COVID-19 and Your Credit Management Arsenal
If you extend credit, you are vulnerable to risk — whether furnishing to a single construction project or selling on revolving terms. This vulnerability grows exponentially in the midst of tragic events, such as the COVID-19 pandemic. Although economic loss is inevitable, you have the power to mitigate the loss through UCC filings, mechanic’s liens, and a fully loaded credit management arsenal.
Credit Management Requires Innovation
Credit Management isn’t simply about reducing risk. It’s reducing risk while promoting long term growth and improving sales. Now more than ever, credit requires innovation. Fortunately, in the era of Big Data, innovation is at your fingertips.
It is imperative to examine and fully understand the data and the potential implications. Listen to industry experts and analysts; review credit indexes, credit reports and bankruptcy reports, as well as lien filings & foreclosures. It’s vital to analyze the collective opinions and statistics to effectively create a comprehensive credit picture.
Technology and Data Sources that Assist Credit Professionals
Technology has proven to be an immense asset; mining the right data is a challenge faced by many. Credit reports, state and county recording offices, industry trade/credit groups and message boards, and even online reviews provide pertinent information. Keep these in your credit management arsenal —
Credit bureaus have compiled information relevant to a business’s credit, analyzed the data, and provided it for consumption as a trustworthy recommendation. Credit professionals use credit reports to review an entity’s viability.
Credit reports are likely to include general financials (payment trends, debt to income, outstanding collections/judgments, UCC filings, DBT), though some comprehensive reports provide additional bits of relevant data, such as the entity’s status with the Secretary of State.
Compliance with Secretary of State
A business should be in good standing with the Secretary of State. A lapse in compliance with the Secretary of State can be an early warning sign of an entity’s financial distress, though this information is frequently overlooked. If a corporate search reveals a status of anything other than “active,” it is worth further exploration.
A company’s corporate status could change for a multitude of reasons, including a change in the company name, the dissolution of the company or neglecting to file an annual report or changing the formation type.
Our research discovered, in an average year, 23% of businesses experience a change in their corporate status with the Secretary of State. Of these changes, over 10% of businesses dissolve or close their doors. As we navigate the current crisis, these numbers are likely to increase exponentially.
Industry Trade & Credit Groups
In many instances, your peers could be one of your greatest resources. Although credit-granting processes and credit management have evolved, common issues remain: debtor isn’t paying timely, debtor is providing a “pay-when-paid” excuse, debtor has little credit history, etc. These aren’t new issues for credit professionals and your peers have encountered them time & time again. Take advantage of the experiences of others – of course, please do so at a safe distance! (Too soon?)
Mechanic’s Lien Activity
A review of mechanic’s lien filings may uncover, among other valuable information, significant financial distress. If a business has been party to several mechanic’s lien filings, red flags fly, as this party has been unpaid. Unless they have an abundance of working capital, several filings should raise concern.
Don’t overlook the valuable information within your own accounts receivable (AR) payment trends and behaviors provide additional insights. The trend of accounts 30 days beyond terms (or 60, 90, 120), is an early warning sign of stifled cash flow.
When negative trends appear in AR, it provides an early opportunity to evaluate the collectability of past due accounts. If collection efforts are necessary, creditors should leverage the security of mechanic’s liens and UCC filings.
Keep in mind, trends from AR do not have to be negative to provide valuable information. Data is what you make of it. Positive trends in AR (i.e. fewer clients 30+ DBT) likely correlate to a company’s growth and/or improved working capital.
Credit reports and mechanic’s lien activity provide obvious benefits for analyzing credit, but they can also provide valuable competitive intelligence. Know what your competitors are doing. Are they filing UCCs? How much credit are they extending via open and/or revolving lines of credit? Are they filing mechanic’s liens? Are they entangled in mechanic’s liens, indicating money issues?
In the fall of 2018, retail and restaurants landed at the top of Standard & Poor’s Distress Ratio list: “As of Nov. 15, the retail and restaurants sector has the highest distress ratio at 19.5%, followed by telecommunications at 15.6%.”
Several major restaurant chains and retailers have filed for bankruptcy in an economic boom; imagine what will happen over the next 6 months – 1 year. Some experts believe the restaurant industry is an early predictor of the overall economy — if restaurants are down, other facets of the economy will soon follow.
Of course, restaurants aren’t the only entities filing for bankruptcy. The healthcare industry is facing the enormous task of caring for those who have fallen/will fall ill. As if caring for the ill wasn’t enough, hospitals were already struggling financially. There have been nearly 5,000 healthcare industry bankruptcies in the last 5 years. Unsecured creditors have been receiving, if anything, pennies on the dollar – pennies!
Regardless of the economic state of the country, understand and remember that bankruptcy will always be a risk. Do not become complacent. Remain vigilant and take precautions to ensure you are a secured creditor.
Credit Management Arsenal
Credit Management requires an array of accessible resources and considerations. Credit reports should provide a company’s net worth, payment history, likelihood of default, and credit limit recommendations, even UCC filings and collection placements. Periodically review the company’s status with the Secretary of State. Monitor and review mechanic’s lien activity, whether related to your customer, project or competitors. File UCCs on all customers and monitor for bankruptcies.
We are here to help you establish and maintain a successful credit risk mitigation program. I feel like an infomercial when I say this, but don’t wait – you need to get these processes in place now.