U.K. Insolvencies to Increase After Brexit

One year later, the United Kingdom’s decision to break from the European Union, known as Brexit, is likely to have a more limited effect than previously predicted, but that doesn’t mean that the U.K. economy is out of the woods yet. Growth will see challenges, mainly due to inflation, and more insolvencies are expected to occur than would have without a Brexit.

The U.K. economy has been resilient following the Brexit vote last June, according to a new report from credit insurer Atradius. Manufacturing exports enjoyed a boost from the higher growth that resulted from the sharp depreciation of the pound, but that depreciation is beginning to weigh on consumer spending. Prices have been driven up from the increased cost of imported goods and the recovery in oil prices. Consumer price inflation reached 2.7% in April, and though Britain is enjoying its lowest unemployment rate in over 40 years, wages have not kept up with inflation.

GDP growth slowed to 0.2% quarter-over-quarter in the first quarter of this year, marking the slowest pace in four years. The slowdown is focused in consumer-oriented sectors such as retail and hospitality. Business investment has been better than expected and is predicted to be stable in 2017. There has been demonstrated confidence in the U.K. economy, but Atradius expects uncertainty to gain ground as negotiations continue with the EU, weighing on consumption and investment next year.

Insolvencies in the U.K. rose by 1% in 2016 for the first year since 2011, Atradius said. First quarter 2017 marked the third consecutive quarterly increase in business failures. Insolvencies in 2016 were concentrated in the construction, retail and hospitality sectors. Construction usually sees the highest number of insolvencies in the U.K. and the depreciation of the pound has resulted in higher costs for imported materials. Weaker consumption is expected to elevate insolvencies in retail and accommodation sectors this year and next.

Improving insolvency performance has been seen in the agriculture sector, with the weak pound boosting income and manufacturing. Nationwide, however, insolvencies are expected to increase 6% in 2017 and 8% in 2018.

The countries most vulnerable to risk due to financial and economic links with the U.K. are Ireland, the Netherlands and Belgium, followed by France, Germany and Spain. The number of insolvencies in Ireland from 2016 to 2018 is expected to be 2.5% higher than if there had been no Brexit. This is followed by the Netherlands at 1.3% and Belgium at 1.2%.

– Adam Fusco, associate editor

 

Getting Sales and Customers on Board with Statutory Notice and Lien Filings

Construction credit professionals often find themselves pondering the difficulties of how to communicate to sales staff members and customers the nuances of whether to file preliminary notices, notices of furnishing and other procedures to perfect payment rights on the job.

In a recently held educational session at NACM’s 121^st annual Credit Congress & Expo in Texas, panelists Leonard Brown, CCE, CICP, a commercial credit consultant with decades of experience in the industry, and Thomas Sacher, CCE, director of corporate credit and collections at Watsco Inc. of Orlando, FL discussed some of the strategies they use to get sales teams and customers on board with these vital payment tools.

Brown said he’s sold the use of mechanic’s lien notices to his internal clients as an effective means to mitigate risk while providing higher credit limits to customers than the company would not have given otherwise. For customers pushing back against the use of notices and other mechanic’s lien provisions, Brown said he explains it’s a routine process the company follows for customers, in part so that accounting staff can track expenses on job accounts. “Try to de-emphasize the piece about the credit rating of the customer. You can get into some nasty arguments that would involve pride and ego and everything in there,” he advised. He also points out to customers that if they get into trouble on a job, the company can use the lien process to apply pressure up the payment chain and help get them paid so they can pay their suppliers. “Through all of that, you have an opportunity to build trust with your customer and build a relationship with your customer. To me, that’s one of the key things that you want.”

Sacher asks his customers: If their customers don’t pay them, are they going to be able to pay him. “Quite frankly, the answer is usually ‘no.’ And that’s why I explain to them, ‘This lien allows us to go after the owner and the general contractor of that job … and to the extent that you owe us that money … we have a legal right to go after the owner and the GC for that money,’” he said. Also, if customers say they can’t pay his company because they haven’t been paid, Sacher then explains that he’d be happy to contact the GC and advise that he’ll lien the job unless the funds are released. “I usually get one of two answers. One of which is ‘Please call,’ which means he’s telling me the truth.” The other response is “No, please don’t call. I’ll pay you out of my own pocket,” which Sacher said likely means the customer has been paid but didn’t want to pay him.

Discussing noticing issues also offers a chance to educate customers on the lien process. “This is something they should know and use to protect themselves,” he said.

– Nicholas Stern, senior editor

 

Credit and Productivity Tightly Linked

One of the most worrisome aspects of the slow growth period the U.S. seems to be trapped in has been the consistently low levels of productivity as defined by output per worker. The pace of productivity has been very slow and has sapped the strength of the overall economic recovery. There have been many theories as to why this has been the case—everything from a slowdown in the adoption of technology to the lack of progress as far as the skilled workforce. It has been more than a little baffling as there have been developments that usually result in higher levels of productivity, but this time these have not had the usual impact. As companies reduce the size of their workforces, there is often an increase in productivity as fewer people are doing the jobs that were once performed by that larger staff. None of the ideas put forth to explain the productivity lags have been very satisfactory. Now there is a new study that asserts that lack of credit may be a major factor in the decline.

The recession was marked by the collapse of the credit and banking system. Just as with the Great Depression, the Great Recession was a financial-sector crisis first—this is what triggered the greater crisis. The availability of credit was an issue from the start as banks had become dangerously overleveraged. The LIBOR rate soared and many of the world’s largest banks were in a state of extreme disarray. These banking crises have not ended, as can be seen by the turmoil in Italy these days. Not only was there a credit crisis in the banks, but the impact was felt in trade credit as well. The Credit Managers’ Index was showing distress as early as the middle of 2008 and steadily weakened through that year and into 2009. Companies of all sizes struggled to get access to normal credit. This inhibited much of the investment that might have boosted productivity.

The study from the International Monetary Fund holds that lack of access to credit resulted in significant reduction in the kind of investment that normally boosts productivity. Companies have not invested in technology to the degree they once did and there has been a dearth of training and education that would otherwise have boosted the output of the workers. Those companies with the weakest financial situation were also the ones that saw the least progress as far as productivity. Those that were more financially stable were the ones that saw gains in overall productivity.

If there was one area that was starved more than others, it was research and development. In most companies, this was the sector that saw the most severe reductions, and in many cases R&D efforts were abandoned altogether. The productivity gains vanished along with those cuts. The inescapable fact is that without development of new products and techniques, there is no real chance of progress.

In order to boost productivity now, there will have to be more attention paid to credit access and to the need to bolster these neglected R&D programs. That puts more of a burden on the banks. These investments can be risky as there is no guarantee the programs will bear fruit. The credit squeeze is basically over. There have been years of lower rates, but this has not meant that lending has been aggressive. The credit markets remain tighter than they have been in the past due to stringent regulations seeking to ensure that there will be no repeat of the “too big to fail” debacle. This is a worthwhile goal, but it has also inhibited credit growth and productivity gain.

– Chris Kuehl, Ph.D., NACM economist

 

Study Finds Corporates Looking Toward New Technologies to Face Growing Complexity

A new study of the corporate payments world shows that the advent of electronic payments technologies over the last several years has resulted in the adoption of new payment management strategies to increase efficiency in a landscape of hyper-complexity and increased security risks.

The 2017 B2B Payments & WCM [Working Capital Management] Strategies Survey from Bank of America Merrill Lynch, Bottom Line Technologies and Strategic Treasurer surveyed 335 corporate and bank practitioners about their views on new payments technology, payment security, working capital management and the current regulatory environment.

Of those corporates surveyed, nearly a quarter originate payments with 11 or more banks, and 13% do so with 21 or more banks, the survey found. Also, 63% of corporates were originating payments in more than three currencies and 40% did so in six or more currencies. To add to this complexity, almost the same percentage of respondents said they were operating in each of the major world regions. Over half the respondents generate 10,000 or more payments each month, driving the need for more automated processes.

“These numbers lend credence to the fact that most businesses today have moved beyond their country of origin and are looking to expand internationally,” the report’s authors said. “Advancements in technology have made this expansion much easier.”

Automating, streamlining and simplifying payment processes is a key factor behind updating technologies on the accounts payable side of businesses, the survey found. Slightly more than 60% of corporate respondents said invoice delivery/capture was the most important component, 57% said invoice approval was and 49% mentioned payment approval as a top concern.

The report notes that, historically, many firms that have implemented treasury management software or other payment technologies have done so at a relatively slow rate. “However, there has been a growing movement within the corporate realm that emphasizes the role of AP in generating value for the firm. … A pivotal component of this movement has centered around the automation of the AP payment process to more effectively manage working capital levels and to take advantage of early payment discounts or rebates.”

Other Report Highlights

Payment methods. ACH was the most preferred method of B2B payment among the survey’s respondents, followed by wires and cards, with checks as the least preferred payment method. More than half of respondents are making 50% or more of their B2B payments electronically via ACH or card.

Corporate card use is also on the rise, “… especially in circumstances where high levels of payment or transaction volumes are occurring,” the report noted. “In these cases, using cards can reduce the number of days in the payment cycle, cut back on the number of invoices/paperwork, and provide more visibility into certain types of spend.” Cards can bring advantage, for instance, when transacting often with the same vendor or making frequent purchases of the same types of materials, supplies or services. About a quarter of corporates surveyed said they intend to spend more or significantly more this year on card programs, while 5% said they’re planning to spend less.

– Nicholas Stern, senior editor