In the News
September 7, 2017
Run Business Normally During Disasters
Safety is No. 1 when expecting a natural disaster. Survival is most important during and after it hits. This does not only pertain to human life but also to business. When a natural disaster such as Hurricane Harvey hits, it is important to remember you are still contractually bound to provide a service or materials. This may be the last item you are thinking about when ensuring relatives and friends are safe, but it is something to consider.
“The key is to follow your normal process that you already have in place,” said Crescent Electric Supply Company Regional Finance Manager Sam Smith. “Times like this can be chaotic.” Unfortunately, the hurricane serves as a reminder that acts of God are “risks that must be effectively managed during the preconstruction and construction phases of every project,” said the Texas Construction Law Blog from Gray Reed & McGraw LLP.
Once the disaster hits, you hope the project is bonded. A payment bond is a guarantee of payment, said James Fullerton, Esq., of Fullerton & Knowles PC in Virginia. If the bond is with a large surety company, it is unlikely to impact the claim from a supplier, he explained. A mechanic’s lien is different because it is much more linked to the value of the property. A natural disaster will likely affect the sale price of a property, which could lead to a deficit in value and defeat lien rights in some states, according to Fullerton.
If materials have already been shipped or are already at the job site, make sure this is documented (proof of delivery). It could be as simple as having pictures of the materials on site, Fullerton said. It is also important to understand when title changes. If your terms are Freight on Board Shipping Point, title of the product transfers to the customer when the material leaves the shipping dock. If the terms are Freight on Board Destination, title changes when the material is delivered to the customer. These freight terms will aid in determining who is responsible for a loss during shipment, said Smith.
The general contractor (GC) normally has the responsibility under his or her general contract to insure the product once it is delivered, said Fullerton. This is where builder’s risk insurance comes into play. It covers losses sustained by GCs and owners.
Force majeure refers to “events that are beyond the control of a contracting party … [and] relieves parties of their contractual duty,” said the law blog. Fullerton reminded suppliers that if they commit to perform by a certain delivery date, they have an absolute obligation to do so or are in a breach of contract, unless they have a force majeure clause saying they are not responsible for delays out of their control. An example of a force majeure clause, according to Fullerton & Knowles’ Construction Law Survival Manual, is as follows:
“Seller shall not be responsible for damage or delay due to strikes, fires, accidents or other causes beyond its reasonable control. Should conditions render unavailable, at reasonable cost, any material or product required in this agreement, Seller may, at its discretion, supply a substitute or suitable value and utility or terminate Seller’s obligation hereunder upon notification to Buyer.”
Call for Proposals
The National Association of Credit Management will hold its 122nd Credit Congress & Exposition in Phoenix, Arizona from June 10-13, 2018. Please click here to fill out the form to submit abstracts, proposed sessions and communications pertaining to participation in the program. Submissions must be made using this form.
Please submit ideas by Sept. 29, 2017. Any proposals that are incomplete or are received after this date will not be considered.
Farm Income Expected to Increase; Credit Conditions Weaken
The U.S. agriculture industry is taking a turn for the better following a three-year slump. Net cash farm income and net farm income have increased, according to the Department of Agriculture’s August forecast. Unfortunately, agriculture credit conditions in the heart of America have not.
Credit conditions “weakened further in the second quarter, but the pace of deterioration has slowed,” according to the second quarter Ag Credit Survey from the Federal Reserve Bank of Kansas City. “I would agree with that,” said Kevin Stinner, CCE, CCRA, credit manager with Crop Production Services. “The deterioration hit in 2016, when there was a weakening of balance sheets.”
Bankers have been more hesitant with farmers over the last two years, Stinner added. “Bankers also were slightly more cautious than a year ago in approving new loan applications,” said the Fed. “In the second quarter, about 17% of bankers reported that they denied at least 10% of all new farm loan requests, up from the previous two years.”
The Federal Reserve Bank of Chicago also reported similar agriculture credit conditions in August for the second quarter of 2017. Non-real-estate farm loan repayment rates were also down in the second quarter, but they were not as low as in the first three months of the year. More than a fifth of respondents to the Chicago Fed survey reported banks required more collateral this year than last.
“This is a negative but has been trending upward since 2016, meaning we are less likely to see defaults,” said University of Illinois Department of Agriculture and Consumer Economics Clinical Assistant Professor Todd Kuethe of the repayment rates. Kuethe also stated interest rates were low but are expected to rise.
Stinner’s greatest concern is seeing an uptick in days sales outstanding from his wholesale customers. Customers can’t pay accounts like before because they don’t have the capital from the bank. They are extending payments until they are able to cash out on crops. This is equivalent to living paycheck to paycheck. “Unfortunately, farmers only get paid once a year—during harvest time.”
The net farm income forecast is at more than $63 billion. It peaked at more than $131 billion in 2013 and has declined every year since. Net cash farm income for 2017 is predicted to be at just over $100 billion, a significant jump from 2016, yet it is still lower than 2011 onward. Farm assets are expected to move upward 4% this year, while farm debt is predicted to increase by 4.4%.
Stinner expects the agriculture economy as a whole will stay like this for another two or three years, but it will slowly get better.
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Larger U.K. Companies Not Paying SMEs on Time
Late payments in the United Kingdom are nothing new, but it is larger corporations that are taking advantage of small- and medium-sized enterprises (SMEs). Just over half of the more than 1,000 SME respondents to the most recent Zurich SME Risk Index said it is larger businesses that are not paying them on time.
“In an environment where cash flow is key to small-business survival, the situation is simply unsustainable,” said Zurich Insurance Head of SME Proposition Paul Tombs in a release. “It is imperative that SME owners receive the support and guidance required and fair access to the funds that they are owed to secure the future of their business.”
SMEs in the U.K. are owed nearly $60 billion in late payments, which is on average more than $21,000. Roughly half of SMEs are waiting up to three months for payment, while 14% of respondents are waiting as long as six months. “It is no surprise that many have experienced cash flow problems or have been forced to enter their overdrafts as a result,” said Tombs.
The U.K. has looked into the issue of late payments by establishing a new initiative to help small businesses. Unfortunately, more than three-fourths of SMEs did not know there was a small business commissioner, and about half said the British government needs to do more to help small businesses. Only 2% of freelancers and micro-business owners believe the commissioner will have an impact on late payments, according to a study from cloud accounting software firm FreeAgent earlier this year.
“The introduction of a champion for small businesses is a great initiative, but the new commissioner must be more than just a figurehead. Large businesses should not be allowed to take advantage of their position in the food chain and remain unaccountable over their responsibility to pay their bills on time,” Tombs said.
If payments were made on time, there would be a $3.2 billion boost to the U.K. economy, while allowing 50,000 more businesses to remain open, according to the Federation of Small Businesses. “For small companies, working with larger organizations and strong brands is an important part of building and running a successful business. But it is a two-way street and large organizations are simply taking too long to pay small suppliers, which are dependent on reliable, regular invoicing to cover their own costs,” Tombs explained.
Earlier this year, the U.K. began requiring large businesses to publish details about the average time it takes to pay supplier invoices. The large companies and LLPs publicly report their payment practices twice a year. “By shining a light on how large businesses pay their smaller suppliers, we want to empower small businesses and drive a real change in payment culture,” said Small Business Minister Margot James in a release last December.
Connect, Network, Learn and Share
Held each fall, the regional conferences are a wonderful opportunity for members to learn and grow by attending educational sessions and network with fellow credit professionals from their respective geographic regions.
Central Region Credit Conference
September 12-13, 2017
St. Louis, MO
Hosted by: NACM Connect
CFDD National Conference
September 21-22, 2017
Hosted by: CFDD
Western Region Credit Conference
October 11-13, 2017
San Diego, CA
Hosted by: San Diego Credit Association
No-Deal Brexit Could Mean Billions of Lost Trade
Though March 2019 may seem far away, Great Britain’s official exit from the European Union is fast approaching and time is growing shorter as negotiations for a final settlement drag on, particularly for trade.
The EU has said that sufficient progress must be made on the financial settlement of Brexit before it will enter talks over a trade deal, Business Insider reported. But David Davis, Britain's secretary of state for the exit from the European Union, said that talks over the size of the "divorce bill" will continue until the end of the Brexit negotiations. An EU summit in October will decide if talks can move on to trade; the next opportunity to start trade talks would probably be a December gathering of leaders, according to Bloomberg.
In its latest Country Report on the U.K. economy, credit insurer Euler Hermes tallied up the cost of Brexit if no trade deal is in place come March 2019. Under such circumstances, the U.K. and EU would be forced to trade under World Trade Organization terms. The U.K. chemicals sector would be the most affected in such a scenario, outside of the services sector. Chemical businesses could be hit with a fall of £5.6 billion.
Machinery and commodities industries would see the next greatest drops in export values, with declines of £5.2 billion and £4.8 billion, respectively. A fall of £3.5 billion is predicted for the automotive industry, though that could be reduced to £1.5 billion if limited free trade agreements are in place. Export losses in the services sector are expected to reach £35.9 billion if there is a no-deal Brexit.
“British industry is enjoying a period of strong growth, but the chief concern among the sector’s leaders is leaving the EU with no transitional deal in place, at the very least,” said Katharina Utermöhl, European economist at Euler Hermes. “For the likes of automotive and chemicals, two of the U.K.’s flagship industries, the prospect of a no-deal Brexit would have significant consequences for export values.”
Uncertainty is beginning to weigh heavily on the manufacturing sector, Utermöhl added. Businesses are postponing investment in new equipment and recruitment. Rising import costs are beginning to tighten margins and there is concern over increasing financial risk in the supply chain.
The average turnover growth of U.K. manufacturers will slow to 3.5% in 2018 before contracting by 1% in 2019, if the U.K. leaves the EU with no trade agreement in place, the report said.
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Auto Sector Performance High While Industry Shifts to Electric
Though the automotive industry has performed well in 2016 and into 2017 so far, potential risks remain, centered on protectionism and limits on free trade from changes in U.S. economic policies. In the short term, the outlook is favorable, with ratings between “good” and “fair” for all countries in Atradius’ latest Market Monitor report, which includes the United States, United Kingdom, Germany, France, Spain and China.
A competitive race is underway with a shift toward hybrid and electric vehicles, requiring larger research and development expenditures from the big players. Small- and medium-size suppliers are weakened by shrinking margins and lower profits. Structurally weaker automotive suppliers may suffer over the next five years from increasing credit risk, with payment delays and business failures as the result.
In this capital-intensive sector, U.S. automotive companies tend to be highly leveraged, Atradius said. Access to funding has improved since the financial crisis of 2008, and the sector has rebounded consistently since the slump triggered by the crisis. Payment duration for the industry in the U.S. averages 30 to 60 days, with satisfying payment behavior during the past two years. Protracted payments, nonpayments and insolvency cases have not increased in 2016 and the first half of 2017. The current insolvency rate is not expected to change. Credit risk assessment is stable for all four factors gauged by the credit insurer. However, the announced Border Tax Adjustment could affect the industry significantly, Atradius said, with a negative effect on sales and damage to margins for manufacturers and suppliers.
In China, payments take an average of 90 to120 days. Nonpayments are not expected to increase in the coming months and insolvencies are low compared to other industries. Business failures in the sector are not expected to increase. Credit risk assessment is stable. Electric and hybrid vehicles are fast-growing segments, though growth this year is driven by the SUV segment.
Solvency and liquidity are robust among German auto manufacturers. Payment behavior has been good over the last two years and the number of nonpayment notifications has not increased over the past year.
In the U.K., payments take 60 days on average. An increase in notifications of nonpayment has occurred in recent months, though the default and insolvency rate is still good. Short term, the outlook is stable. A post-Brexit slowdown impacting demand or insolvencies has not yet appeared, according to Atradius, though increasing concern over trade negotiations among businesses has resulted in a sharp decline in investments in automotive production.
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