eNews February 1, 2018

Trade Creditors Report Rebound in January’s CMI

NACM’s Credit Managers’ Index (CMI) rebounded in January after December’s decline, boosted by climbing sales, new credit applications and the amount of credit trade creditors extended to their customers.

The CMI’s combined January score climbed to 55.1 from 54.2 in December. Overall, “the movements have not been all that dramatic and the vast majority of the change has been within the favorable factors,” noted NACM Economist Chris Kuehl, Ph.D. The highest reading in 2017 was 56.6 in November, while the lowest was in May at 53.6—both scores being firmly in expansion territory.

Strong economic data of late has been encouraging, but the longer-term concern of factors such as inflation are likely to impact the CMI going forward. “January was a rebound month, but not an especially strong one,” Kuehl warned, “and it would be premature to assert that an upward trend may be in the offing.”

Many of January’s gains in the favorable category, including sales and new credit applications, helped offset losses in December’s index. Other factors, like dollar amount beyond terms, slipped a few percentage points—a potentially troubling sign that can impact other categories in future CMI readings. “The issue with dollar collection is that there are many reasons for a dip,” Kuehl said. “It can mean that customers are in trouble and are struggling to pay, but it may also mean that companies with leverage are forcing their creditors to essentially be their bank by holding off payment as long as possible.”

Improvements in the manufacturing sector for the most part mirrored those in the overall CMI. Of particular note, rejections of credit applications stayed stable in January—good news when the rate of credit applications has seen gains. Credit managers should watch the dollar amount beyond terms in manufacturing, in light of the January five-point fall. “The fear here is that companies are right on the edge of a problem or are anticipating something and are stretching their creditors again,” Kuehl said. “This has been an issue all year.”

In the service sector portion of the CMI, dollar collections fell slightly, but otherwise remained one of the few categories of potential concern in January for the sector. Gains were reported in multiple categories—from sales and new credit applications to the amount of credit extended and rejections of credit applications. “By all accounts, the retail sector had a very good finish to the year and there has been some momentum in 2018,” Kuehl said.

– Nicholas Stern, managing editor

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Even If You’re Working for Wealthy Clients, Send Notices Early in Oregon

“Construction credit is unique,” said Chris Ring, of NACM’s Secured Transaction Services (STS), in a recent webinar he hosted on preliminary notifications. Not only is it unique, but it can often times be difficult. When construction credit does become difficult and hard to manage, it is important to stay focused on what needs to be done in order to be paid.

No company, large or small, can escape some of the effects changes to a construction project can have. Such is the case that surrounds athletic wear giant Nike in Oregon. Nike and its general contractor, Hoffman Construction, are several years into a huge headquarters expansion in Beaverton. Nike announced the upgrades in April 2013. The total project currently encompasses more than four million square feet, according to a recent article from the Oregonian. There are also hundreds of subcontractors working on the job, which has made life unpleasant for some.

There have been changes to the project design from Nike and Hoffman, and claims of nonpayment from subcontractors. “It’s a big project, we still have issues we’re working through,” said Hoffman CEO Wayne Drinkward, according to the article. “There have been changes, and it’s been a difficult process. We do want to get everyone fairly compensated.” Similar complaints of nonpayment were also raised nearly 30 years ago during the first phase of the Nike headquarters. The project’s cost has not been announced, but it is assumed to be in the hundreds of millions of dollars, according to the Oregonian.

As a supplier, it’s important to not get caught up in the large sum of money a firm may be paying for its state-of-the-art facility. Stay focused on the steps you must complete in order to receive payment from your customer. Oregon’s notice, lien and foreclosure stages have some complexities.

Oregon is a full-price lien state, meaning if documentation (notices, liens, etc.) is filed timely, the owner is subject to paying twice to fulfill supplier payments. Suppliers should submit the notice to owner within eight days of first furnishing, excluding weekends and holidays. However, if this short timeframe slips your mind, all is not lost. The notice of right to a lien can be delivered or mailed at any time during the improvement, but only protects the right to perfect a lien on materials, service or labor provided eight days prior to the notice, according to Oregon lien law. It is important to note that a notice is not required for laborers on commercial projects.

A lien can be filed within 75 days of last furnishing or 75 days from substantial completion of the project, whichever is shorter. A written notice and copy of the lien claim must be mailed to the owner and the mortgagee no later than 20 days after filing the claim. Should a supplier remain unpaid, it can foreclose on a lien. To do this, lien claimants must deliver to the owner and mortgagee a written notice within 10 days before commencement of the suit. Claimants have up to 120 days after the lien is filed to bring suit. No lien will be enforced after two years, but claimants who have extended payment provided, as stated in the lien, have 120 days from the expiration of that extended payment to file suit, according to Oregon statutes.

– Michael Miller, associate editor

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Despite Low SMB Lending, Optimism Notches Decade-Long High

Small business (SMB) loans and total business loans reached double-digit growth rates before the financial crisis hit in 2009. But afterward, SMB loans led the decline. As the U.S. Small Business Administration continues to analyze the post-crisis years, its January 2018 study concluded that SMB lending is operating at “depressed levels,” while total business lending hints at recovery.

Completed by the Florida Atlantic University College of Business faculty, the latest study indicates that total business lending has grown twice as fast as SMB lending since the crisis, the latter of which grew at about 2% per year. These SMB loan originations have declined more at large and troubled banks compared to small and healthy banks, the report states. But the less SMB lending there is, the greater the impact on the economy, said the study’s author and FAU finance professor Rebel A. Cole, Ph.D., in the report.

“Small businesses account for about half of all private sector employment, about half of all net job growth and about half of gross domestic product,” Cole said. “… If small businesses can’t get credit, they don’t grow. … That’s one big reason we’ve had such an anemic recovery since the financial crisis; the small business sector has been constrained.”

But SMBs have not lost hope; instead, it’s quite the opposite. According to a Wells Fargo survey published Jan. 25, SMB optimism reached its highest point so far this quarter, attaining a score that was last achieved more than a decade ago. Based on a week-long survey in early January 2018, the Wells Fargo/Gallup Small Business Index scored 107, up four points from November 2017, and 66% of business owners anticipate strong revenues over the next 12 months.

Furthermore, 77% of business owners expect cash flow to be “very good or somewhat good” in the next year, while 38% anticipate some sort of increase in the amount of money their business allocates for capital spending.

“These trends tell us that small business owners are more positive about the economy, and that optimism is translating into investment in the future of their businesses right now,” said Andy Rowe, Wells Fargo head of Customer Segments, in a release.

Among small business owners’ (SBOs) concerns are taxes; however, a Balboa Capital survey for January showed that half of SBOs are not aware of the latest tax reform and how it will actually impact their companies. For example, 72% of SBOs were not aware that the section 179 tax deduction increased from $500,000 to $1 million in 2018.

“When asked how they will gain a better understanding of the Tax Cuts and Jobs Act, 77% of SBOs said they will talk to an accountant or tax specialist, 19% will conduct research online and 4% will talk to their peers and/or business associates,” the survey showed.

– Andrew Michaels, editorial associate

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Tax Reform Could Hit The Energy Industry Hard

Many sectors will see a positive impact from the recently signed U.S. tax reform, but there are some corporates that will receive no impact or negative results, according to a report from Fitch Ratings. The credit ratings agency broke down tax reform effects into nearly 20 sectors, including chemicals, technology, oil and gas and utilities. Each sector also earned a grade on the tax reform’s effect on credit and cash flow.

Unfortunately, utilities are taking the brunt of the Tax Cuts and Jobs Act, signed Dec. 22, 2017. The sector was the only one to receive a modestly negative credit effect as well as a negative cash flow effect. All other sectors were either given a modestly positive or neutral credit effect and a positive, neutral or mixed cash flow effect from Fitch.

The negative credit implications for regulated utilities and utility holding companies are only for the short-to-medium term. “Over a longer-term perspective, Fitch views tax reform as modestly positive for utilities.”

Moody’s Investors Service believes the tax reform is a credit negative for regulated utilities in the U.S. “because the lower 21% statutory tax rate reduces cash collected from customers,” said a release from the credit ratings agency. Effective Jan. 1, 2018, the corporate rate decreased from 35% to 21%, ultimately a neutral credit effect and a positive cash flow effect for all of corporate America, according to Fitch.

One way utilities are trying to work through this impact is by strategizing with state regulators. “Utilities will work closely with state regulators to try to mitigate the negative impact of tax reform and in some cases they may seek to refine their corporate financial policies,” said Jim Hempstead, a Moody’s managing director, in a release.

Potential regulatory solutions given by Moody’s include: “accelerated cost recovery of certain regulatory assets or future investment; or changes to the equity layer or allowed ROEs in rates.” Possible policy changes to help utilities’ cash flow are: “changes to capitalization, the financing of future investments [and] dividend growth.” Moody’s downgraded rating outlooks for 25 utilities and utility holding companies in January. Fitch estimated utilities will see a 6% reduction in net revenues, which turns out to be about a 15% decline in funds from operations.

– Michael Miller, associate editor

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On-Time Payments to Small Businesses May Help Economic Growth in U.K.

Investment spending in the United Kingdom (U.K.) took a dive after the Brexit Referendum in 2016, clouding the economic outlook amid negotiation uncertainties. Despite the lingering unknowns, Wells Fargo Securities predicts an economic recovery beginning this year, and a slow return to the previous 2% growth rate.

According to a Jan. 26 IHS Global Insight and a Wells Fargo Securities’ report, a recovery was hinted after the fourth quarter’s increase of 0.5% in real GDP. The British economy fell slightly behind 2016’s 1.9% expansion rate in 2017, with increases of 0.6% and 1.3% in the service and manufacturing sectors, respectively. There were decreases in the construction and mining sectors’ respective growth by 1% and 3.9%.

Despite nearly 6% growth of gross fixed capital formation (GFCF) in the first quarter of 2017 on a year-ago basis, the report states this growth slowed to about 2% by the third quarter. Last year’s third quarter also saw investment spending slowdowns in business and public investments, but with intentions rising in the fourth quarter.

“Our forecast looks for the year-over-year rate of real GDP growth in the U.K. to pick up from 1.5% in [2017’s fourth quarter] toward 2% by the end of 2019,” Wells Fargo reported. “This forecast is predicated on the assumption that uncertainties related to Brexit do not weigh unduly on investment spending decisions.”

U.K. and EU negotiators cleared up some uncertainty in December when they agreed to “divorce” terms. Arrangements that currently govern economic and financial transactions between the two parties should remain in place until 2021.

Meanwhile, Simply Business reported that addressing U.K. corporate customers’ late payments to small businesses could bring a significant boost to the economy. In a MarketInvoice survey, respondents reported that 62% of 80,000 invoices issued by small businesses in 2017 were paid late; an average value of nearly 52,000 pounds. Small Business Minister Margot James said in the report that the economy could see a boost of 2.5 billion pounds annually, if these businesses were paid on time.

Most delays were not intentional, but caused by ineffective and inaccurate processes. In an FCIB survey of the U.K. in July 2017, 16% of respondents reported an increase in payment delays—up from 11% in September 2016. The majority of delays were from cash flow issues, followed by billing disputes and customer payment policies.

Respondents reported that “Brexit has hurt some smaller businesses” and affected customers’ margin and cash flow.

To address late invoice payment disputes, the U.K. government appointed Paul Uppal as Small Business Commissioner. Uppal said in Simply Business that the commissioner’s website is a complaint handling service, guiding businesses on how to check, chase and choose the steps to take regarding late payments.

“Success will be a U.K. economic culture where a business that does a job promptly, is paid promptly,” added Mike Cherry, chairman of the Federation of Small Businesses.

– Andrew Michaels, editorial associate

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