eNews February 23, 2017

Credit Conditions Turn Favorable for Small Businesses

Credit conditions are looking positive for small businesses going into 2017, with delinquency rates driven down in the fourth quarter of 2016 as credit balances expanded. Robust balance growth and continued declines in delinquencies appear to be the theme for the remainder of this year, according to the Experian/Moody’s Analytics Main Street Report, which focuses on the small-business landscape.

One reason for the improvement is that the disruption from the financial crisis of 2008 caused a “massive shakeup in the small business space,” said Gavin Harding, senior business consultant for Experian Decision Analytics. Those companies that survived were forced to refocus. Nine years later, what is left is a core segment of the small business sector that has all the excess peeled away to accommodate a pragmatic, risk-adverse environment, Harding explained.

Before 2008, “approval rates were through the roof and were more oriented toward growth,” Harding said. “The credit pendulum swung all the way to the risk side after 2008. Where we are now, the pendulum is coming back to the middle.” Credit professionals need to be careful that the pendulum doesn’t swing to the other side. “Make sure your underwriting and portfolio is in alignment with your marketing and growth strategy. When there is good alignment between these two, that’s when you have a more sustainable and efficient model.”

Credit providers must also remain vigilant in the face of global economic uncertainties. With downside shocks, small businesses are particularly vulnerable because they tend to rely on the personal credit of the owner. Downside risks over the next few quarters include rising interest rates and changing trade policies. Small retailers may be particularly affected by the latter, given their exposure to imported goods. Upside risks include changes to the tax code, rising commodity prices and a labor market nearing full employment, the report says. Rising prices for energy commodities will improve the credit condition of small businesses in mining and transportation, but may affect profits for manufacturers.

The brightest spot in the current economic climate is the labor market, the report says, with payrolls growing and personal income rising in December. Utilization rates remain below 40% among small businesses, leaving room for growth.

The report cites the Federal Reserve’s loan officer opinion survey, which showed an uptick in willingness to lend toward the end of the year, with credit standards loosening for small firms. “If we see that small businesses in the business-to-business sector are paying their bills on time, this tells me that they are being paid on time and paid, period,” Harding said.

Harding believes that the report’s data on small businesses can be extrapolated further to reflect on larger businesses. 2017 is set to be a strong year for small businesses and small-business credit performance—and the remainder of the economy as well.


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25582. Excel Training: Manipulating Data

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Speaker: Marlene Groh, CCE, ICCE, Carrier Enterprise LLC.This session will guide attendees through a typical aging report and show how to evaluate collectors or territories using pivot tables. It will include formatting, sorting, filtering and adding calculated fields to pivot tables. It will also demonstrate creating templates with pivot tables built in to eliminate creating the same pivot tables over and over again.

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Construction Creditors Plan for Year of Solid Revenue Growth, Chances to Improve Work Processes

With 2016 representing a good year overall in the construction industry, construction creditors in the sector polled recently by NACM’s Secured Transaction Services (STS) say they’re expecting more of the same in 2017.

Of the respondents to STS’s Construction Trends Survey 2017, the majority or about 52% said they anticipate revenue growth of 5% to 10% this year. Nearly 32% said they’re expecting revenue to grow by up to 5%, and about 16.5% said they’re expecting growth of 10% or more. No one participating in the survey anticipated revenue declines this year.

Larry Lipschutz, CCE, CICP, director of credit and collections with French Gerleman Electric Company of St. Louis, MO, is among those who see a positive economic environment for construction this year, from a solid housing market and upgrades to chemical industrial facilities to a potential bump in the nation’s infrastructure spending. Energy conservation has also been flourishing lately, with lighting projects to replace LEDs and solar panel additions adding to tailwinds, particularly for suppliers to electrical contractors. “So I think even with some uncertainty among individuals, companies expecting a good economy should help our business,” he said.

According to the survey, the vast majority—about 80%—of construction creditors expect growth will come from commercial projects. Approximately 48% of respondents anticipate growth in residential construction, 47% see growth in public jobs at the state or local level, 39% expect growth in private jobs and about 31% say they’ll see more revenue from federal public jobs.

When it comes to areas of opportunity for improvement within the credit department function, respondents pointed to establishing a more efficient workflow process as the most popular choice, with nearly 68% saying they planned to do so this year.

For Lipschutz’s credit department, the goal is: “how do we get things to happen with fewer touches.” One plan the firm has under consideration this year is to automate its accounts receivable process. Currently, credit professionals scan through aging reports in Excel to figure out who to dun for payment, but adding software to automate this step will free up time and improve workflow processes, Lipschutz said.

Other survey respondents said they saw opportunities in their credit departments to improve DSO (56%), spend more time training staff on the specifics of construction credit (43%), identify more sales opportunities (40%) and hire new staff members (16%).


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Be Prepared for Your March Designation Exam

You are one step away from earning your CBA, CBF or CCE designation. The only thing left is the designation exam, which you are scheduled to take on Monday, March 6.

The NACM Education Department has been searching for ways to support test candidates and made the bold move of not only reducing the price of the exam review modules available on the Credit Learning Center, but also packaging them together in a bundle—priced at $99. The exam review modules are specifically designed to cover the material on which the test is based, addressing key concepts and providing test-taking advice to make sure you are well-prepared on test day.

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Virtualization Top of Mind for Treasury Professionals

The success and effectiveness of those in the treasury profession is dependent on how well they work in an increasingly virtual environment. That’s the conclusion of PwC’s Global Treasury Benchmark Survey 2017, which collected the views of over 220 treasurers and chief financial officers (CFOs) around the world. New complexities in the profession have been created with the outsourcing of back office and payment factory processes and more involvement with local finance teams for exposure reporting.

“With only one-third of people involved in treasury processes reporting into the treasurer, treasury should be seen very much as a process rather than a department,” said Sebastian di Paola, global corporate treasury leader at PwC. “More than ever, the treasurer is becoming responsible for managing the risks the organization is exposed to instead of just the risks as reported to them by operations. Traditional management models may not be as effective as in the past.”

Cash flow forecasting is at the top of the agenda for CFOs and treasurers, with nearly half of respondents ranking it as a priority. Basic issues that need resolution before proper scenario analysis can be enabled, however, include accuracy of data, data mapping and proper tooling.

With cyberattacks and payment fraud regularly making headlines, the report notes that only 19% of treasurers list cybersecurity as a critical concern, though 45% of CFOs mark it as a priority, suggesting a misalignment between agendas.

Also of note is that many treasurers find it challenging to balance budgets to adequately meet compliance requirements. The treasury agenda is dominated by a wide range of high-effort compliance topics such as Know Your Customer and accounting changes. Innovation in digital applications may provide a solution.

“Given the broad responsibilities of treasury, combined with the low number of people involved and flat budgets, integration and automation will generally be the best strategy,” di Paola said.

Financial technology, such as online tools, Enterprise Resource Planning and Treasury Management Systems, is delivering on promises made for the past 20 years, the report states. In the IT landscape, European companies rely on an average of six different applications for their treasury functions while North American companies deploy an average of five different applications. About one-third of all companies interviewed make use of SWIFT for bank connectivity. Treasury is increasingly operating online and uses multiple solutions for its enterprise-wide processes.

“Clearly, treasury has an interesting future ahead,” di Paola said. “More than ever, treasury professionals have to be jacks of all trades to succeed in today’s environment.”


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Another Court Rules Electricity is a 'Good' Entitled to Bankruptcy Code Priority

On Feb. 10, 2017, the U.S. Bankruptcy Court for the District of Colorado, in In re Escalera Resources Co., ruled that a utility supplying electricity to a debtor during the 20 days prior to the bankruptcy filing was entitled to an administrative priority claim under Bankruptcy Code §503(b)(9). This was based on the court’s finding that electricity is a good, which is one of the requirements for §503(b)(9) priority status.

Section 503(b)(9) generally grants an administrative priority claim for the value of all goods a debtor receives within 20 days of the commencement of its bankruptcy case. Notably, this priority claim is unavailable to the provider of “services.” Section 503(b)(9) claimants usually receive full payment of their claims before any distributions are made to general unsecured creditors. Therefore, the question of whether electricity is a “good” or a “service” is critical to electricity providers obtaining §503(b)(9) priority treatment.

This issue has been the subject of conflicting court decisions and considerable debate. The Bankruptcy Code does not define the term “goods” and courts have looked to other sources for an understanding of its meaning in the context of §503(b)(9). The Escalera court found that dictionaries provide a very broad definition of “goods,” including “things that have value, whether tangible or not.” The court also adopted UCC Section 2-105’s definition of goods as (i) things existing and identifiable; (ii) movable at the time of identification; and (iii) capable of being sold. Based on the UCC’s definition of goods and the expert testimony of a physicist at trial, the court concluded that electricity, or “electrical energy” as referred to by the court, is a good that is eligible for §503(b)(9) administrative priority. The court also relied on federal antitrust law, federal labor law, federal energy regulatory law, state tort law, tax law and international treaties, including the United States Convention on the International Sale of Goods, the international version of the UCC, which the court found also confirms that electricity is a good.

The Escalera case is notable because of the extensive expert scientific testimony discussed and analyzed by the court to demonstrate that electricity is movable when it is identified. The lengthy opinion also provides a detailed analysis, and criticisms, of opinions from various courts, since the enactment of §503(b)(9) as a part of the 2005 amendments to the Bankruptcy Code that have arrived at conflicting holdings on whether electricity providers, including utilities, are entitled to §503(b)(9) priority. The issue remains far from settled, but Escalera certainly presents well-reasoned arguments for both debtors and claimants to consider.


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As Retail Risks Grow, E-Commerce Has Its Place, as Do Brick-and-Mortar Shops

The advent of e-commerce has weighed on brick-and-mortar retailers for years, but trade creditors looking out for late payers and heightened liquidity risks in the sector should also consider that the vast majority of purchases are expected to be made in person in the near term.

That’s the conclusion of a recent report by David Silverman, senior director of U.S. Corporates at Fitch Ratings. Still, “The best-protected retailers are those in more insulated categories and those with the cash flow and liquidity to invest in robust omnichannel models,” he concluded.

“Beyond Amazon, much of the e-commerce share gains have been made by chains with a physical presence, like Walmart, Macy’s and Best Buy,” Silverman said. “These companies have been able to leverage their existing brand identity, inventory position and free cash flow generation to develop robust online businesses.”

Profit margins have declined, though, as the cost to operate multiple channels for customers adds up. These costs in turn have increased the industry’s expected default for 2017 to 9% from 1% over the last year, while the retail sector had about $39 billion in outstanding debt as of December 2016, Fitch said.

E-commerce sales growth has grown at an average annual rate of 15% a year over recent years and currently makes up about 20% of total retail sales, excluding categories like automotive, gas, food service and food retail, Silverman said. Growth for this sector is set to continue, but should reach about 30% of total retail sales over the next few years, leaving the remainder to sales in physical locations.

Even if e-commerce grew at a substantially higher rate than expected, issues with distribution infrastructure, such as fulfillment and shipping logistics, will likely limit to some degree the ability for e-commerce to expand, he said. The grocery, large-scale consumer electronics and home improvement categories pose especially problematic logistical challenges.

That doesn’t mean that creditors should expect their customers to open more brick-and-mortar stores as few if any retail categories are expanding this capacity, while department stores in malls and specialty apparel retailers are shrinking their footprints, Fitch said.

Vitamin, sporting goods and pet supply retailers, “… where the largest competitors have actually been adding stores in recent years, may be ripe for a reduction in square footage given e-commerce encroachment,” Silverman said. “We’ve already seen several large sporting goods retailers declare bankruptcy and close stores.”

On the other hand, home improvement, auto parts and food retailers are among a handful of retail categories that appear protected from an e-commerce takeover in the near future, as their customers either prefer to shop in the store or delivering fresh or cold products is a barrier, Silverman said.


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