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National Trade Credit Report

Small Business Confidence Rises in First Quarter

Expectations for revenue, finances, credit conditions and cash flow all strengthened during the first quarter of 2016, according to the Wells Fargo/Gallup Small Business Index, which rose to 67. That's the highest it has been since last January, but it still falls below quarter-on-quarter figures.

"The current reading is consistent with modest overall economic growth, while a reading of 90 or more would be more consistent with strong growth," Senior Economist Mark Vitner said in an email.

The rise follows three consecutive quarterly drops. Explosive growth in the energy sector largely accounted for "the earlier run-up in small business optimism," Wells Fargo said. "The abrupt reversal in oil prices has adversely impacted many small businesses with operations in the energy sector and likely accounted for a sizable portion of the slide in confidence during 2015."

Participants expressed more confidence about the economic outlook and reported improved cash flow and better finances in general. "The increase suggests that worries about the global economy, which have rattled the financial markets much of this year, are not necessarily carrying over to Main Street," Wells Fargo noted.

Businesses reporting their current financial situation as "very good" or "somewhat good" rose two percentage points to 67 in the first quarter—the best reading of this measure in eight years. And, "Sixty percent of small business owners said that their cash flow over the past 12 months was either 'very good' or 'somewhat good,' which is the highest reading since late 2007," the firm said.

The survey finds owners have exercised expense control and are cautious about expanding operations. Slightly more than half of respondents stated capital spending was about the same year-on-year; a quarter saw an increase; and 21%, a drop. Those business owners reporting accelerating revenues fell to 38%—one percentage point lower than the prior quarter and 11 percentage points off from a year ago.

Most respondents identified attracting customers and finding new business as their greatest challenge, followed by the economy. "While the overall survey indicates improving confidence, big-picture issues like the slowing global economy and recent volatility in the stock market are weighing on the minds of many business owners," Wells Fargo said.

To put the most recent score of 67 in perspective, the highest score recorded was 114 and the lowest score was -28, Wells Fargo analysts explained. Results for the total dataset are based on telephone interviews with 600 small business owners, with the majority having annual sales of $1 million to $3 million.


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Enrich Your Credit Knowledge and Business Relationships

Apply Now for The Graduate School of Credit and Financial Management (GSCFM)

Program Dates: June 20-30, 2016 & June 19-29, 2017

To learn more and apply, click here.

Beware of Data Broad-Brushing in Credit Decisions

Reliable data points are in many ways the lifeblood of making strong credit decisions. Fortunately, technology has rendered data more plentiful and easier to obtain than ever. However, using data superficially, such as only skimming the top line of information, can result in risk and loss of possible sales. The topic of capital spending by U.S. businesses illustrated this point again this week.

Analysts providing forecasts for commercial capital expenditures have been revising their overall outlook for spending levels in 2016 downward. On the surface, that would be bad news for many industries, notably construction and parts suppliers for heavy equipment. However, it appears one industry is the overwhelming drag on capital spending, meaning opportunities are still plentiful and risk remains low in many other sectors. It's a reality that often gets lost in the shuffle.

Citigroup Inc. equity strategist Tobias Levkovich drove this point home in messages to customers this week, according to widespread media reports. Citing a recent Citigroup survey of more than 700 U.S. corporations, Levkovich reportedly predicts a 5.2% annual reduction in capital expenditures in 2016. However, he notes that by removing the worst-performing sector (oil/energy), the forecast flips to a 7.4% increase. That is a massive swing and not particularly shocking considering that the energy sector composes far more of total U.S. capital expenditures, about a third overall, than any other industry.

The point for credit managers may be whether spending in all industries will be down because a dominant sector has skewed the numbers, or if one company in a certain market is high risk simply because other similar companies have a reputation for slow payment. Strong opportunities can be lost when looking only at a top-line, surface-level number without more of a deep-dive, analytical approach.



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Completing the monthly Credit Managers' Index (CMI) survey is easy. Just indicate if something is better, the same or worse than the month before. That's it!

The next survey opens on Monday, March 14. Please sign up today for our monthly email reminder.

Construction Industry Forecast Looks Promising

Bankruptcies in the U.S. construction industry are expected to decline further, but at a slower pace than last year, according to a Feb. 18 report by Atradius.

Market Monitor—Construction—USA reports robust performance for the sector should continue in 2016. Last year, the industry continued the rebound it started in 2012—with increases in employment and reported billings. Unemployment rates in the construction industry are at the lowest levels since 2007. "There is a sense of optimism among construction industry executives that growth will continue for the foreseeable future," the report says.

Residential construction grew about 8% in 2015, and nonresidential construction had its second-best year since 2002—reported spending grew by more than 8% year-on-year.

“A projected decrease in bankruptcies and growth in the construction sector is good news for the U.S. economy,” said Chris Ring, of NACM’s Secured Transaction Services. “However, material suppliers that extend credit to subcontractors need to stay vigilant with their credit policies. Extending credit to subcontractors carries an inordinate amount of risk due to the fact the credit lines extended to subcontractors often exceed their net worth.” For example, if a $50,000 job account credit line is extended to a subcontractor with a net worth of $5,000 and the subcontractor is unwilling or unable to pay, secured lien rights may be the avenue to the debt being paid.

Foreclosures decreased 19% over the past year. According to the report, states such as Maryland, Florida, New Jersey and Nevada still record high delinquency rates, however, and "segments dependent on the energy sector continue to suffer from sharply decreased investments."

"As the commercial and residential development markets strengthen, the construction sector´s financing climate is improving," Atradius said. On average, payments still take 30 to 60 days, but 90-day terms are not uncommon. Small construction businesses typically still pay later and have higher bankruptcy rates and delinquent debt than other industries. "The overall number and the value of late payment notifications we received in 2015 have decreased, as did insolvencies," the firm said. "Given the positive growth prospects for the industry, we expect notifications of late payments to decrease further in H1 [the first half] of 2016."

Atradius has steadily increased its "risk appetite for the industry over the past few years." Caution, however, "is still advised, especially with smaller construction businesses. When available, financial statements are to be reviewed annually with supplemental soft credit information reviewed more frequently," it added.



Manual of Credit and Commercial Laws—Get Your Updated Volumes Now

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.

Volume III: Construction Issues, 2016
Individual state statutes were updated to reflect new laws passed in 2015.

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

New Financial Woes Affect Top U.S. Trading Partner

Credit managers in the United States continue to grant terms to more businesses based in Canada than any other nation, according to surveys conducted by NACM of its members and other reports. While Canada's creditworthiness remains stronger than many countries, red flags are mounting as one of its most important sectors continues to struggle.

Canadian economic challenges were underscored this week with lawmakers commenting that upcoming budget negotiations are foreshadowing a hard fight between keeping spending balanced and continuing or expanding public programs advocated by new leader Justin Trudeau.

The concerns come on the heels of a rare credit downgrade. In its most recent review of overall Canadian risk levels, Coface dropped its rating one notch to an A2 level. Though still the second-best rating by Coface's metrics, the credit insurer left the country on its negative watch list going forward.

Canada has long been viewed as one of the most reliable nations based on the policies of its government and the payment behavior of its businesses. However, its growing dependence on the energy sector in recent years has raised red flags because commodities prices, especially oil, have fallen to historic lows and struggled to rebound amid a global supply glut. This situation is altering how the government and its businesses are approaching 2016 and 2017 in a rapid and significant way, said NACM Economist Chris Kuehl, Ph.D.

"The lack of oil revenue has been severe; and even if there were no increase at all in spending, the budget gap would be widening," Kuehl said. "It will be impossible for the Trudeau Administration to keep the promise of a deficit limit of $10 billion while keeping the other promises made in the campaign."



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