eNews December 17, 2015

Why Credit Cares about Fed’s First Rate Hike in Years

The Federal Reserve finally answered the big question about when its Federal Open Market Committee was going to raise the historically low target for the federal funds rate. It raised the rate by about ¼ point to a range between 0.25% and 0.50%. The Fed also noted that it expected continued increases in a "gradual" fashion, theoretically to keep markets from mass overreaction.

While the mainstream media focuses mostly on the stock market and housing industry impact, as well as when the next rate increase might occur, the following are a few ways a climbing federal funds rate affects the trade credit profession:

  • Foreign exchange: In recent months, companies began acknowledging that the significant strengthening of the U.S. dollar versus other currencies has reduced expected revenues and in some cases led to losses. Credit and collections professionals doing business abroad, even in some well-regarded currencies, are finding it often unpredictable to know how much money they will have after converting a payment from another currency into dollars. Unwanted surprises such as the risk of collecting the fully owed amount, which clears the customer of additional payment obligation, but doesn't deliver the amount of liquid cash expected have surged. This is significant because, traditionally, in an era of rising Fed interest rates, the value of the dollar strengthens. It already did so considerably between the Wednesday afternoon Fed announcement and Thursday morning. More credit managers than ever named foreign exchange issues caused by the strong dollar as one of their top concerns for the coming year, according to results of an annual NACM study conducted in October.
  • Companies on the margins: A growing number of analysts are starting to agree with the assessment by Bruce Nathan, Esq., partner at Lowenstein Sandler LLP and a member of NACM's Government Affairs Committee, that Fed rate increases would likely drive up bankruptcy filing levels. As the rate was near 0% for the whole of this decade, borrowing money from financial institutions has been historically inexpensive. This has been helpful for many companies operating close to the margins. As borrowing becomes more costly and potentially more difficult, there is increased risk of late payments and defaults by companies that haven't fully recovered from the downturn, Nathan said. Add to that the massive impact the diminished price per barrel of oil is having on the energy industry and its suppliers, and it's a recipe for increased Chapter 11 filings. How quickly that will bear out and whether it will be a small uptick or a worrisome surge remains to be seen.
  • Emerging market flight: Exporters that invested heavily in emerging markets when they were hot have found doing business in such countries increasingly difficult since many of the growth leaders of five years have cooled. A strengthening dollar is likely to inspire continued investor flight from such nations, which is not good for the companies based there. "Concern about the creditworthiness of companies, in emerging markets especially, is a rising concern because they have borrowed heavily over the past decade," states the recently released Atradius report, U.S. Interest Rate Rise: Emerging Markets at Risk. It lists the most vulnerable countries as Turkey, Indonesia, South Africa and Malaysia. Brazil and Russia are also somewhat susceptible.



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Three Industry Sectors Downgraded in Q3

Retail in North America, metals in Western Europe, and textile and clothing in emerging Asia received downgraded ratings for the third quarter, according to Coface's Dec. 9 report, Sector Assessments in the World, the Persistence of High Risks.

The retail sector in North America was downgraded to "medium" risk following a slowdown in sales, particularly in Canada. Also affecting consumption is Canada's dependence on oil and household debt, as well as the withdrawal of the distributor Target.

In Western Europe, the metals industry is now ranked as "very high" risk. Steel production declined due to an increase of low-cost imports from Asia. During the first seven months of 2015, "Europe imported twice as much steel from China as it did in 2013," according to the report. In emerging Asia, Coface downgraded its textile and clothing sector to "high" risk due to a slowdown in sales, a drop of cost competitiveness in China and tensions in cotton inventories.

Looking at the whole of 2015, Coface issued more risk downgrades than upgrades. The assessments were based on 14 sectors in three large regions (North America, Western Europe and emerging Asia), which represent 73% of global gross domestic product (GDP). "Sector risks have deteriorated in comparison to 2014," said Coface Economist Paul Chollet. "One-third of the sectors are now assessed as 'high' or 'very high' risk, and no region is spared. Greater control over risks is required."

The "biggest loser" of the year was the energy sector in the United States, which underwent two downgrades. The industry was also "penalized by drastic cuts in investments and the high level of indebtedness of companies working in exploration and production as a result of the drop in oil prices," states the report.


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Join Us at the Palace!

NACM's 120th Credit Congress & Expo is at the magnificent Caesars Palace, Las Vegas, June 12-15, 2016.

Be a part of this grand tradition of education, professional development and networking opportunities among business credit professionals from around the world.

The Early Bird rate is currently in effect, so register now and SAVE! For more information, click here.

Planning and Preparation Key to Maintaining Healthy Cash Flow

Maintaining a healthy cash flow can be a major challenge for many businesses, especially at smaller entrepreneurial firms where professionals are filling many roles simultaneously.

"When you're passionate about what you do and work hard all day running your business, doing the math at night may not feel like a priority," explains Bob Falkenberg, senior vice president of business credit cards and lines of credit for Wells Fargo, in an article, Keep Your Business Healthy by Managing Cash Flow. "To be ready for any scenario, take a broader, more challenging look at your business cash flow, identifying potential weaknesses clearly and objectively."

To better manage cash flow, Falkenberg suggests the following four areas should be considered: planning, making payments, receiving payments and credit options. He also suggests that business owners start by forecasting their projected cash flow for the year ahead, plan for any potential challenges and prepare by putting financial tools in place before they are needed. "Many business owners underestimate the impact of unexpected expenses, the cost to take advantage of business opportunities, or both," Falkenberg writes. "Once you know what your challenges are, you can take the necessary steps to manage them."

Meanwhile, optimism among small business owners fell for a third consecutive quarter, according to the Q4 Wells Fargo/Gallup Small Business Index released on Dec. 7. The index score dropped from 59 in July to 54 in November, resulting in the lowest score since July 2014.

"With the economy growing as slowly as it has been, it's been difficult for many business owners to increase their sales; and this has been particularly burdensome for firms who have seen expenses rise, including health care costs," says Mark Vitner, managing director and senior economist for Wells Fargo Securities. "As a result, many have been reluctant to invest in equipment, expand their operations and hire staff, even as business owners in general have seen gradual improvement in their financial situation and cash flow over the last few years."

Dropping by nearly 10 percentage points from the first quarter survey, 39% of small business owners reported in the fourth quarter that their revenues increased by a little or a lot over the last 12 months. Out of those surveyed, 13% of small business owners cited government regulations as their biggest challenge. Attracting customers, finding new business, and hiring and retaining quality staff were also among top concerns.



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U.S. Oil Export Ban to End

Although an agreement by leadership has been announced, the decision by Congress to allow oil exports from the United States is not yet a done deal. Even if there are enough votes in the House and Senate, the timing is far from ideal, as the price per barrel sat below $40 on Wednesday and is less than half of what it was a year ago.

The legislation also includes support for various alternative fuels and technology, which is supposed to ensure support from the Democrats and the White House. That remains to be seen, as there is always the chance it will be vetoed by the president.

Forty years ago, the U.S. elected to ban the export of crude oil to any other state except Canada. The rationale was easy enough to see at a time when the country was embroiled in a real gas shortage crisis. Times have changed, and the development of oil shale has altered the nature of the business, making the U.S. one of the top three oil producers in the world.

The two big questions are whether this makes much difference to the oil world right now and whether this will compromise the U.S. in future decades. The answer to the first question is likely to be a qualified "yes," as global oil prices fell a little on the news. It means that there is going to be even more of an oil glut than was the case previously. Every time a new player is added to the mix, the price per barrel falls. The last time this occurred was when Iran started to get back in the game as sanctions were lifted.

The long-term impact on the U.S. is a little harder to predict. The fear was that when there is another shortage, the U.S. oil companies will just sell to other nations and leave the U.S. without its own oil. It is very unlikely the sales would be made to other states when there is demand in the U.S. simply because the transportation costs will always favor selling to domestic refineries. Right now, the bulk of the U.S. oil is in storage and production is down due to lack of demand. If the U.S. can gain access to other markets, some of that glut can be reduced and the U.S. oil industry may be able to recover lost momentum. The U.S. will most certainly start to have more influence over the price per barrel in the world.


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EU Strengthens Oversight on Data Security

The European Union took major steps this week in holding companies accountable for proper usage of data that they store. Although the new provisions aren't designed to directly affect B2B transactions or daily credit management functions, it underscores the continued increase, especially in Europe, in compliance measures regarding the information of customers.

Officials unveiled the framework Tuesday for new EU-wide rules regarding data security and use. The primary focus of the legislation, which has been delayed for nearly four years because of corporate lobbying against some of the new regulations, is on digital privacy. The EU wants to create rules for data harvesting from consumers and to stymie misuse of information for purposes to which they have not given consent.

"This gives people in Europe a greater say over how their digital information is collected and managed, mainly by U.S. tech giants—Google, Amazon and Facebook—who collect and mine data from social media posts and online search results as a part of their digital advertising activities," said Pia Porvari, head of credit and group credit risk management for the firm UPM in Finland and a member of FCIB's European Advisory Council. "This law ensures that people have greater control over their online data. It looks to me that Europe's stance on individual's privacy is much stronger than in the U.S."

To wit, the fines for the most egregious violations would be high: up to 4% of a company's global revenue. As with any EU-wide legislation, the governing bodies of the 28 nations involved must adopt and enact the mandates. That process has often been fraught with delays in the past, as was notable in the pursuit of improvement to EU prompt payment laws. The optimistic timetable is for universal enactment of the new digital privacy law, replacing legislation originally constructed 20 years ago, by 2017 in those nations.

Still, Edwin Bell, Ph.D., ICCE, senior manager of credit administration at W.W. Grainger, Inc., believes consistent rules on data throughout the EU are a good thing. As for a potential impact on trade credit, Bell believes it could become more difficult or expensive for some to obtain credit data in the EU.

"Certain customers in the B2B arena in the EU are treated the same as personal consumers depending on the local laws," said Bell, who will be a speaker at NACM's 120th Credit Congress & Expo in Las Vegas this June.



Make Sure Your Knowledge of the Law is Up-to-date

Updates to volumes I and II of NACM's Manual of Credit and Commercial Laws are now available. The four volumes of NACM’s Manual of Credit and Commercial Laws are the essential resource for credit professionals, providing comprehensive coverage of legal issues chosen and developed by leading experts in bankruptcy, collections, unclaimed property and mechanic’s liens and bonds rights, and more.

Here's what's new:

Volume I: General Business Laws, Related Statutes, and Collections, 2015
Volume I was revised to include new technology for reporting unclaimed property, add the Telephone Consumer Protection Act to the collection process information and provide an update on the COSO Internal Control Framework for SOX.

Volume II: Commercial and Consumer Credit Topics, 2015
Volume II includes an overhaul of the UCC Articles as well as the Sales Tax and Use Rates are updated.

Look for the update to Volume III: Construction Issues later in Jan., 2016.

Visit NACM's online Bookstore for more information about the manual and to order your volumes today!

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