACM's insistence that no bankruptcy reform legislation would be complete without preference reform: "With regard to the Bankruptcy Code as a whole, NACM believes its previously stated position on preference reform is also consistent with its support of a faster, fairer bankruptcy process for small businesses." "The current preference statute allows debtors and trustees to force small credit grantors to negotiate a return of a portion of a preference claim, without regard to the appropriateness of the claim, because these small credit grantors cannot afford legal counsel to fight the claim. The preference statute also functions to pay only for collection efforts without providing any benefit to the estate itself, and acts as yet another hurdle preventing the quick confirmation of a fair, successful reorganization plan."
As previously noted in its Issue Brief and Suggested Enhancements to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), originally released mid-2009, NACM believes the burden of proof in a preference claim should be shifted from the creditor to the debtor. This means that instead of creditors having to prove their innocence and deflect the frivolous preference claims made against them in a bankruptcy case, debtors would instead have to prove that a payment was preferential before filing the claim. "Such a change would not only reduce delays in the bankruptcy process and serve to restore balance between creditors and debtors, but would also benefit small businesses, as the burden of preference abuse falls hardest on the nation's smaller firms," said NACM in its letter.
A full copy of the letter can be found on NACM's Advocacy Page. Stay tuned to eNews and NACM's Credit Real-Time Blog for future updates.
Jacob Barron, NACM staff writer
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Apparently, what bankers and their smaller customers have is a failure to communicate.
That was just one of the many insights shared by industry experts, participants and observers at the Federal Reserve's recent forum, "Addressing the Financing Needs of Small Businesses." Attendees noted that the current crisis facing small businesses looking for financing has two sides and no one party is to blame.
"The observed decline has both a supply and demand side," said Kausar Hamdani, senior vice president and community affairs officer with the Federal Reserve Bank of New York. Hamdani moderated the event's first panel, which focused on private sector small business finance. "Businesses have become generally more conservative and some financial institutions' ability and willingness to lend to small businesses has declined." In such an environment, companies don't have much to offer, and customers don't seem to be wanting much either, making it harder to help small companies grow and create jobs. "There's a frustration, maybe an anger, and certainly bafflement by small businesses on how to respond to the current environment," Hamdani added.
The solution most frequently mentioned among panelists was increased communication between lenders and potential borrowers. "We're really trying to get those healthy borrowers to invest again," said Kevin Watters, CEO of business banking at JPMorgan Chase Bank, N.A., who instructed small companies to "go back in and talk to your bankers. Your banker is your friend. Call them and go in and have a conversation. Ask 'here's what's going on in my business, what can you help me with?' Come and talk to us and we can help you along the way."
Fellow panelist Jack Hopkins, president and CEO of CorTrust Bank, N.A. and director of the Independent Community Bankers of America (ICBA), echoed Watters' comments. "I think it's important for the customers to come in prepared," said Hopkins. "Come in with your ideas, with cash flows that are reasonable. Work with your small business development centers and the lenders are more than willing to sit down and help you with your business plans."
One of the other issues restricting banks from lending to smaller customers is the lack of information available for them to analyze the risk. "Lenders really have limited access to information," said Denise Pickett, executive VP of American Express' OPEN product, which is a credit card geared toward small businesses. "There's lots of information on consumers. There's a dearth of information for small businesses. There are also a substantial number of applications we get that lack information or have information that we can't verify." Pickett recommended that a smaller company looking for help from their bank be an open book when it comes to their finances and provide as much information as possible so that the bank can properly verify its accuracy.
Advocates of small businesses themselves pondered whether or not the pervasive use of credit scoring was keeping some small firms from getting the financing they needed. "Banks increasingly rely on the credit scores of the business owner," said Todd McCracken, president and CEO of the National Small Business Association. "What impact does that have? They're often extremely busy, so they're likely to miss a payment, and that's always been the case. They're having the credit lines reduced, which further reduces their credit scores, which sends them out for more credit, which further reduces their credit scores."
To combat this, banks have begun implementing "second look" programs, which give potential borrowers a chance to explain themselves. "If they can explain what's going on and maybe there was a rough patch, then come in, sit down, talk to us and explain it to us," said Hopkins. "It comes down to communication. The communication stops when things start getting tight and, if anything, they should be communicating more at that time, not less."
Jacob Barron, NACM staff writer
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President Barack Obama, like many economists, believes one of the keys to a robust economic recovery for U.S. businesses lies in exports. Thus, Obama has relaunched a stated effort to double U.S. exports over the next five years through the restarted President's Export Council and the new Export Promotion Cabinet.
It sounds great on the surface, but many in the business and finance world appear more than a little underwhelmed.
The President's Export Council, consisting of top business and labor leaders, and Export Promotion Cabinet, comprised of senior administration and presidential cabinet members, aim to increase businesses' profits with the end-goal of spurring significant job growth through a sizable increase in exporting activity, even if the domestic economic rebound remains sluggish. Part of this stems from the emergence of economic opportunity abroad, as places including Brazil, India and even portions of the Middle East are experiencing surges in commercialism while battered Americans appear more fiscally conservative. Obama focused on that saying it is "not where jobs are today, but where American jobs and customers will be tomorrow."
"Ninety-five percent of the world's customers and fastest growing markets are beyond our borders," Obama said in a July address. "So, if we want to find new growth streams, if we want to find new markets and new opportunity, we've got to compete for those customersâ€”because other nations are competing for those new customers."
Through the National Export Initiative, the Obama White House has tried to increase advocacy of U.S. businesses in the international marketplace and worked toward new free trade agreements in recent months. But underwhelmed economists like Ken Goldstein, of the Conference Board, responded with comments such as, "I've seen this show before, and it doesn't play better in reruns."
One of the key obstacles preventing a spike in exports is that domestic efforts to allow companies to sell more freely, easily and fairly abroad often have been stunted by what some consider protectionist, foot-dragging responses from the U.S. Critics say the U.S. does not often offer the same opportunities to companies based in such emerging nations.
"I think it's a sincere effort, but it's window dressing at the moment," said NACM Economic Advisor Chris Kuehl, Ph.D, of Armada Corporate Intelligence. "They're forming a commission that's going to say 'selling stuff is better than not selling stuff.' Wow. The problem is Democrats are negative on trade. You cannot sell if you don't buy. No country in the world is interested in imports if they can't export. If we want to sell to the Brazilians and Indians, we actually have to buy their stuff, too."
Brian Shappell, NACM staff writer
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Reacting properly to signs that a customer is approaching serious financial trouble has become much more important in recent years thanks to economic woes that have yet to abate completely. And creditors should be getting their money even if it's possible they'll end up in court years down the line, says Deborah Thorne, Esq.
So, what should a creditor do when it sees problems emerging with a customer? Thorne, a partner in the Chicago office of Barnes & Thornburg LLP, will address that very question during an NACM teleconference, "Supply Contractsâ€”How to Protect Yourself," scheduled for July 21 at 3:00pm (EST). The teleconference will focus on remedies creditors can use to protect their respective companies from getting in deeper with, and trying to get payments from, a debtor that appears to be headed for a bankruptcy filing. And despite the higher frequency of bankruptcies and the subsequent horror stories, many creditors are still caught by surprise when they end up in a legal dispute over accepting payments.
"I have a client right now that did the right thing for their company while selling to a customer years ago, and now they're being sued for a preference...because they took these payments," said Thorne. "[It was argued] they took a payment outside of the normal course of business."
Still, if Thorne had her druthers, creditors would always pursue payments with aggression in such instances."
"I think the prudent thing to do is exercise your Article 2 remedies and then be aware that the downside is you may be suedâ€”but, in the meantime, you have your money," said Thorne. "That money is sitting with you instead of somewhere else, where you'll likely never see it." She added that once the bankruptcy is filed, the recent fast-track nature of proceedings often leaves little money left over for creditors unless they're well-organized and aware of their options, another topic Thorne will discuss during the teleconference.
"You may sell widgets to a company and a sale happens in 60 days," said Thorne. "Let's say you have 55-day termsâ€”there may be no money left after the sale with an insolvent estate. You didn't protect yourself. That's an easy trap to walk into, and one you can protect yourself from."
For more information and/or to register, click here.
Brian Shappell, NACM staff writer
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Despite China's recent decision to allow the Yuan to appreciate against the dollar, top officials on the U.S. Senate Finance Committee continued to urge the U.S. Treasury Department to take a harder line on China and its currency.
The latest batch of criticism comes in the wake of Treasury Secretary Tim Geithner's release of a delayed semiannual report on currency exchange rates. Originally, the report was to be released on April 15, but Geithner pushed the date back to July 8, amid heavy criticism from Senate officials eager to see if the report would officially label China as a currency manipulator.
In the end, the report did no such thing.
"Secretary Geithner finally released the Treasury's semiannual report on currency exchange rates, which was supposed to have been delivered to Congress by April 15. As expected, the Administration has again failed to identify China as a currency manipulator. China recently allowed a modest crawling peg of its currency exchange rates, but overall China's currency is tightly controlled and mostly removed from market forces. So Treasury's determination doesn't match the facts," said Sen. Chuck Grassley (R-IA), ranking member on the Finance Committee. "I reiterate my call for the Administration to bring a case against China's currency manipulation at the World Trade Organization under article 15 of the General Agreement on Tariffs and Trade."
Furthermore, Grassley offered the vague threat of congressional action against China should President Barack Obama and his administration fail to react sufficiently to the problem. "Everyone knows China manipulates its currency," he added. "If the President continues to avoid acknowledging China's currency manipulation and fails to address it in a meaningful way, Congress will have to act."
Grassley's Democratic counterpart, Sen. Max Baucus (D-MT), chairman of the Finance Committee, was a bit more level in his criticism, but still convinced that executive action will be required before any real change takes place. "China's currency practices harm ranchers, farmers and exporters across America and around the world," said Baucus. "I have long said that China must take meaningful action to address its currency practices. A few weeks ago, China took a small step in this direction, but small steps are not enough. China must take significant steps to appreciate its currency and I expect those steps to happen soon. I urge the Administration to be vigilant in pushing China on this issue."
Jacob Barron, NACM staff writer
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Newly unveiled statistics on international trade of goods and services as well as on small business confidence surprised experts Tuesday...and not in a good way.
The U.S. trade deficit increased to $42.3 billion in May ($194.5 billion in imports, $152.3 billion in exports), said U.S. Census Bureau statistics. It marks the highest deficit in 18 months, and the $2 billion increase from April numbers marks the largest monthly escalation in the deficit since February 2010.
The largest deficit by a wide margin is with China at $22.3 billion, nearly $5 billion more than reported just one year ago, said the Bureau. The statistics also illustrate large deficits to OPEC and European Union nations, as well as increasing import-export ratios coming out of emerging economic players like India and Mexico. The statistics are troubling in that analysts predicted a much lower deficit for May, and the news could serve as another obstacle for improvements to business and consumer confidence domestically.
A separate report also unveiled Tuesday, conducted by the National Federation of Independent Businesses (NFIB), found optimism among small businesses falling thanks largely to a downgraded six-month economic outlook. NFIB said its index tracking small business confidence fell from a level of 92.2 to 89 in May, the lowest level in three months.
Ongoing problems getting the economic recovery and employment numbers to make substantial gains have left many small businesses tentative, to say the least, to hire more staff or make significant capital expenditures, even in cases where there is a perceived need. As such, demand for credit from businesses continues to remain low. In recent months, NFIB has commented that "even if credit were free, these business owners would not spend the money to hire or make capital outlays since such expenditures have no prospect of earning their keep."
Brian Shappell, NACM staff writer
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