CMI Shows Economy Weak, But Headed In Right Direction

The reports on the economy have been mildly encouraging at year's end and now everyone's attention is turned to 2010—the year that is supposed to provide the anticipated recovery. The December Credit Managers' Index (CMI) matched the mood of the economy as a whole-essentially flat, but showing some mild progress. The most important aspect of the report is that the index remained above the 50 mark that separates growth from contraction and even showed a slight gain as it moved from 52.3 to 52.9. "This is hardly the kind of advance that provokes celebration, but given the gloomy assessments made about the 2009 holiday season, the gain is certainly preferable to what had been anticipated," said Chris Kuehl, economist for the National Association of Credit Management (NACM).

The indicators that showed the least movement included sales and new credit applications. "This is to be expected and is consistent with December readings in past years," said Kuehl. "This is the period in which most manufacturers are in semi-hibernation unless the retail community is frantically trying to bolster inventory. That was not the strategy employed by retail this year; stores held the line on inventory and shoppers eventually caved and bought what was available." The retail numbers thus far showed a gain of around 4.5% over last year, but these are still preliminary. What did show up as more positive was an increase in dollar collections and an expansion of credit extended. Both of these data points bode well for the coming year, and the fact that there is still evidence of companies seeking to catch up on their debt is making it a bit easier to advance credit. As has been stated many times and from a variety of sources, the key to the economy's healthy recovery is the rebound in the credit markets. Thus far that recovery has been slow, but there continues to be a willingness to extend new credit and there is some sense that more will become available in the coming year.

Other elements showing promise include the modest improvement in unfavorable factors—disputes, rejection of credit applications and the like are still showing declines. But one unfavorable factor—filings for bankruptcies—has deteriorated significantly. "There have been more bankruptcies and that poses some long-term problems. The growth of bankruptcy activity is not unexpected at this point in a recession, but until these are worked through, there will be hesitation in the market to extend credit to any but the most healthy companies," Kuehl said. "As the economy rebounds, the companies that have been struggling to survive will start to encounter more aggressive competition, which is often the straw that breaks the back of these weakened companies."

The overall conclusion from this month's data is that the economy remains weak, but headed in the right direction. The slow thaw in the credit markets is still taking place and there are signs of expansion in both the manufacturing and service sectors. There has been no sign of explosive growth thus far, but that is consistent with most of the other assessments on the economy. The improvement in 2010 looks more feasible, but there are still no fireworks in the immediate future.

The full CMI report, including graphs, can be found here.



Twas the Night Before the Recession

Season's Greetings from the NACM Staff! Enjoy this timely submission to this year's Credit Words Contest:

Twas the Night Before the Recession
By Tom Muter, CCE

It was the night before the recession and all through the country,
Not a vendor, banker or customer was stirring, all were quite "comfy."
Mortgages were processing, financing easy and no unemployment to bear,
There were hopes that prosperity would always be there.

Credit managers, bankers and brokers were all "smug" in their beds,
While visions of more profits danced in their heads.
The farmers were dancing on ethanol dreams,
The price of corn would surely keep climbing it seems.

While out on Wall Street, there arose such a clatter,
And then Main Street suddenly joined in the chatter.
I hung to the radio, watched the TV; away to the Internet I flew like a flash,
Oh no! Oh no! My IRA and 401K had taken a crash.

Now something was abreast, and not just new fallen snow,
Is it the luster of mid-day...No! The market is really low!
When what to my wondering eyes should appear?
The Recession has come, it is definitely here!

But what were the drivers that brought it so quick?
This is not the work of "W" or his Vice President Dick.
More rapid than eagles its courses they came,
There was no whistling or shouting when they called them by name.

Now Freddie and Fannie, now Chrysler and AIG,
Now Merrill Lynch and GMC, and maybe G.E!
To the bottom the interest rates they did fall,
Now crash away! Crash away! Crash away all!

Mortgages were falling like lead balloons fly.
And more ARMs are going to reset and die.
So up to the Central Bank all our hopes flew.
Please, Please Mr. Bernanke what can you do!

And then in a twinkling, the election was on,
We need change! We need change! Was the cry of the throngs.
As I drew in my breath, and was turning around,
Washington was all a bustle: Obama's in town.

He was dressed as casual as casual could be,
He promised he was no different than you and me.
Many believed America would once again have an advantage,
What we need is an Economic Stimulus Package!

A bundle of changes he flung on our backs,
One of the promises...troops out of Iraq.
His eyes how they twinkled; his campaign was so merry,
A 1.4 trillion-dollar budget, oh, how scary, how scary.

How much credit to extend, it's so hard to know,
Which way, which way? Will the economy grow?
Sales are down wherever you go,
The season is coming when it will snow, snow and snow.

Credit managers everywhere are grinding their teeth,
Bankruptcies are up, it looks like more grief.
Profits are slipping 'cause revenues are down,
Should we be more liberal or shut the marginal accounts down?

The sales manager is griping; "Inventories are too low,"
I laughed when I saw him within myself.
Twas the night before the recession, the CFO arrived at my desk,
"What receipts are coming? Give me your best guess."

I cranked out the numbers with all I was worth,
While he sulked at his desk, then turned with a jerk.
"I'm drawing on the credit line to make cash flow,
But what will we do when it begins to snow?"

"Don't worry," he said. "Everything will be all right,
We'll hunker down with all of our might."
He sprang from the chair and let out a cry,
He leaned over close and looked me in the eye.

"The recession is here," he quietly whispered,
"We'll have to work harder, be smarter and be crisper!
And I heard him exclaim, ‘ere he walked out of sight,
"Merry Christmas to you...Have a good night."

In these uncertain times, it is extremely important to get with management, owners and directors to determine if the goals and strategies of the company have been or need to be restated. The goals and strategies are the most important part of the puzzle. They are the most determining factor on setting credit policy and procedures of the company in any economy, but especially in this economic climate.
If the goals and strategies of the company have not changed in this recession, then it is important to continue with the basic "tried and true" credit principles that have lasted over the years in all business climates and cycles:

  • Investigate
  • Process information
  • Analyze the information carefully
  • Monitor the accounts closely
  • Communicate often with customers internally and externally
  • React to changes

The second most important piece of the puzzle in these unstable economic times is to document, document and document. With the many pressures on the credit professional today, from sales, owners, management and customers, it is easy to get pulled into a bad credit decision. Make the correct credit decision based on solid credit management principles and the facts you have from your investigation, then remember to document your position in case others override your decision.
Revisit strategies and goals at regular intervals predetermined by owners and management.

Happy Christmas to all and to all a good night. Have a safe and happy holiday.

Dealing With a Troubled Company: No Need to Cry the Blues

"We're in a time of economic uncertainty," said Bruce Nathan, Esq. "The recession is over, the economy is projected to grow, but there's still a lot of uncertainty as to whether or not we'll have a double dip."

Figures from the Department of Commerce have signaled the official end to what has been referred to as the "Great Recession," but, as Nathan noted, business conditions and lending have remained so stubborn that a second dip into economic trouble doesn't seem out of the question for many companies. "The commercial real estate market may fall," he added. "Bank lending has dropped 28% in the third quarter of 2009 alone and that just continues the credit crunch that started in the fall of 2008."

In addition to tightened lending, bankruptcies have also experienced meteoric increases, with Chapter 11 filings rising 68% over the last year.

This being the case, companies have had to take even greater care to protect themselves in the increasingly likely incident of a customer's bankruptcy. In his most recent NACM-sponsored teleconference, entitled "Dealing With a Troubled Company: No Need to Cry the Blues!," Nathan offered a wealth of legal defenses and practices to help creditors stay safe when their customers become risky.

One of the more important things to remember in a bankruptcy proceeding is where each type of creditor falls in the pecking order. "Your claims are segmented based on a hierarchical distribution in the Bankruptcy Code," said Nathan. "The secured creditors are on top, whether they're the lender or secured lenders of a purchase money security interest, or creditors with state law lien rights, etc."

Unsecured creditors tend to be on the bottom, a position that carries many potential risks, despite the fact that Chapter 11 debtors will often attempt to rely on these creditors to see them through the proceedings and further extend credit. "Any of you being asked to extend credit in the Chapter 11 are told ‘don't worry, you have an administrative priority claim,'" said Nathan, noting that to get the trade credit, debtors will assure their suppliers that any credit given to them will eventually be repaid. "The problem is there are other categories of administrative claims and there is a risk that after the secured creditors are paid in full there may not be enough to pay the admin claims." Citing the bankruptcy of Ames Department Stores, Inc. earlier in the decade, Nathan noted that there aren't necessarily any guarantees despite what a debtor might promise. "The Ames Case still hasn't paid their administrative claims after something like 8 years," he said.

Nathan went on to discuss how to use specific defenses and other security devices to greatly increase a company's chance of payment on its claims.

To learn more about NACM's teleconference series, or to register, click here. A replay of this teleconference is available from Tracey Flaesch at (410)740-5560 or traceyf@nacm.org.

Jacob Barron, NACM staff writer

Bills Introduced to Aid Small Business Lending, Exporting

A trio of bills recently introduced in the Senate would aim to enhance small business participation in international trade and increase the sector's access to working capital.

The Small Business Trade Representation Act (S. 2861) would permanently establish an assistant U.S. trade representative for small businesses, in order to give the sector a more pronounced voice in trade policy considerations, and the Small Business Export Enhancement and International Trade Act (S. 2862) would establish an associate administrator at the Small Business Administration (SBA) for international trade, increase the number of SBA export finance specialists and raise the maximum amount of an international trade loan or export working capital program loan from $2 million to $5 million.
On the domestic side, the Small Business Job Creation and Access to Capital Act of 2009 (S. 2869) would increase the small business loan limit to as high as $5.5 million and extend the fee eliminations and increased guarantee set to expire under the Recovery Act for another year.

All three bills were jointly introduced by Senate Committee on Small Business and Entrepreneurship leaders Mary Landrieu (D-LA) and Olympia Snowe (R-ME).

"Our nation's small businesses have created 64% of all new jobs in the last fifteen years, yet in the last year nearly 85% of the jobs lost have come from small businesses. Now that we have stabilized Wall Street, it is time to jump-start Main Street, and that begins with implementing the vital provisions within this bill," said Landrieu, referring to the Small Business Job Creation and Access to Capital Act. "The loan limit increase could boost SBA lending by $5 billion next year alone, while the refinancing component of the bill could help save 60,000 jobs. To ensure small businesses are able to grow and continue being the job creators they have historically been, we must make these needed changes." The refinancing component mentioned by Landrieu is a provision in the bill that would allow businesses to refinance short-term commercial real estate debt into long-term fixed rate loans through the SBA's 504 loan program, its second most-popular, behind the 7(a) program.

As exports and international trade have been a fairly consistent bright spot in an otherwise grim economy, Landrieu and Snowe have been eager to get smaller firms involved in the global market, and aim to do so with both the trade representation and export enhancement acts. "Small businesses face particular challenges in exporting, and the bills that Chair Landrieu and I have introduced will take great strides toward ensuring their greater participation in international trade," said Snowe. "By improving and bolstering critical Small Business Administration (SBA) lending and assistance programs, we will be giving our nation's entrepreneurs a helping hand in surviving, diversifying and competing effectively in the international marketplace.

The more domestically-oriented of the three bills, S. 2869, has already garnered a uniformly-democratic group of 12 cosponsors in addition to Landrieu and Snowe.

Jacob Barron, NACM staff writer

Trade Finance in Crisis

While the causes of the global credit crisis have been pinpointed and stimulus actions taken by countries all over the world, credit, lending and especially trade finance have remained tight. Banks and insurers are still leery of financing business transactions, both domestically and internationally, and those that have the taste for it often require onerous fees to stem their potential exposure.

"Banks are requiring collateral now, the fees are much higher, especially if you're not rated, or noninvestment grade," said David Gustin, managing partner at Global Business Intelligence Corp. Gustin recently led an FCIB teleconference, entitled "Trade Finance In Crisis," in which he illuminated the current state of the global financing market for a rapt group of attendees who hailed from 12 different countries around the globe.

Contrary to just tightened credit policies, Gustin noted that regulation had taken its toll on the banking sector and its willingness to lend. "Banks are not lending because of Basel II capital issues and because they've tightened their credit policies," he noted. "Basel II sucks out what capital is available to support trade and creates a capacity issue." The Basel II regulations dictate how much capital banks need to set aside to protect themselves against various types of risk. Money kept for this purpose is geared toward safeguarding the institution from insolvency and meeting the Basel II requirements means banks have to use their capital for compliance rather than for lending.

The outlook for the future of trade finance is relatively bright, but the details of the current situation don't necessarily show any major form of relief coming in the near-term. "While the outlook for the credit markets is showing some improvement, credit availability remains tight," said Gustin. "Companies have borrowed more from the bond market than from the banks and the focus has been to lock in cheap long-term funding." In addition to increased reliance on bonds, underwriting standards at banks have also risen across the board, and banks have found that they have very little incentive to lend to a sector now struggling with a lack of creditworthy members.

Creditors tired with the world's thrifty banks have turned both to the bond market and to the insurance market, which is also facing major constraints. Gustin noted that insurers' underwriting capacity for trade credit and political risk has been significantly limited, with a loss ratio exceeding 100% for multi-buyer insurance policies and 200% for the single risk structured trade credit market. Rate increases have also bedeviled policies with poor loss ratios, as Gustin noted that struggling policyholders can see their rates triple should their provider deem it necessary.

For more from David Gustin, look for his article in the January 2010 issue of Business Credit magazine. For more on FCIB and their educational programs, visit their website at www.fcibglobal.com.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

SBA’s Lender Oversight Deemed Inadequate

The U.S. Small Business Administration (SBA) is learning a lesson in sound credit management in the wake of a Government Accountability Office (GAO) report that illuminated the agency's inadequate lender oversight.

The lenders can be viewed as the SBA's customers; they receive guaranteed loan portfolios, which basically amount to money they can distribute in the form of loans to small businesses. While the report noted that the administration had made improvements to its lender oversight, the GAO's research showed that the SBA hadn't been following common industry standards when it came to validating its Loan and Lender Monitoring System (L/LMS). The SBA relies on the system to judge the health of the lenders, but without regular validation, the system is consistently behind economic and industry changes, making it a far more ineffective judge of lender worthiness.

Although the agency uses the system to focus their off-site monitoring of lenders, it does not use it to target risky lenders for on-site reviews or to determine the scope of those reviews, unlike fellow regulators like the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve bank. "SBA uses its risk rating system to monitor lenders and portfolio trends but does not rely on it to target the riskiest 7(a) and 504 lenders for on-site review," said the report. The 7(a) and 504 programs that it refers to are the agency's two largest small business loan programs.

"Instead, SBA focuses on what it thinks is the most important risk indicator-portfolio size-and targets for review those lenders with the largest SBA-guaranteed loan portfolios-that is, 7(a) lenders with at least $10 million in their guaranteed loan portfolio and 504 lenders with balances of at least $30 million," said the GAO. "Of the 477 reviews SBA conducted from 2005 through 2008, 380 (80%) were of large lenders that, based on its lender risk rating system, posed limited risk to SBA. The remaining 97 reviews (20%) were of lenders that posed significant risk to the agency."

As a result of the SBA's decision to rely on portfolio size, rather than risk, 97% of established high-risk lenders did not receive on-site reviews, putting a great deal of the SBA's potential credit at risk. Furthermore, the reviews conducted were not scaled according to potential risk, nor did they even include an assessment of the lenders' credit decisions.

"Just as it is important to ensure small businesses have access to capital, we must ensure that lender oversight promotes proper underwriting, establishes effective standards and safeguards for SBA loans while maintaining reasonable and proportional fees assessed to the lenders for this oversight," said Senator Mary Landrieu (D-LA), chair of the Senate Committee on Small Business and Entrepreneurship. "Ultimately, robust oversight of the SBA loan programs will enhance the ability of the SBA to complete their mission of supporting our nation's small businesses."

Landrieu, along with committee ranking member Olympia Snowe (R-ME), originally asked the GAO to conduct the report in June 2008, following an Inspector General's report that revealed the SBA's oversight of merely four lenders had created a loss of $329 million for the agency's 7(a) loan program, which is its largest. Snowe noted that she would re-introduce legislation, cosponsored by Landrieu, aimed at improving SBA lender oversight.

A full copy of the GAO's report can be found here.

Jacob Barron, NACM staff writer

House Passes Financial Reform Bill, SOX Exemption Included

The House of Representatives recently approved sweeping financial legislation that would exempt small businesses from having to comply with a controversial portion of the Sarbanes-Oxley Act (SOX), in addition to addressing a strikingly broad array of financial regulatory issues.

H.R. 4173, dubbed the Wall Street Reform and Consumer Protection Act of 2009, passed strictly along party lines by 223-202, with no republicans voting for the bill and 27 democrats voting against. The bill's most controversial provisions create a new agency, the Consumer Financial Protection Agency (CFPA), that will regulate consumer bank transactions. The legislation also increases oversight on the nation's largest banks, including imposing stricter capital requirements, and authorizes the government to dismantle firms that present a larger systemic risk to the nation's economy, combating the existence of firms that are "too big to fail."

Tucked in the legislation was language that exempts small businesses from compliance with SOX Section 404. The amendment faced a late challenge by prominent democrats, but was ultimately included in the final version of the approved legislation.

Earlier this year, the U.S. Securities and Exchange Commission (SEC) said that firms with a market capitalization below $75 million would have to comply with Section 404's auditor attestation requirement starting in June 2010. Specifically, SOX 404 requires an independent third party audit of a company's internal controls over financial reporting and already applies to firms larger than $75 million.

The amendment was originally introduced by New Jersey representatives Scott Garrett (R) and John Adler (D). Other provisions address oversight in the nation's derivatives market and increase transparency in the credit rating industry.

The bill now heads to the Senate where action isn't expected until after the New Year.

Jacob Barron, NACM staff writer

Getting Paid on Your Delinquent Account

While many companies are facing a recessionary shortage of demand for their products and services, their employees are simultaneously weathering higher demands for better performance from their superiors.

Customers may be absent and payment may be harder to collect than it ever has been before, but companies still continue to ask much of their salespeople and credit professionals. And more than just trying to maintain, many employees are working to improve their company and their department's performance, even as they face one of history's toughest business environments. "What we're saying is ‘how can we in the credit department improve the quality of the accounts receivable (A/R)?'" asked Scott Blakeley, Esq. of Blakeley & Blakeley LLP. "Their responsibility in this recession is to find a way to improve the quality or collectability of their A/R on the one hand, yet on the other hand they have customers pushing invoices past what the credit professional originally evaluated."

"We find then that the role of the credit professional instead is a relationship builder at the highest level," he added.

As customer payment has become ever more elusive and infrequent due to tightened credit nationwide, delinquencies have kept pace and creditors have been forced to grasp to keep the customers they have, let alone find new ones. "We don't have the customer base that we did two years ago where we could hold the order and call on other companies," said Blakeley. Maintaining a relationship with customers who have failed to live up to their expectations can be a difficult process however, and Blakeley, in a recent NACM-sponsored teleconference entitled "Getting Paid on Your Delinquent Account," illuminated the many in-court and out-of-court options available to creditors and debtors looking to work out payment and keep their trade relationship intact.

The first step for creditors is to determine whether or not their account is actually delinquent. The simplest way to do this is to look at the original invoice. "The easiest measure is the terms that we established at the evaluation stage," said Blakeley. However, a less quantitative measure can often more firmly establish a customer as delinquent or not. "Where the rub can be is the customers' efforts to extend out those terms through excuses," he added.

Once an account is considered delinquent, many creditors can wind up with legal exposure if they become too accommodating of the customer's new, later payment schedule. "We need to be mindful that accommodating that customer's cash flow may result in a dispute with the customer of course of dealings," said Blakeley. "If we're committed 45 day terms but routinely accept payment outside of those, the customer may say that course of dealings controls the sale." Under the Uniform Commercial Code (UCC), a debtor can cite the course of dealings defense to keep from paying a creditor what's owed.

Blakeley also discussed a number of other pitfalls for creditors to avoid, as well as different ways to ensure a customer's payment before things wind up heading south.

A replay of this teleconference is available by contacting Tracey Flaesch at (410)740-5560 or traceyf@nacm.org. For more information on NACM's teleconference series, or to register, click here.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National




SOX Proponents Raise Concerns Ahead of Congressional, Judicial Challenges

The Center for Audit Quality (CAQ) recently came out in defense of the Sarbanes-Oxley Act (SOX), urging Congress not to exempt the nation's small businesses from the Act's controversial reporting requirements.

In a letter to the Senate Banking Committee, the CAQ urged lawmakers not to exclude smaller firms from SOX's reach, noting that doing so would undermine much-needed investor confidence. "If, as proposed by some members of the House of Representatives, Congress agrees to a permanent waiver for small companies, there may be little independent scrutiny of financial reporting safeguards at an estimated 6,000 small companies," said CAQ Executive Director Cindy Fornelli. "Reporting under Section 404 provides investors with meaningful information regarding a company's internal control over financial reporting (ICFR)."

A bill recently passed by the House included an amendment that would permanently exempt small businesses from SOX Section 404, which already applies to larger companies and requires an external auditor to certify that a business' internal controls are in place and effective. Without an exemption, or yet another delay, small businesses would be forced to comply with the provision starting in June 2010.

The CAQ also noted that, should an exemption be granted, financial statement revisions could increase drastically in a small business sector that already accounts for more than half of all financial restatements. "Recent research noted that restatement rates for companies that disclosed to investors that their ICFR was effective was 46% higher for smaller companies that did not have an independent audit of ICFR as compared to companies that were required to have an independent audit of ICFR," Fornelli added.

Supporters of the amendment, namely author Scott Garrett (R-NJ), argue that small businesses are already facing tremendous financial difficulties and that now isn't the time to further burden them with what some consider SOX's onerous reporting requirements.

In addition to the congressional challenges facing SOX, the Supreme Court hears arguments today regarding the legislation's constitutionality. The ruling in Free Enterprise Fund and Beckstead and Watts, LLP v. Public Company Accounting Oversight Board (PCAOB) will decide whether the SOX-created and Securities and Exchange Commission-monitored PCAOB violates the separation of powers and appointments clauses of the constitution.

Stay tuned to NACM's Credit Real-Time Blog for updates.

Jacob Barron, NACM staff writer


Surviving Conflict

The day-to-day business of a credit professional, especially in today's economic environment, can present a number of potential conflicts.

Yet, when it comes to dealing with them, many people are lost, giving the concept of conflict management far too little thought and, subsequently, making the situation worse before making it better. Others choose to ignore the conflict altogether, acting as though they can will it away by not recognizing it. "The word conflict brings chills down the spine of many people. We do everything we can to avoid it but it's something that's a part of life," said Toni Drake, CCE. "It's nothing to be afraid of and it isn't always a bad thing."

Drake, in a recent NACM-sponsored teleconference entitled "How to Manage Conflict...And Survive it!," offered her uniquely credit-centric look at how to handle conflicts both outside of and within an organization. "When you have conflict, you're thinking about conflict with your customer or your debtor, maybe with the sales department" said Drake, who drew on her own experience as a credit professional to help attendees. "If you've got conflicts with this other department, you can cease to trust them if the conflict isn't handled correctly and that can create secrets."

Poorly managed conflict, Drake noted, can have an altogether negative effect on in-company interactions and ultimately sack a company's overall goal. "We may withhold information and this breaks down the communication," she said.

On the other hand, well managed conflict can be extremely productive and create a far more collegial, successful work environment. "Conflict can bring about new ways to problem solve, it helps us to think outside the box and it helps us to be creative," she said. "A lot of us have pat answers in what we do, but a lot of times we don't think beyond that or create new ways to solve problems. Conflict gives us an incentive for growth."

Drake also discussed other benefits of properly managed conflicts, as well as some tips of her own for how to effectively reach a compromise with other parties in a disagreement.
For a replay of this teleconference, contact Tracey Flaesch at NACM at (410)740-5560 or at traceyf@nacm.org. To learn more about NACM's teleconference series, click here.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.


First Business Credit of 2010 Offers Look Ahead, New Opportunities

NACM's Business Credit magazine is kicking off the new decade with a host of articles to help credit professionals prepare for the coming year, as well as a look at the association itself and its newest chairman, Phyllis Truitt, CCE, who takes the helm next month.

Truitt is a familiar face at NACM events, both local and national, and her lengthy experience as a credit executive and NACM board member has given her a unique vision for the association and its members. Get to know Phyllis by reading her profile in the January 2010 issue!

As for the features, the January edition of Business Credit includes a thorough and insightful wrap-up of the November 2009 survey question, offered monthly at www.nacm.org. The November question asked participants what their greatest concern for 2010 was, and while the economy is still quite clearly weighing on the minds of the B2B credit sector, several other concerns have moved to the forefront. Check the issue's domestic feature for a full summary, complete with participant comments and unique analysis.

Internationally, the January 2010 feature focuses on the many export opportunities offered to small businesses in the currently convalescing economy. Many governmental entities have sprung into action to try to get the nation's struggling smaller firms into international markets and there's no better place for new business than overseas, where demand is still booming in many developing markets. This article discusses how agencies have torn down the barriers keeping small businesses from exporting and how struggling companies can make the most of their money by looking outside the U.S.

Other articles in the upcoming issue deal with new legal decisions out of the Delaware courts, contracting trends on Capitol Hill and a wealth of other relevant and timely topics.

Not a subscriber? Click here to get started today!

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.



Growth in Sales and Other Favorable Factors Nudge November CMI Further Into Expansion

Black Friday has come and gone and the results are mixed. On the one hand there was much more traffic in the stores than last year, but the average consumer has been spending a bit less and more cautiously. The same pattern seems to have emerged in the business community, as indicated by the shifts in the Credit Managers' Index (CMI). For the first time in some months, the reports suggest that sales are rising at a pretty rapid clip. The index noted a jump from 51.1 to 55. Given that last year's number was at 34.4, this is pretty encouraging news heading into the depths of the holiday season. There was also some positive movement in terms of new credit applications and dollar collections. The new applications number went from 52.7 to 55.4, much improved from the 45.2 notched in November 2008. Dollar collections had been pretty steady for the past several months, ranging from 50 in November 2008 to 53.4 in September this year. For two months in a row that level has improved more dramatically-54.7 in October and 55.8 in November. All of these improvements in the positive factors are encouraging.

In general there was improvement in the non-favorable category as well, but the pace has slowed from what it was in October and September. There have been fewer disputes and fewer rejections of credit applications and a marked reduction of accounts placed for collection. The data suggest that creditors are still working to get their financial affairs in order in anticipation of better times ahead. The pattern in the past has shown that creditors start to work toward catching up a few months before they anticipate getting back into higher levels of production. To accomplish this, they need to more readily engage their suppliers.

November marks the second month in a row that the CMI crested 50, mirroring the trends identified in the Purchasing Managers' Index. The growth in credit availability remains a major concern in the business community as a whole and there are still some strong headwinds as far as the financial sector is concerned, but there is some renewed activity going into the Christmas season and that is a good sign.

NACM's economist, Dr. Chris Kuehl, indicated that this latest set of survey results reinforces some of the assessments that have been made about the future. "As sales increase and credit applications are granted, there is a sense that more business is optimistic about the coming year than not. It was revealed in a recent KPMG survey that business confidence is improving and the CMI provides a clue as to why. Access to credit remains a limiting factor for many businesses, but there is evidence of the logjam loosening. In conversations with credit managers and through the comments sent along with the survey, there is a sense that there are growing opportunities for the best customers and a willingness to get engaged with those showing a plan and some progress."

A full report can be found here.

Developers and Lenders at a Standoff as Payments Drag

The real estate sector was a boon for lenders in the tender years of the new millennium. Banks and investors were dumping billions of dollars into large scale projects and enjoying significant returns. Then the real estate market collapsed. The devastation caused a worldwide economic downturn and plunged the United States and Europe into the throes of recession.

The snapback of a rocked financial and real estate sector has been a clamp down on lending and a stall on new development. A more serious problem on the horizon is the maturity of loans doled out during those years when the market was hopping, which, now, as the financial climate in the country has cooled, are expected to lead to a massive series of defaults.

“The construction loan side is one of those things where nobody really has a good handle on the details and the pain and implications of it,” said Mike Kelly, president and co-founder, Caldera Asset Management. “Based upon the values on which the loans were given—where the prices and where the world was two to three years ago— all these loans are coming up on their maturity periods without any home.”

Most construction loans have a 3-year term with two one-year built-in extensions. Loans that originated in 2005 have already expired and the developers are currently staying afloat by the extensions. And with each passing month, the number of those loans extensions increases.

“When most people were building, they were trending rents, which has not occurred. Rents have actually gone down and underwriting standards have gone up,” explained Kelly. Added to the situation is that permanent loan holders, like commercial mortgage-backed securities (CMBS), have been wiped out, leaving few venues for this debt to go or few parties that want to take a risk holding such debt. “You’re going to have a lot of maturity defaults to start coming in the next six months on for the next 2-3 years as all these deals mature,” Kelly said. “They’ve already had their one extension or two. But this time it’s not going to help them.”

According to Caldera, hard hit sectors, like apartment construction lenders, are facing losses of $22 billion as asset values have tumbled downward 25% during the last couple years. That loss amount represents 17% of total loan balances. Because of the real estate market bubble burst, investors who anted up the 10% equity during the 2005 boom have already lost that investment. Apartment construction loans from 2005 to 2008 totaled roughly $137 billion. Equity represented approximately 10% of that sum, around $12.5 billion, while construction debt accounted for another $125 billion outstanding. That original equity has been evaporated as the total value of those projects has fallen to $103 billion this year.

Furthermore, Kelly believes that the days of that 80-90% loan-to-value (LTV) ratio that was available in 2005 are gone for the foreseeable future. Lenders today want to have a lot less exposure, with around 65% LTV. That means if the original developers wanted to refinance those completed apartment assets, they would need to come up with $36 billion in new equity.

The current economic situations forces banks into a difficult position. New loans aren’t problematic—conditions now are very optimal for lending. It’s that the payments on existing loans have slowed considerably and are not being repaid at the rate the banks had originally anticipated. This creates a clog where, even though conditions are ripe for banks to fund new projects, the exposure they already have on their books and the loans they are waiting to receive payment on won’t let them supply more capacity to the marketplace.

“Apartments were the belle of the ball on the investment side,” said Kelly of the boon years between 2005 and 2008. “But those days are gone. If the money is not being recycled through, the bank isn’t going to add to its exposure in an asset class where there is a lot of uncertainty.”

Now, the near-term future for the construction market is going to be smaller deals in “bulletproof” markets like Washington, D.C. The days of a $100 million project backed by a single lender are done. But for developers, another tough obstacle to overcome is that banks that lent heavily to the construction sector, like Washington Mutual, are also gone.

“You had a lot of these guys that were aggressive who aren’t there anymore,” explained Kelly. “Now, banks don’t want to put that much exposure into the sector or with an individual developer or with an individual project. That means you’re going to have a lot more equity and the deals are going to get tighter and tighter and tighter because your equity wants a higher return.”

Even though Kelly believes there is plenty of money on the sidelines waiting to be put into play, he doesn’t think there’s enough upside right now for anybody to leap into the game. “The pain can sort of be mitigated. However, nobody has a lot of real incentive to jump in front of the train. Not from the lenders’ standpoint, from the FDIC’s standpoint, from the borrowers’ standpoint or the buyers’ standpoint,” Kelly stated. “What that is going to do is kill new development going forward because there’s not going to be any capacity. So, the developers are going to start taking hits and laying people off and it’s just going to be a vicious cycle.”

Matthew Carr, NACM staff writer. Follwo us on Twitter @NACM_National


Manufacturing Return Unseats Recession

Is the recession truly over? Most of the evidence says "yes," although there will be problems to contend with for the next few months. In many ways, the best way to characterize the situation is to say that the beatings on the economy have stopped, but that every bone has been broken. The recovery started slowly in the last few months and will continue to progress slowly and not without some reversals from time to time, but news of the last few days of October has been especially solid with the third quarter GDP numbers stronger than anticipated-3.5% growth after four quarters in the negative category. Even more significant from the perspective of credit availability is that the CMI has broken past the 50 neutral barrier for the first time in over a year. The index started in that direction in September when the service side of the equation improved to 50.1, but manufacturing still lagged, finishing at 49.6. Now both sectors are showing expansion and the CMI as a whole is pointing toward growth.

The significance of these findings is hard to overestimate given the kind of analysis taking place around the improved GDP numbers. The dominant theme is that four factors were at work with third quarter GDP: the impact of the stimulus package, the "Cash for Clunkers" program, the $8,000 new home-buyer credit and the Fed keeping interest rates low. These are all important factors, but are not the only ones at work-the CMI data makes this pretty clear. The private sector is also engaging in this economic comeback with the CMI tracking this activity in both the service and manufacturing sectors.

This month, progress was made in both the positive and negative indicators in contrast to the numbers in September where the majority of the progress was in the negative indicators. NACM's Economic Analyst Dr. Chris Kuehl said that there were two streams of good news, "Not only has there been some expansion in terms of credit availability, but there continues to be evidence that companies are catching up on their debt. Over the last few weeks, I have spoken at a several NACM events and have heard similar stories at each. Companies that had been behind in their obligations are catching up in anticipation of further growth and the need to ask for more credit in the future. By the same token, comments by attendees suggest that there is more money starting to filter into the system, making credit more accessible than it has been in some time."

The CMI data show a significant improvement in dollar collections and that the amount of credit extended is higher than it has been in well over a year. There were also far fewer accounts placed for collection and fewer applications rejected. This latter point is important to note as one would expect more rejections in a much more restrictive credit environment. This means that many of the applicants are more creditworthy than they have been in past months.

Manufacturing Sector
The manufacturing sector finally crested the 50 mark this month, a long-awaited development and one that is consistent with other economic data coming from the industrial community as a whole. "After falling just short of the growth mark in September at 49.6, manufacturing numbers are now past the neutral zone and are standing at 51.2," said Kuehl. "This is a pretty sharp gain given the slow development over the last several months. While it took from July to September to move 1.3 points, it only took one month for the sector to move 1.6 points to reach October's numbers. This is rapid expansion by any measure."

As noted in September's report, the data has been building to this point. In past years, when it appeared that creditors were starting to see their clients catch up, there was a delay of about a month or two before the manufacturers started to see more business. This pattern is nearly always the same. The companies that are in financial distress to some degree or another slow down payments and try to stretch dollars, even to the point of irritating their suppliers. Now that growth is nearing, these same manufacturers are gearing up by catching up. They are starting to bring in more raw materials, which is the predecessor to more production. That this is happening at a national level is represented by the rise in GDP numbers and the improvement in other indexes such as the Purchasing Managers Index (PMI) issued by the Institute of Supply Management. Right now the CMI and PMI are mirroring each other and that is generally a good sign for the manufacturing sector.
There remains a considerable way to go before the entire sector is nearly healthy, but the trends are moving in the right direction. From this point on, the critical factor will be consumer demand and the improvements that show up in trade.

Service Sector
The big gains in September were in the service sector as the index moved from 48.2 to 50.1. This pattern was not repeated in October even though the sector still maintained some momentum, moving from 50.1 to 50.9. The manufacturing sector has rapidly jumped ahead of service in the race toward growth and that may reflect some retail reticence about the coming holiday season. There is still a sense that inventories will be held to lower-than-usual levels. This is affecting sales and the number of credit applications and also putting less pressure on the part of retailers to catch up with their suppliers.

Kuehl noted that "there seems to be some trepidation in the health care sector as well. This industry is booming, but there is also concern that changes from the as-yet-defined health care plan will impact them and many are in a state of some confusion. Disputes have been up, which may suggest that this is more about a fear of the future than of current conditions."
The good news from the service side is that there is still growth despite the challenges, providing optimism that the November numbers will be more impressive.

October 2009 vs. October 2008
"The year-over-year comparison is finally showing a clear trend toward growth," said Kuehl. The index holds that anything under 50 indicates contraction and that numbers over 50 are growth indicators. "The climb has been steep and awkward and the numbers are still far from robust, but the trend is clearly headed in the right direction," he said. "The comparison to October of last year is stark and, for the next few months, the emerging numbers will make last year's collapse all the more dramatic."

This report, complete with tables and graphs, and the CMI archives may be viewed at http://web.nacm.org/cmi/cmi.asp.

Small Businesses Singing the Blues

The U.S. economy is plodding forward to more solid ground. The stock market topped 10,000 before receding back. Retail sales have continued to show gains. And though the unemployment rate is still increasing, pushing its way toward double digits, the pace has slowed noticeably. It has been a time to let some of the unease felt about the financial future of the nation to relax.

But, even though there has been plenty to be optimistic about, there has been a nagging gap in recovery between large U.S. businesses and their small- and medium-sized counterparts, as evidenced by payments trends.

When looking at the payment activities of approximately 260,000 small businesses, Cortera Inc., in its September 2009 Small Business Index (SBI), found that there is a widening disparity between the payment behaviors of large and small enterprises. According to the September SBI, small businesses are paying invoices 25% slower than a year ago and are paying at a rate 20% slower than the overall business average.

Prior to the recession, small and large businesses were paying at approximately the same rate. Now, the nation’s small businesses have a days-beyond-terms (DBT) rate 55% higher. What’s weighing more on small businesses is that larger companies have stepped up their collection initiatives against smaller companies, while at the same time, have pulled back on paying invoices.
“While the economy is steadily improving, we are still seeing numbers that show small businesses are feeling the after effects of tough terms by their larger suppliers and a tight overall credit market,” said Jim Swift, president and CEO, Cortera. “As a result, small businesses are suffering from reduced and much needed working capital—a credit crunch that impedes their ability to plan, grow, and in some cases, survive.”

Cortera has also found that geography is playing a considerable role in how companies are paying. In its October Past Due by States report, the company found that for the ninth month in a row, Nevada is the worst in paying bills on time. According to Cortera, 25.55% of Nevada-based business accounts are past due, which is 50% higher than the national average of 16.99%. Utah is a relatively close second with 24.38% past due, followed by Minnesota with 24.02%.
Of the top ten states with the slowest payment of accounts receivable, seven were west of the Rocky Mountains.

The worst part of the country for past-due accounts: the American Southwest. Of the top ten states with the latest A/R, all six states of the Southwestern region of the U.S. were listed, including being four of the top five worst states—Nevada, Utah, Colorado and Arizona.

“It’s no coincidence that states hit particularly hard by the economy, like Nevada, show the most stress when it comes to paying bills in a timely manner,” said Swift. “It is positive to note that the latest data shows a plateau in such delinquencies, suggesting that while some states may not yet be benefitting from a slow recovery, conditions don’t appear to be worsening.”

The states with lowest percentage of A/R debt past due were mainly on the East Coast. Alaska, with only 7.05% of corporate A/R beyond terms, was the top state in the country. Main, with 7.25%, was a close second, while Kansas, with only 8.50%, rounded out the top three. The rest of the top ten states for the lowest percentage of accounts beyond terms were South Dakota, Wyoming, Montana, New Hampshire, Vermont, Louisiana and West Virginia.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

House Passes Bill Exempting Select Firms from “Red Flags” Rule

The House of Representatives recently passed a bill that exempts certain firms from the Federal Trade Commission's "Red Flags" Rules.

Passing unanimously in a 400-0 vote, H.R. 3763 amends the Fair Credit Reporting Act (FCRA) to exclude certain businesses from the "Red Flags" guidelines. Specifically the legislation exempts any health care, accounting or legal practice with 20 or fewer employees from the meaning of creditor used in the FCRA and thus the "Red Flags" guidelines. Additionally, the act excludes any other business that the FTC determines "(1) knows all of its customers or clients individually; (2) only performs services in or around the residences of its customers; or (3) has not experienced incidents of identity theft, and identity theft is rare for businesses of that type."

The bill now awaits approval from the Senate and has been referred to the Senate Committee on Banking, Housing and Urban Affairs. It was originally introduced by Rep. John Adler (D-NJ) and was cosponsored by four other congressmen, Rep. Paul Broun (R-GA), Rep. Christopher Lee (R-NY), Rep. Ron Paul (R-TX) and Rep. Michael Simpson (R-ID).

"Today's vote was an important recognition that the Federal Trade Commission's interpretation of the ‘Red Flags' Rule over-reaches and its application to lawyers is unnecessary," said Carolyn Lamm, president of the American Bar Association (ABA), which has lobbied heavily against the rules' application to lawyers. "More work remains. Today's legislative solution is incomplete and would burden large segments of the public and the FTC with unwarranted bureaucratic procedures. We look forward to working with the Senate to fine tune this legislation and further remove confusion and over-regulation."

NACM has repeatedly covered the "Red Flags" Rule and worked with the FTC on clarifying the rule's application to business-to-business creditors. In addition to having hosted two separate joint teleconferences on the subject with FTC staff, several articles have been published in NACM's eNews and the March and May 2009 issues of Business Credit magazine. NACM will host another "Red Flags"-centric teleconference this Monday, October 26th, entitled "'Red Flags' Rules and Guidelines Simplified" and led by Bruce Nathan, Esq. and Wanda Borges, Esq. Click here for more details, or to register.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

SEC Says No More Delays For Small Businesses On SOX Compliance

The U.S. Securities and Exchange Commission (SEC) recently issued a firm reminder to the nation's small businesses that the compliance date for Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) is only nine months away. Come June 15, 2010, public companies with a public float below $75 million will have to comply with Section 404's auditing and reporting requirements.

Previously, only the nation's larger companies had been required to comply with the provision, as smaller companies had been granted an extension designed to give them more time to properly create, implement and document their internal controls. In a statement, however, SEC Chairman Mary Schapiro noted that there would be no further delays and that smaller firms will be required to report to the public on the effectiveness of their internal controls. "Since there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance," she said.

The original compliance date for small businesses was for fiscal years ending on or after December 15, 2009. The extension was granted to allow the SEC's Office of Economic Analysis to conduct a study to determine whether the agency's previously-issued guidance had successfully reduced the cost of compliance for smaller firms.

Since 1977, all U.S. public companies have been required to maintain internal accounting controls, but SOX requires the reporting of these controls and an auditor's attestation that they exist and are sufficient enough to prevent material misstatements on financial documents.

Schapiro was joined by SEC Commissioner Luis Aguilar in assuring investors, smaller companies and other non-accelerated filers that there will be no more delays. "Over the last seven years, in several separate instances, the Commission has deferred the compliance date for non-accelerated filers to provide the auditor attestation under Section 404(b). I know that, as a result, there is uncertainty among investors and among non-accelerated filers about whether and when compliance with Section 404(b) would actually be required," said Aguilar. "The Commission is for the first time resolving that uncertainty by making it clear that all public companies, regardless of size, will be required to comply with Section 404(b) of the Sarbanes-Oxley Act, and that non-accelerated filers will begin complying in their first annual report for fiscal years ending on or after June 15, 2010."

For more information, visit the SEC's website at www.sec.gov.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Obama Endorses Raising SBA Loan Limits

President Barack Obama recently proposed an increase in the limit of loans to the nation's smaller businesses under the Small Business Administration's (SBA's) 7(a) program.
The 7(a) program, the SBA's most popular, currently has a loan maximum of $2 million, which Obama suggested should be raised to $5 million. Additionally, the President also proposed increasing the size of SBA's less prevalent 504 loan from $2 million to $5 million for standard borrowers, which would support a total project of $12.5 million, and from $4 million to $5.5 million for manufacturers, which would support a total project of $13.75 million.

The SBA's Microloan program would also get a boost under the President's proposal as well, bumping the maximum from $35,000 to $50,000.

Obama's proposal was quickly picked up in the form of legislation, proposed by Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu (D-LA). "As Chair of the Senate Small Business Committee, I have held several hearings, roundtables and other events and have heard from lenders and small business owners that the current loan limits do not adequately meet their needs," said Landrieu. "That is why today I am introducing legislation to raise the limits on small business loans to as high as $5.5 million. Coupled with lower-cost capital available to community lenders, these higher loan limits will spur small business growth and aid in our nation's continued economic recovery."

The size of the increases proposed by the Obama administration were identical to those proposed in legislation earlier by Landrieu's republican counterpart on the Senate Small Business Committee, Olympia Snowe (R-ME). "These actions will help satisfy the capital needs of small businesses looking to start or expand their operations," she said. "They were good ideas when I introduced them nearly a year ago, they were good ideas when I reintroduced them in August, and I am pleased that others, including the President, are on board with these critical initiatives."

Many other parties have advocated an increase in the SBA's loan limits, including representatives from groups of manufacturers in a recent Senate hearing on restoring credit to their sector. The SBA itself pledged its commitment to increasing their loan limits and also to separate proposals by Obama to encourage banks to increase lending to the small business sector. "The President also announced additional support from the Treasury Department for smaller community lenders that are committed to increasing their lending to small businesses," said SBA Administration Karen Mills. "[U.S. Treasury] Secretary [Timothy]Geithner and I will host a conference on small business lending with Members of Congress, regulators, lenders and the small business community. The conference will discuss additional efforts that can be taken to provide small businesses with access to credit. These steps, coupled with SBA's ongoing efforts, will help small businesses grow and create jobs throughout America."

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Economy Shows Signs of New Life as Exports Blossom

The U.S. dollar has struggled to hold its own against the euro. Since hitting a year-to-date low of $1.25 to the euro in March, the dollar has lost almost 25 cents, plummeting to $1.50 to the euro this month. But as the dollar remains weak, gold and oil become more affordable to foreign markets, and U.S. exports are at least more competitive overseas.

The country has been campaigning heavily to entice as many small- and medium-sized enterprises that it can to get involved in international trade. Congress is wading through hearings to remove any obstacles that might exist to small businesses entering the global marketplace, while the United States Trade Representative's office is exploring amending established, as well as pursuing new trade agreements to bolster exports. This is a prime pillar for the nation’s economic recovery and long-term growth. And it’s particularly poignant with the projected budget deficits over the next decade.

The good news is that in August, the United States trade deficit continued to shrink, falling from $31.9 billion in July to $30.7 billion. This decrease was fostered by a slight $200 million increase in exports and a more significant $900 million decline in imports. Maybe most importantly, this was the fourth consecutive month that the export of U.S. goods and services improved. Though at the same time, it also illustrates the sustained weakness that the dollar has suffered through.

Across the Atlantic, France and Germany have already declared themselves free of recession. The United States is impatiently waiting its turn. Thankfully, these numbers show that the country seems to be on the right path.

“We’re encouraged by the continued signs that the U.S. and other major economies are beginning to expand again,” said U.S. Commerce Secretary Gary Locke. “But we must remain steadfast in our effort to boost U.S. exports and put Americans back to work.”

In August, the U.S.’s trade deficit with the European Union (EU) shrank, falling from $8 billion in July to $5.4 billion, primarily because exports from the EU are down 20%. The 16-nation Eurozone saw its own trade balance collapse considerably from July to August, decreasing from $18.3 billion to just $5.9 billion. Total exports for the Eurozone were down 5.8%, while imports declined 1.8%, and both figures were down more than 23% compared to the same period last year.

Demonstrating the severe impact the global economic decline has had on both the United States and Europe, the EU’s trade surplus with the U.S. fell from $57 billion through January-July 2008 to just $33.3 billion for the same period this year. It has been a tough time for the world’s two largest economies.

But, it is welcomed to see that United States’ two largest trading partners—Canada and China—somewhat renewed their thirst for U.S. goods in August, even if it wasn’t enough to significantly impact the running trade deficit the nation has with both. Exports to Canada increased $1.2 billion in August, while exports to China increased $300 million. Unfortunately, U.S. imports from both countries also ticked upwards, albeit far more modestly.

Despite mounting job losses and bankruptcies, there were more encouraging signs for the U.S. economy in terms of retail sales. Though sales slipped 1.5% in September, weighted down by the nearly 10.5% decline in vehicles sales, the drop was still not as steep as anticipated. In fact, retail sales in the third quarter actually saw the strongest gains in almost two years.

The Commerce Department is optimistic that the healthy increase in sales excluding motor vehicles and gasoline over the past two months—which increased 0.4%— is indicative that consumers are gaining confidence. That spending is at the initial stages of rebound.

“But much work remains,” warned Locke. He is confident that as more stimulus money makes its way into the system in the coming months, it will further promote an upturn and provide more opportunities for America’s unemployed.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Slow Payment, Tight Credit Pinning Down Smaller Manufacturers

There has been no shortage of struggles over the last two years for the nation's manufacturers, which have absorbed the full brunt of the credit crisis' impact, and difficulties still remain despite government attempts to spur investment. A recent hearing in the Senate Committee on Banking, Housing and Urban Affairs illuminated the various forces still squeezing the sector.

"Small and medium sized manufacturers are often trapped between the troubles of their much larger customers and financial institutions," said Robert Kiener, director of member outreach for the Precision Machined Products Association (PMPA). Kiener was one witness testifying at the hearing, dubbed "Restoring Credit to Manufacturers and called by Sen. Sherrod Brown (D-OH), chairman of the Subcommittee on Economic Policy. Kiener, along with David Andrea, vice president of industry analysis and economics for the Motor and Equipment Manufacturers Association (MEMA), discussed the many ways in which government programs fall short for small- and mid-sized manufacturers (SMMs) and the financial services sector's opinion of the nation's manufacturers that continues to contribute to its difficulties.

"Many banks are not lending to manufacturing businesses because of the fear of having their rating level reduced by federal regulators," said Kiener. "The federal government's policies should not create an environment in which manufacturers struggle to access adequate and timely credit. The nation's economy, in which manufacturing accounts for 12% of GDP, cannot recover without a sound manufacturing base. Returning to sound lending practices with manufacturers is good for their business and critical for the country."

Outreach and loan programs to smaller firms have fallen short in the sector, mainly due to the limitations placed on the amount of money loaned in these programs. "It is not unreasonable for a small supplier to be called on for the investment of $2 to $4 million to assist with t he design, engineering and tooling for a component on a new vehicle program. However, typically suppliers receive payment for this investment after the launch of production through the piece price of the component,' said Andrea. "The supplier might not begin receiving any cash flow on their investment for 12 to 24 months and will not be completely reimbursed until the product ends production in another 36 to 60 months."

"The SBA programs are limited to only $2 million loans," he added. "Since suppliers are expected to fund a great deal of the research and development in the projects, the net worth and loan amounts have limited utility to our industry."

The absence of available credit might not be the sector's greatest scourge though. SMMs are currently pinched both between banks who are tightening up and their own customers who have taken to delaying payment for as long as they can. "Many SMMs need a return to traditional lending, while other companies and their lenders require assurance that their customers will pay their outstanding accounts receivable. While guaranteeing loans is critical to supporting all manufacturers, guaranteeing accounts receivable is particularly important to SMMs requiring an immediate injection of cash to continue operations," said Kiener. "PMPA and other metal working industries are working with the Department of Commerce Manufacturing Council and members of the Administration on such proposals."

"As one of our members said, ‘I pay my employees weekly, my leases every four weeks, my vendors every six weeks and my customers pay me every eight weeks,'" said Andrea. "The need is evident."

Jacob Barron, NACM staff writer

Bill Introduced to Exempt Small Businesses From SOX 404

Just after the U.S. Securities and Exchange Commission (SEC) issued its strongest language yet about the Sarbanes-Oxley Act (SOX) and its pending application to small businesses, Congressman Scott Garrett (R-NJ) introduced a bill that would exempt the nation's smaller firms from SOX's most onerous provisions.

Aptly dubbed the "Small Business SOX Compliance Relief Act," Garrett's bill would exempt public companies with less than a $75 million public float, also called non-accelerated filers, from what he described as the burdensome reporting requirements contained within Section 404(b) of SOX.

"Although the stated intent of Sarbanes-Oxley was to provide investor confidence in our markets through greater accountability and disclosure, the Act has had the unintended effect of creating undue-and often unbearable-burdens on small businesses," said Garrett. "It is diverting valuable resources away from other legitimate business needs, creating massive and tedious documentation requirements and discouraging the public listing of both international and domestic companies on U.S. markets. Honest companies are being punished and the U.S. economy will suffer as a result."

Currently, the bill has been referred to the House Financial Services Committee and garnered no cosponsors.

In an effort to reassure investors, who were uncertain of when, if ever, small businesses would be required to comply with SOX's reporting provisions, the SEC issued a statement stating that no further delays would be granted to small businesses and that all the nation's firms would be required to comply by June 15, 2010. Section 404 currently already applies to larger businesses and requires public companies to report on their internal accounting controls and have an independent auditor attest to their efficacy.

Observers have raised questions about the timing of the act's imposition on the still struggling small business sector. "Especially now, as our country struggles to emerge from a recession, the last thing American small businesses need is another barrier to economic stabilization," said Garrett, who, in a release, used the SEC's own words against them. In a survey of businesses published by the agency in September, the SEC wrote that "[A] majority felt that the costs of compliance outweighed the benefits. This was especially true among smaller companies."

Garrett's release also referred to research by NASDAQ that showed the burden of compliance, on a percentage of revenue basis, falls on small businesses 11 times harder than it does on larger companies, giving these already better-positioned companies an even greater market advantage.

NACM has watched and reported on SOX since its passage in 2002. If you have any thoughts on the Act, the SEC, or Garrett's proposed legislation, please email them to jakeb@nacm.org.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Total Late A/R Improves, but Past Dues are Only Getting Older

When the economy is going strong, more often than not, suppliers are receiving what’s owed to them in a timely fashion. Commerce chugs along and cash flows stream smoothly. As the economy sags and it takes longer and longer for retailers to get products off the shelves and out the door, they begin to drag their feet on invoices. Suppliers and manufacturers then find themselves in a pinch and the pangs of delinquency trickle their way through the entire supply chain.

“With the supply chain, you’ve got the flow of goods between manufacturers and wholesalers and retailers and the transportation companies that move everything. And the flow of money—in that particular segment of the economy—is really important,” stated Jim Swift, CEO, Cortera, Inc. “If I’m a manufacturer, I need cash to buy more ingredients and more raw materials in order to increase my production, my inventory and my shipments.”

Insurance companies and financial institutions like banks can survive more easily if customers begin to slow pay. But for manufacturers and suppliers, growth is culled and revenues curtailed until payments for past invoices are received. Over the past two years, there has been a sharp increase in delinquencies, which has been accompanied by a sharp uptick in accounts sent for collection. Days sales outstanding (DSO) has widened as more and more companies began hoarding cash, uncertain of the economic future of the nation, let alone their own industry. But, as other indexes have also begun to spy, Cortera’s Supply Chain Index (SCI) has seen payment conditions throughout the supply chain have become increasingly more favorable over the last several months.

Tracking payments against agreed upon terms, the latest SCI release shows that, overall, the amount of late account receivables (A/R) has continued to trend downward from high water marks set at the end of 2008. According to the August SCI, the amount of A/R more than 30 days past due has fallen to a hair above 10%, which is a level not reported since last October, when the SCI saw a spike in delinquencies in correlation to the financial meltdown. In December 2008, the amount of late A/R peaked to a reading of 23%, but has since worked its way down steadily for nine straight months. Though the current level is still above the majority of what was seen in 2007 and 2008, the declines are signaling that change has taken hold.

“It tells me, that at least in the minds of finance folk, there is some kind of return of stability to the system,” explained Swift. “If you’re a finance guy and you slow down your payments to your suppliers, it’s probably one of two reasons. It’s either because you don’t have confidence in your sales forecast, so you’re trying to hoard your cash, or, it’s because you can’t pay; you have your own cash issues.”

Swift admitted that he wasn’t sure if it was simply fear or whether customers were really going bad and not paying their bills at such a rapid rate, which caused the spike in the amount of late A/R in December 2008. But the fact that there was a similar spike seen in the SCI in December 2007 may suggest some kind of seasonality. Regardless, he said the declines the SCI has reported in the amount of late A/R over the last several months goes beyond psychology to the actual physical cash flow in the system. It demonstrates that not only are companies getting healthier, but that finance departments are also growing more confident.

“The way we look at it is that the faster the money flows through the system of the manufacturing and supply chain world, the more efficient production is,” said Swift. “If the money isn’t flowing that fast, that means inventories are piling up, production is way down or there is something else that is wrong in the actual flow of goods.”

He added, “When we see things like this—where we’re back to levels that we hadn’t seen in a year—that tells me cash flows are moving a lot more smoothly than they were. What does that mean for the overall economy? Well, extrapolate it up.”

Unfortunately, what Cortera is also finding throughout the supply chain is that though the total amount of late A/R is receding, items days beyond terms (DBT) continue to grow grayer. The August SCI’s DBT measurement is 15% worse than last year.

“The amount of debt that is late is returning back roughly to the same point where it was last year, but it’s later,” said Swift. “So, we’re looking at some of the deeper buckets—the 90+ day buckets—and trying to figure out if it’s a temporary thing or what else is happening. The simple answer is that it’s a similar amount that’s late, but later than what it was before.”

It's an unfortunate duality. The increases in aging, those accounts pushing their way past 60 and 90 days, become harder and harder to collect on. And the trend can also be representative of a coming change.

"It can be a change in behavior, where we’re just going to get later and later and later, and we’re okay with that now,” explained Swift. “It could also be a temporary blip. Or it could mean that things are moving toward write-offs. It could just be a build-up of debt that will never be recovered and we might see a bump in collections down the road. That’s the part we don’t know.”

Sifting through the numbers, Swift said that small companies are being more profoundly impacted by the economy, lagging to recover and are guilty of paying slower. Cortera expects to have a more detailed release of this data in the coming weeks.

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Snowe: Stimulus Yielding “Tangible Results” For Small Businesses

The ranking Republican member on the Senate Committee on Small Business and Entrepreneurship recently said the small business provisions in the stimulus bill passed earlier this year are having a positive effect on the nation's smaller firms. "The small business provisions we included in the stimulus are yielding tangible results. We have witnessed an approximate 60% increase in SBA lending, which translates into more than $11.3 billion in new loans through the 7(a) and 504 programs and the creation or retention of over 300,000 jobs," said Senator Olympia Snowe (R-ME). "In procurement opportunities through the stimulus, the Federal government is exceeding its small business statutory contracting goals in every category except for women-owned small businesses."

Snowe's comments came after an oversight hearing held by her and committee chair Mary Landrieu (D-LA) entitled "The Recovery Act for Small Businesses: What Is Working and What Comes Next?" According to witness testimony, the $787 billion American Recovery and Reinvestment Act (ARRA) passed in February has, as Snowe noted, increased lending and made it easier for small businesses to create and retain jobs. Still, both senators agreed that more work remains in several different areas. "We cannot rest on our laurels," said Snowe. "I urge the Administration to implement a meaningful women's contracting program like Congress directed it to nearly a decade ago. This would help the Federal government to meet-and exceed-its contracting requirements for women-owned small businesses. And we must also pass legislation I introduced to increase the maximum level on 7(a) and 504 loans to $5 million so that more small businesses are able to access capital."

The legislation to which Snowe refers is S. 1615, also called the Next Step for Main Street Credit Availability Act of 2009, which was introduced in August. In addition to increasing the maximum on 7(a) and most 504 loans, the bill would also raise the maximum threshold for microloans from $35,000 to $50,000.

Another area in which the senators are seeking improvement is federal contracting. While the biggest spending agency, the Department of Defense (DOD), has spent 58% of its ARRA funds on small businesses, the federal government as a whole is lagging behind, having spent just over 25% of total recovery act funds on small businesses, a number dragged down by agencies like the Department of Energy (DOE), which has spent less than 7% of its recovery act funds on smaller firms.

Another controversial ARRA provision that was criticized in the hearing exempted the National Institutes of Health (NIH) from participation in the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. In joint letters sent early this year, both Landrieu and Snowe and Senators Ben Cardin (D-MD) and Russ Feingold (D-WI) urged NIH to allocate the money anyway, despite the exemption. "This provision cheated small businesses out of as much as $230 million in work, and it directly counters the goals of the Recovery Act to create high-paying jobs, spur innovation and boost America's competitiveness," said Landrieu. "The SBIR and STTR programs have a proven track record in these areas."

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Financial Statements for Beginners

While the title suggested that it was a novice-level course, it wasn't just new credit professionals who tuned in to Doug Darrington, CCE's recent NACM teleconference, "Financial Statements for Beginners." Attendees of varying experience levels were rewarded with a wealth of thorough, practical information on how to best nail down a potential customer's financial health, a skill that has become vital in today's economy. "Financial statements form a basis for understanding the position of a business," said Darrington, a credit manager for Altaview Concrete, Inc. in Sandy, UT with more than 25 years experience. "Typically, you'll find the financial statements included in the annual report or, for any company that trades stock, it's required for them to submit an annual report to the SEC. For those who aren't large companies, we just have to take the financial statements that are provided."

In his presentation, Darrington went through what forms go into a financial statement as well as what each of them is worth in the analysis process. "Basic financial statements include a balance sheet, an income sheet, a statement of stockholder equity and a statement of cash flows," he said, diving head first into the balance sheet. "It's exactly what it says. It has to balance," he added. "It's made up of assets, things that the company owns, liabilities, things the company owes and stockholder's equity, also called net worth."

In terms of assets, Darrington first went through what comprises current assets and what else credit professionals can get from this and other figures. "Current assets include cash and those assets expected to be converted into cash within one year or one operating cycle, whatever's longer. Typically, the operating cycle will be shorter than one year. Therefore most financial statements will be presented at the end of the year," he said. "The working capital is simply the difference between total current assets and total current liabilities. That doesn't mean much all by itself but it will mean something in financial ratios."

One familiar portion of the financial statements that Darrington paused on was the potential customer's accounts receivable. "The accounts receivable is always the amount of money that is owed on credit sales, the amount that your customers owe," he said, adding that this figure will also be accompanied by another figure that indicates how much of the receivables are likely going to be collected. "This number is going to be net of doubtful accounts. Each company will have an account set up in various ways to allow for those items which they may not collect." How much of their receivables a potential customer is allowing for bad debt can be an important indicator of a company's fiscal health, and Darrington noted that comparing the current number with the prior year's figure is an important step in analysis. For example, if a potential customer has seen a sales increase over the last year and their allowance for debt that's not likely to be collected stays the same, this could be the sign of a good company that's made more cash sales. If there has been a decrease in sales and the allowance for debt that won't likely be collected stays the same, or goes up, this should be a red flag.

Darrington took attendees step-by-step through a sample financial statement and offered a number of important financial ratios that credit professionals can use to look deeper into a potential customer's health.

To learn more about NACM's teleconference series, or to register, click here.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Latest Edition of Business Credit Offers Readers a Credit Yard Stick

The upcoming November/December issue of NACM's Business Credit magazine offers credit professionals and their companies a diverse array of articles and insights geared toward giving them the tools they need to measure up and become the best in their field. The issue's theme is "Metrics & Benchmarking" and, along with articles on how to compare your company's credit performance to the best in their field in many different aspects, includes features on how to make the best decision when it comes to risky small business customers and what the best collectors do in America's number one export market.

While the sector itself is seen as the lynchpin to recovery in the U.S. economy, small businesses have been among the hardest hit by the global financial crisis and, all the while, sellers looking for information on smaller customers have been left wanting. While these companies are abundant and often eager to buy, they can also be among the riskiest to sell to and frequently lack the information larger companies have on their financial status. Relying on a wealth of new research regarding small business risks, the domestic feature in the November/December issue focuses on how to use statistical techniques and technologies like credit scoring to effectively analyze a small business' position, even in the absence of thorough financial information.

Just as the small business sector has suffered in the U.S., so have other business sectors in other nations. Simultaneously, however, exports have soared in the U.S. and have frequently been the solitary bright spot in many economic analyses over the last several years. Nowhere is this fact more visible than in America's northern neighbor, Canada, with whom the U.S. enjoys a one-of-a-kind trade relationship. Exporters doing business in Canada in the wake of the recession need to be prepared for the prospect of their customer's delinquency, and through a series of discussions with top-notch collectors and lawyers, the November/December international feature focuses on what the best, most successful collectors know, and do, in Canada.

Other articles include a piece by Bruce Nathan, Esq. focusing on a glut of recent cases dealing with a creditor's rights in a bankruptcy under Section 503(b)(9), a rundown of the troubles facing local governments in the wake of the recession, and thorough analysis of NACM's September Monthly survey results and comments, which focused on collection communication. Don't miss this issue! Click here to get your subscription started today.

Jacob Barron, NACM staff writer. Follow us on Twitter at http://twitter.com/NACM_National.

Too Big to Rule? The Question of Increasing Judgeships

Law in the United States can be a frustrating thing.

On one side, it protects Americans and their rights. It ensures freedoms and punishes those that have committed crimes and lived lives of malice. It is a time to cheer when the “bad guys” are brought to justice and they are tried and sentenced. The system operating smoothly and efficiently.

Of course, there are moments to jeer. The times viewed with bitterness as frivolous lawsuits and massive class action suits worm their way through the system, awarding lofty sums of money for seemingly benign infractions. The times when a cynic might view that one of the United State’s inalienable rights seems to be the ability to sue everyone for anything. Those times when the “bad guys” get away on a technicality or a “legal loophole,” walking away unscathed.

The law is layered and complex. There are civil cases, criminal cases, federal cases and appeals and more. Just last week, consumer bankruptcy filings pushed past the one million mark through the first nine months of 2009. And the American Bankruptcy Institute (ABI) believes that the numbers will work their way higher.

“Bankruptcy filings continue to climb as consumers look to shelter themselves from the effects of rising unemployment rates and housing debt,” said ABI’s Executive Director Samuel Gerdano, who said the filing pace was consistent with ABI’s belief that consumer bankruptcies will top 1.4 million by year’s end.

Through of all of this, there is a network of individuals that serve as the gears of the legal system. And overseeing the outcome is a select stable of judges. Unfortunately, judges across the country are facing a deluge of cases. According to the Judicial Conference of the United States, which conducts a survey every two years of the needs of the U.S. appellate and district courts, case filings for both the appeals and district courts have increased more than 30% since 1991.

“It has been nearly two decades since Congress passed comprehensive judgeships legislation,” testified District Court Judge George Singal before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts. “To enable the judiciary to continue serving litigants efficiently and effectively, the judicial workforce must be expanded.”

Last month, Subcommittee Chairman Senator Patrick Leahy (D-VT) introduced bill S. 1653, the Federal Judgeship Act of 2009, which looks to expand the number of judgeships in the U.S. The Judicial Conference recommends that Congress establish 63 new judgeships in the courts of appeals and district courts and have five current temporary judgeships be converted to permanent positions, with one temporary district court judgeship extended another five years. From the Conference and Leahy’s perspective, the reasons are quite simple. Weighted filings per judgeship—which the Judicial Conference uses as a measurement to determine the workload of judges— in the district courts that the Conference is recommending additional judges have increased from 427 in 1991 to 575 in June 2009. And this year, four circuit courts exceeded 800 adjusted filings per panel, though two of these courts—the Fifth and Eleventh Circuits—did not request an additional judgeship.

“The numbers underscore the need for action,” stated Senator Sheldon Whitehouse (D-RI). “On average, there are 573 so-called ‘weighted filings’ in the district courts for which new judgeships are recommended; well above the 430 ‘weighted filings’ needed to trigger a judgeship recommendation by the Judicial Conference. “

During the time period from 1991 to 2009, filings in district courts have risen 31% because civil cases have increased 22% and criminal felony filings have shot up dramatically by 91%. Immigration filings have witnessed a tremendous increase, ramping up from 1,992 in 1991 to more than 24,500 in 2009. Interestingly, despite what is portrayed on the evening news, homicide, robbery, embezzlement, forgery and counterfeiting filings have been on the decline the last 18 years.

Since 1991, filings in the courts of appeals have also been on an upswing, increasing 38% by June 2009. For the six circuit courts where new judgeships are recommended, there is an average of 802 adjusted filings per panel, which, as Whitehouse pointed out, is well above the 500 adjusted filings per panel measure the Judicial Conference uses to determine the need for additional judges.

“Although Congress created additional judgeships in the district courts in recent years in response to particular problems in certain districts, no additional judgeship has been created for the courts of appeals,” pointed out Singal. “As a result, the national average caseload per three-judge panel has reached 1,067. Were it not for the assistance provided by senior and visiting judges, the courts of appeals would not have been able to keep pace.”

On the surface it may seem rudimentary that an increased workload for courts should be a no-brainer to increase the number of judges. But it’s apparently not that simple, particularly for appellate judges.
“The chief argument for increasing the number of appellate judges is to reduce the workload per judge,” testified Eleventh Circuit Court of Appeals Judge Gerald Tjoflat. “This seems simple enough, but, from my experience, increasing the number of judges actually creates morework. Adding judges decreases a court’s efficiency by diminishing the trust and collegiality that are essential to collective decision-making.”

Tjoflat explained that when he was a member of the Fifth Circuit in 1979, when Congress increased the number of judges from 15 to 26, it negatively impacted the court’s efficiency and the stability of the rule of law in the circuit. And as the consistency in the rule of law diminishes, remarked Tjoflat, it in turn creates an increased need for more district court judges because unstable law leads to increased litigation. Though he is currently a judge in one of the busiest circuits in the country that has repeatedly refused an additional judgeship, Tjoflat argues that more important for appellate courts is a smaller, tight-knit group of judgeships because those relationships translate into speedier, consistent justice. Based on the Judicial Conference’s threshold for additional judges, Tjoflat's Eleventh Circuit should have 27 judges; more than double its current 12.

“Because appellate judges sit in panels of three, it is critically important that a judge writing an opinion be able to ‘mind-read’ his colleagues,” explained Tjoflat. “The process of crafting opinions can be greatly expedited if a judge is aware of the perspectives of the other judges on the panel so that he can draft an opinion likely to be amenable to all of them. In a small circuit, where the judges know each other— and each other’s judicial philosophy and predispositions—the process of drafting opinions likely to attract the votes of the other judges on the panel is much simpler.”

He added that increasing the number of appellate judges also torpedoes a critical circuit function: the en banc hearing, where all the judges of a circuit come together to speak definitively about a point of law for that circuit. An en banc occurs after multiple panels have issued conflicting opinions or a longstanding precedent needs to be revisited because of changing circumstances. When a circuit gets too large, it has to resort to a “mini” or “limited” en banc, where a minority of judges definitively determines the law for an entire circuit.

“The courts of appeals must be limited in size if the law is to possess the clarity and stability the nation requires,” lobbied Tjoflat. “As the law becomes unclear and unstable, our citizens—whether individuals or entities like corporations—lose the freedom that inheres in a predictable and stable rule of law. The demand for more judges, if satisfied, will inexorably lead—little by little—to the erosion of the freedoms we cherish.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National