Street Credit – How To Survive 2009

Author: Michael Mitchell, CAE – CMA President

Recently I attended a meeting of the Los Angeles Bankruptcy Forum (a quarterly event that CMA administers) and the guest speaker was Congressman Richard Gephardt. As a former Speaker of the House, he offered many insights about the current financial crisis and the stimulus package that has since been signed by President Obama. One of the most memorable moments for me was the way he put our economic situation into perspective. From his position on the Board of U.S. Steel, he bore witness to the historic performance of the first three quarters of 2008, which were the best in 100 years; only to witness the last quarter of 2008, which was the worst in 100 years. Around the middle of last September, for U.S. Steel and many companies throughout the U.S., the economy just stopped.

This was another sobering addition to the myriad of stories that have already been told and written about the global economic crisis, with much of the news focused on how the financial crisis has affected Wall Street. I think it is important for CMA to focus on how the economy is affecting Main Street companies that grant commercial credit and the impact on how credit professionals make credit decisions and manage business relationships with their customers. If any of the following anecdotes from member service calls, credit group meetings, networking events, and the anscers Community Bulletin Board sound familiar, let it be a reminder that you are not alone.

At CMA, we have seen a significant increase in the number of bankruptcy filings by our members’ customers, and unfortunately, even by our members themselves. Credit group meetings now begin with members reporting layoffs at their customers’ companies and at their own companies, followed up with inquiries about available job openings. In the face of staff reductions, travel freezes, and other cost-cutting measures, credit managers are struggling to deal with a sudden and significant increase in the number of customers whose payments are slowing and who are not responding to calls – in fact, too many for the credit managers to visit personally (even if they could afford to travel). Solid customers are slowing, receivables are aging across the board, and the Association is fielding an ever increasing volume of calls from members asking about various forms of credit protection and advice about dealing with bankrupt debtors.

One effective approach to slowing payments came from a credit manager in one of my industry credit groups. I call it the pre-emptive strike. Recognizing that her aging was beginning to stretch out further and further, the credit manager began calling on accounts just before the terms were up to remind customers that current balances were due in a few days. She reported that this helped her identify (and in many cases avoid) deliquencies early so that action could be taken before the accounts got too old. She claimed that most of her customer did not have a problem with this approach because they understood that this is a sign of the times and recognize that cash flow is critical for everyone right now.

Members that supply materials and labor to the construction industry have reported to us that they are no longer stratifying the jobs they prelim – they are issuing preliminary notices on all jobs no matter how secure or how small. We have received an increasing number of inquires from materials suppliers that are looking at construction lien law for the first time because the risk of default has increased dramatically in the construction industry.

So what else are CMA members doing to survive 2009 in the face of these formidable challenges? Here’s the word on the street:

  • Update all credit applications over a year old

  • Re-evaluate all customers and readjust credit lines according to recent changes in payment habits

  • Periodically deactivate customers that have not made any purchases for a year

  • Reduce credit lines for customers that had large projects in the past but have drastically reduced purchases

  • Reduce credit lines on customers who are making installment payments on account balances that are much less than the full credit line

  • Conduct daily reviews of all customers that are over their credit limits

  • If a credit line has to be adjusted down, send a letter to the customer advising the customer of the reason for the adjustment

  • Reduce customer orders to use as leverage for payment

  • Let slow-paying and unresponsive customers know that you are reporting your third party collection placements to the national credit reporting bureaus (Experian, D&B, and Equifax), which may affect a company’s existing credit lines with the bank

  • File more UCCs

  • Look for “red flags” like customers who stopped buying from you and now are suddenly anxious to buy from you again on terms – did they exhaust their credit with your competitors?

  • Consider whether disgruntled employees and staff reductions are signs that your customers are becoming unstable

Although there are many differences of opinion as to the best ways to approach credit and customer relations in this risky environment, everyone I talked to agreed on one thing, that this is a debtor’s market, and creditors have to do whatever they can to keep the cash flowing.

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