eNews July 8, 2010

July 8, 2010

News Briefs

  1. No Incentive Pay for Majority of Credit Professionals
  2. Death Delays Financial Reform Passage, Imminent Changes Loom for Ratings Agencies
  3. Former NACM Chairman to Talk Credit Documentation
  4. Consumer Filings Up 14% Through First Half of 2010
  5. Credit Investigations and Making Credit Decisions
  6. Walmart Offshoot Rolls Out Small Business Loan Program

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No Incentive Pay for Majority of Credit Professionals

Respondents in NACM's June monthly survey scoffed at the idea of incentive pay for collection staff with 71% answering that no such thing existed at their companies.

When a company does offer incentive pay, respondents noted that a combination of days sales outstanding (DSO), percentage of A/R over 60 days past due, debt written off and ratio of debt written off to sales is used to determine how much bonus pay the staff member receives. Still, the overwhelming majority had either never seen incentive pay or had recently stopped seeing it due to their company's budget woes.

Among employees of companies that do pay their credit professionals more for exceeding their goals, the most common arrangement seemed to be a company-wide incentive program, rather than a department-specific one.

"We have a firm-wide incentive policy that is based on how we all work as a team and not on individual performance," said one respondent. "Our incentive pay for the credit and collections department is based on the same incentives as the rest of the company—net income and cash flow," said another. Such an environment where employees are rewarded for meeting company goals rather than personal ones prevents lone employees from making decisions based on their own paycheck, rather than the company's bottom line. "We feel incentives to hold down DSO or past dues could lead to restricting credit for personal goals, and not company goals," said one respondent.

Some survey participants noted that even if their company does offer incentive pay, they might as well not bother in today's economy. "Most of the numbers set up are unattainable in a perfect economy, let alone what we are experiencing these days," they said. Others noted that it went to a portion of the staff that deals with credit extension, but not to the collections department specifically. "We have separate risk and collection teams," said one respondent. "Incentive pay is offered to the risk team only."

Still, the only "incentive" most respondents listed was that good performance means they get to keep their job for a little longer. "If you do an excellent job, you get to keep your job," said one participant, "For now."

The NACM Monthly Survey for July is now live on NACM's website and asks about upper management approval of high-dollar credit decisions. Participate now by clicking here.

Jacob Barron, NACM staff writer

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Death Delays Financial Reform Passage, Imminent Changes Loom for Ratings Agencies

The passing of longtime Capitol Hill lawmaker Sen. Robert Byrd (D-WV) derailed getting the recently finalized financial reform bill passed by July 4, but action on the legislation remains imminent, short of a revolt in the Senate.

On June 30, the House passed the final version of financial reform after weeks of wrangling between its and the Senate's wish lists in conference committee proceedings, which were spearheaded by Rep. Barney Frank (D-MA). The Senate was expected to do so soon afterward, but Sen. Byrd's death forced it to cancel plans until after lawmakers return from a quick July respite. The final version of the legislation includes rules to reduce bank participation in perceived risky or vague investments such as hedge funds, forces banks to hold on to more of the loans they issue ("keeping more skin in the game"), calls for an audit of the Federal Reserve, sets up a consumer protection agency to be administered by the much maligned Fed and calls for a closer watch of credit ratings agencies.

Lawmakers believe the package will pass the Senate this month and be signed into law shortly after.

Though a Senate amendment calling for much tighter regulation of credit ratings agencies was watered down by House lawmakers, who preferred the Securities & Exchange Commission study them, the big three ratings agencies (Standard & Poor's, Moody's Investment Services and Fitch Ratings) are all paying close attention. In fact, in a move that smacks of throwing stones from its own glass house, one of the big three credit ratings agencies has already threatened to downgrade the rating of one of its counterparts/competitors amid the seemingly imminent enactment of such reform.

After weeks of criticism from lawmakers and experts directed at ratings agencies that they had too many conflicts of interest in rating products from the financial industry, Standard & Poor's (S&P) placed Moody's Corp., parent company of Moody's Investment Services, on its negative CreditWatch list. In essence, S&P is telling the world that provisions within the legislation package will increase operational and litigation-related costs for Moody's and force a significant alteration of its business practices. All of this will, in theory, lead to lower profit margins for Moody's, which was perhaps hit hardest by the Capitol Hill soapbox and was characterized as a "AAA factory" for its easy-to-get high ratings that failed to live up to their billing. Granted, many experts believe the same could be said for potential increased costs at S&P, or Fitch for that matter.

"Moody's business will likely undergo noticeable changes due to new global regulations and the U.S. legislation's impact on industry risk, which are business risk considerations under our criteria," S&P stated. S&P did, however, note Moody's profitability has been strong and consistent in recent years and that it would resolve/update the CreditWatch status for Moody's in the "near term," likely soon after it analyzes the signed, final version of financial reform.

Brian Shappell, 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.

Former NACM Chairman to Talk Credit Documentation

To former NACM Chairman Val Venable, CCE, the question isn't "Why is it important to continue brushing up on the topic of credit documentation?" it is "Why isn't it?" After all, credit documentation often is not only the first line of defense, but the last as well.

Venable, credit manager for SABIC Innovative Plastics, will discuss the topic in the July 12 NACM teleconference, "Credit Documentation: First Line of Defense" Venable will discuss the importance of consistently applied credit policies, proper documentation and some easy fixes that can prevent problem-creators from slipping through the cracks in the sales and credit processes. Venable says it's often things the credit department doesn't see every day that can have the most severe negative consequences.

"What I mean by that is the credit department may not see the sales order, but we're bound by it," said Venable. "We may not see consignment agreements every day, but we're going to be responsible for collecting in accordance to that agreement. There can be a disconnect." Sometimes an issue of non-compliance can stem from something as small as not checking for inconsistencies such as a company's exact, proper name or an out-of-date address. In essence, sweat the small stuff!

"When we get a credit report, what are we doing with the information on that credit report? There are all sorts of little tiny things we can do to clean up our process and make it tighter to save us down the road," she noted. Some good examples are ensuring your company has a strong and accurate tracking system that details which customers have a certificate for a tax exemption or when confidentiality agreements expire. This and other methods to be discussed during the teleconference can help greatly reduce the amount of non-compliance headaches your credit department will have to address.

"It's those kind of 'not most of the time' things that are going to come back to haunt you," said Venable. "In my experience, [auditors] care about the end result, not gaps or mistakes in the process [or intentions]. It's 'Are you following the law or are you not?'"

For more information on this teleconference or to register, click here.

Brian Shappell, NACM staff writer

MLBS Offers Complete Lien and Bond Services and More

NACM's Mechanic's Lien and Bond Services (MLBS) brings best-in-class service options to today's construction credit professional.

MLBS' Lien Navigator is a web-based service that provides up-to-date information for all 50 states and Canada, including notice, lien, payment bond and suit timelines, procedures and other relevant information in a state-by-state/province-by-province format.

MLBS also offers two preliminary notice to owner (NTO) services, deadline tracking, a lien and bond filing program, and a suit against bond and foreclosure service. Both NTO services include, at no additional charge, a Next Action Notification Email. These reminders are sent automatically to ensure that your lien and suit deadlines are met during each step of the lien process.

For more information on NACM's MLBS, click here.

Consumer Filings Up 14% Through First Half of 2010

It continues to look like a banner year for bankruptcy filings in 2010.

The most recent report from the American Bankruptcy Institute (ABI) showed that consumer filings totaled 770,117 nationwide in the first six months of 2010, marking a 14% jump from the 675,351 petitions filed in the same period last year. This marks the highest total since 2005 when Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

"Years of rising consumer debt and low savings rates, combined with the housing and unemployment crises, are causing bankruptcy levels not seen since the 2005 amendments to the Bankruptcy Code," said ABI Executive Director Samuel Gerdano. "We expect that there will be more than 1.6 million new bankruptcy filings by year end."

Despite the notable increases in year-over-year numbers, however, monthly consumer filings have experienced steady decreases since March. The overall consumer filing total for June 2010 was 126,270, which marked an 8.5% increase over the same period in June 2009, but a 7.8% decrease from the May 2010 total of 136,142.

Of the June filings, 27% were filed under Chapter 13, which marked a slight increase over May's Chapter 13 numbers. Rather than a Chapter 7 or a Chapter 11 proceeding, a Chapter 13 allows an individual with a steady income and debt that doesn't exceed a certain amount to budget their future earnings in order to pay unsecured creditors more fully.

Jacob Barron, NACM staff writer

Reap the Rewards of Participation

NACM conducts two surveys on a monthly basis: the Credit Managers' Index and the NACM Monthly Survey.

These surveys exist to benefit you, the credit professional. When you participate, the surveys not only give us data, they help us produce the resources and answers you need for your day-to-day accomplishments.

We greatly appreciate your monthly participation in both. Just look to your weekly NACM email for monthly reminders, or go to www.nacm.org to check their status.

Credit Investigations and Making Credit Decisions

It's no secret that small businesses continue to face dire credit conditions.

The recession has officially ended, but financing remains scarce for companies in many industries across the nation. Efforts by lawmakers to spur investment and get Americans back to work have had an effect in the form of stimulus projects and building opportunities, but their attempts to loosen up credit for the nation's smallest firms have still fallen somewhat short.

Congress and the Obama Administration have continued, however, to peg nearly every proposal as a means to stimulate job growth and break the logjam in small business credit. Most recently, the Small Business Administration (SBA) announced its first group of loan pool originators, an aggregate of banks assembled by the SBA to sell bundles of 504 program first mortgage loans. The program, funded by the American Recovery and Reinvestment Act (ARRA), aims to boost liquidity to small business lenders, thereby increasing financing to their small business borrowers.

As this program pans out, businesses eligible for that credit are expected to use it wisely to grow further and aid the nation's recovery. Companies that aren't worthy enough to get bank financing will, on the other hand, be looking to their trade creditors to stay afloat and make it through the next payroll.

The demand for still elusive credit is great among the nation's ailing businesses, and the lenders of last resort for many of these companies are suppliers and sellers. Vendors must find a way to make sales to companies that might not be "creditworthy" in the traditional sense of the term, and doing so often comes down to the groundwork that precedes any actual extension of credit. A thorough credit investigation and analysis of a customer's finances is the first step any credit professional should take to ensure their company's investment is profitable. Additionally, in today's environment, customers angling for financing will use everything in their power to make themselves look like less of a risk than they actually may be. A keen eye for detail and a familiarity with the tools available to creditors are integral to a vendor's quest to stay profitable and grow even in a world of tightened credit and weaker customers.

To learn more about the factors that go into making a successful credit decision, as well as the many ways tools like reports and scoring can help you make better choices, join Debie Wangsgard, CCE on July 14 for the NACM teleconference, "Credit Investigations and Making Credit Decisions." In her 90-minute "Added Advantage" presentation, Wangsgard will give listeners everything they need to effectively manage and extend credit to customers in today's market, including tips on how to set appropriate credit limits, how to conduct direct and indirect credit investigations and how to use scoring to manage company finances.

For more information, or to register, click here.

Jacob Barron, NACM staff writer

Why Join CFDD?

  • 30 chapters operating throughout the United States
  • Fostering educational opportunities, networking, professional certification and scholarships
  • Designed to aid the beginning credit professional as well as those at the mid- and executive-levels
  • Membership available to all credit professionals who are members of NACM or CRF; direct membership available in areas with no CFDD chapter

To learn more about CFDD, click here.

Walmart Offshoot Rolls Out Small Business Loan Program

As stories of difficulty securing credit continue to spread throughout the small business community, a division of the world's largest retailer is stepping in to help...perhaps itself most of all.

Sam's Club, a subsidiary of Walmart, unveiled a program Tuesday that will offer loans ranging from $5,000 to $25,000 to its small business members. Noting the economic downturn and drastically tightened lending conditions at banks, company officials said it is particularly interested in channeling credit to minority-, veteran- and female-owned entities.

Experts were quick to pontificate that the move is more a plan to get small businesses to buy more Sam's Club products than any sincere showing of goodwill designed to help U.S. businesses. Still, while the program would likely help drive more businesses and subsequently consumers to Sam's Club stores, it actually should help many cash-strapped businesses struggling to garner small business loans.

The announcement comes just days after Federal Reserve officials continued its campaign that includes browbeating, coercing and even begging financial institutions to resume offering credit and unfreezing credit lines for businesses and consumers alike amid tight conditions.

Fed Governor Elizabeth Duke, in a speech to a group of bankers gathered at a June 30 Ohio Department of Commerce event, noted that difficulties for small business and consumers trying to garner credit continue to increase and again reemphasized the need for financial institutions to start lending more frequently than in the recent, recession-fraught years. She did, however, stress that such credit should be extended to "worthy borrowers" in a manner that is more prudent than the easy-money economic boom years around the middle of last decade.

"In no way do we want to return to the world where people could buy a house with no money down and no documentation," said Duke. "But where prudent loans can be made, we want to do everything we can to make sure those deals are struck. It's best for the banks, it's best for the borrower and it's best for our economy as a whole."

Duke, who promised the Fed would continue to support opening up credit availability post-recession, also focused specifically on the situation of small businesses, saying:

"Data that would indicate underlying borrower demand is much harder to find for small businesses than it is for consumers. Nonetheless, [while] a number of indicators suggest that demand for credit by small businesses is down...we continue to hear about difficulties experienced by small businesses in obtaining credit."

Duke also used the speech as a public reminder that Fed officials continue to hold meetings, more than 40 to date, nationwide with small business owners in an attempt to craft a plan to help these entities through problems such as credit illiquidity.

Click here to view Duke's full speech.

Brian Shappell, NACM staff writer


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